Impact Investment Group (IIG) is a leading Australian impact investment funds manager with a mission to shift capital towards investments that blend financial returns with deep social and environmental impact.
They have just launched a new, diversified impact fund, designed to generate income and be attractive for first-time impact investors; The Impact Alternatives Fund.
The group’s record shows successful investment opportunities in commercial real estate, renewable energy infrastructure and venture capital. RIAA hears from CEO Daniel Madhavan on IIG’s unique experience in the Australasian impact investment space, and where the group and indeed the market is headed.
When the COVID pandemic hit, there were some initial fears that it may strip away some of the momentum behind responsible and impact investing, but fortunately we’ve seen an ever greater push for investments that deliver positive outcomes and avoid harm. What has been IIG’s experience and the response from investors during this time?
It’s been diverse! Generally, our community of investors has re-committed to their fundamental principles and their approaches to impact investing. Already by March and April, our closest investors were looking for ways to increase their support for their communities, but it’s fastest and easiest to do that via philanthropy: Good social impact investments take longer to develop. But no-one was saying “well, I’ll stop thinking about environmental impact investing”. Just the opposite; people were hoping that this shock and enforced pause would see more people shift their investment habits.
That’s not to say that, across our entire portfolio which spans VC for impact startups, green property and renewable energy infrastructure, there weren’t investments that needed disproportionate focus. Our investors were fortunate that we exited some property funds towards the top of the last cycle, but we also have some under-development property projects which we are managing through the economic turmoil.
Our solar funds are holding up well financially, especially considering the challenges, and Giant Leap, our VC fund is performing in the top quartile. We’ve just sent out our impact reports for each of the funds, and I think investors can be proud of where they’ve invested their capital.
RIAA’s 2020 Benchmarking Impact Australia report showed that while Australian investors don’t have a strong preference for whether their investments target social or environmental impact, investments in conservation and clean energy are the most highly preferred. The same study in New Zealand in 2019 showed this similar leaning towards conservation and clean energy investments, particularly amongst active impact investors. These preferences run in stark contrast to the GIIN’s annual survey which shows globally, a much greater desire for investments targeting social themes over environmental themes. What has been IIG’s experience? Do you have any insights into this from an Australasian perspective?
I think IIG’s experience is very much informed by our history, and our part of the market. By dollars invested, our portfolio skews towards environmental impact (although the VC fund, Giant Leap has a lot of investments targeting empowering people, and health & wellbeing benefits).
We have always been focused in growing the impact investing market, whether by the number of investors, or the amount of capital, and that has meant developing investments that are truly impactful and also attractive financially. Green buildings, renewable energy, and sustainability startups have ticked those boxes, and the investable market is bigger for environmental impact projects than social impact projects, especially when you consider the big cheque size for a solar farm, for example. There are social impact investments that have good financial attributes; stability, lower risk profiles, but historically there just haven’t been the same number or size for social impact opportunities in Australia. That may be changing a bit, but you’ve got to remember that ALL impact investing is still something like 1% of the total investing market, so both areas have room to grow.
I also need to point out that climate changes are hitting disadvantaged communities hardest, in Australia and around the world, so making a delineation between environmental and social impact has its limits.
IIG is a leader when it comes to measuring and reporting on impact. How important is this to your investors and what has been your biggest learning so far when it comes to impact management?
We do impact management because it’s a crucial part of the practice: Impact investment calls for intentionality and measurability by definition. But in terms of investor appetite – it varies. Some investors and their advisers really dig into the reports, whereas some are satisfied with the simple thesis that, for example, a solar farm has a positive impact. And frankly, some of our investors just like the financial returns.
Regarding learnings: Impact management and measurement is still very much an emerging practice, and in some ways more contested and complex than financial measurement. There’s value in the UN Sustainable Development Goals framework. We use it, and lots of our community get behind it, but there’s still good debate about whether it’s the most relevant framework for a mostly-rich country like Australia. The Impact Management Project’s five dimensions are a good set of questions to ask. It helps you think systematically about the who, what, how much, contribution, and impact risk of an investment.
We’ve invested a fair bit of time and thought in this area, but there’s still a long way to go, for the whole industry and for us.
You recently launched a new impact investment fund of funds which brings together a range of different asset classes. Who has this been designed for and is it aiming to fill any particular gap in the marketplace?
It’s a true-to-label impact investment fund that’s also designed to fit into a really broad range of investors’ portfolios, on its financial merits.
More and more people are looking to move into impact for the first time, but they haven’t felt comfortable with single-strategy funds, or illiquid funds, or no-yield funds. So this fund is aiming for good diversification, yield and redemption offers.
Because many investors are also looking to rebalance away from public equities because they think those valuations are high, but they also see issues with bonds or property, they’re looking to fill the ‘alternatives’ portion of their portfolio. As we’ve said before, impact of itself isn’t an asset class, but IIG has experience managing assets like renewable infrastructure and VC that fit into the alternatives classes.
Despite much evidence to the contrary, in some quarters there is still a perception that impact investing necessitates sacrificing a financial return. What’s your response to this?
If I’m being honest – I don’t respond to it. The facts say otherwise. If there are people ‘in some quarters’ that need to believe something different that says more about their needs than it does about the facts.
If I’m being professional (which I do try and be occasionally) then the evidence base, and IIG’s record, shows that you can have meaningful impact alongside attractive financial attributes. In some cases that’s an attractive return in other cases it’s a return that prices in the actual risk you are taking where other investments may be under-pricing risks like reputational risk associated with poor community engagement, stranded asset risk, regulatory risk etc.
IIG is exploring the ‘democratisation’ of impact investment, of widening access to much larger numbers of people. What is the opportunity here and what role do you see for IIG and others in this space?
For IIG, in the short term, this is about partnerships. The most accessible form of investment for most Australians is superannuation, and it’s great to see more and more super funds adopt the ideas of impact investing. Clearly, they’re responding to what the community wants. We have a mandate with WA Super, (who are merging with First State to become Aware Super), and Future Super was the first of our superannuation fund investors, coming into our Solar Income Fund – which has done very well for them. We’d like to do more with superannuation funds, and that’s the most likely opportunity, but you never know who’s going to call us with another idea!
I also think there’s a role for storytelling, building awareness and opening the doors of finance to a wider range of people. Beyond being customers of impact investment managers, we want people to feel empowered when it comes to capital and their participation in the world of finance. Finance shouldn’t be just for people with lots of money.