By Inge West, Responsible Investment Specialist, Mercer Global
Impact investing refers to investments made with the intention of generating positive and measurable social and environmental impact alongside a financial return.1 It is one of a number of responsible investing approaches along with others, including ESG (Environmental, Social and Governance) integration, active ownership, socially responsible investing (screening) and sustainability-themed investing.2
While impact investing could fall under the broader category of sustainability-themed investing (allocating capital to investments addressing sustainability challenges particularly related to the environment and society), what clearly defines it as a distinct, responsible investing approach are the core characteristics of impact investing. These include:
There is a growing focus on impact investing as an investment strategy, as evidenced by the size of the impact investing market, which has grown from just 60 billion US$ in 20144 to 715 billion US$ in 2019 according to the Global Impact Investment Network Annual Impact Investing Survey 2020.5 The survey further highlights that most capital (59%) is allocated to emerging markets, of which sub-Saharan Africa is attracting the most assets (21%).
Investors are increasingly realizing that they can generate financial returns while allocating capital to businesses that are addressing many of the world's sustainability challenges in areas such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare and education6 — all themes that are included in the Sustainable Development Goals (SDGs).
Asset managers are increasingly developing these impact strategies specifically targeting these impact areas that aim to achieve one or more of these SDGs. The interest in impact investing in sub-Saharan Africa is also likely to grow in future with sub-Saharan Africa tied in first place with Southeast Asia as one of the two regions where "over half of respondents (52%) plan to increase their allocations over the next five years."
African Organizations Are Increasingly Emphasizing Impact Investing
Impact investing is gradually gaining traction for pension funds in Africa and offers potential growth for other regions around the world. According to Mercer's Growth Market Allocation survey, pension funds in Africa are traditionally quite conservative, but as institutional investors become more familiar with alternative assets, and as access to nontraditional assets improves, allocations to alternatives, including impact investments, are expected.
In South Africa for instance, in 2018, the South African Reserve Bank announced an increase in South Africans' offshore investment limits from 25% to 30%, and the exposure to Africa (outside South Africa) was increased from 5% to 10%. This increased access provides South African pension fund managers with more opportunities to invest in funds that can make a positive difference for people across the continent while also providing positive financial returns.
Why Pensions Should Look Into Impact Investing
Local institutional investors are starting to appreciate the role that pension funds can play in mobilizing capital toward investments in their own regions that can make a difference in their local communities while providing positive financial returns for investors.
For example, the need for affordable housing is one of the top three priorities for employees in Nairobi, Kenya, according to Mercer's People First: Driving Growth in Emerging Megacities report. One group of nine Kenyan pension funds has recently formed a consortium to help address the problem. Together, the consortium plans to invest in local infrastructure and affordable housing.7 This investment will potentially mean improvements in housing for local residents, as well as financial returns for pension fund investors.
By including at least one impact investing strategy in their portfolios, pension fund managers have the ability to not only generate financial returns but also contribute to their communities resulting in both financial growth and an improved, more sustainable quality of life.
How Impact Investments Are Making a Difference
Pension fund managers interested in impact investing can find a wide variety of investment vehicles aimed at themes such as affordable housing, agriculture, microfinance, renewable energy and water, as well as telecommunications and transportation infrastructure. There are opportunities to invest in improving many of the needs most important to a pension fund's members or communities.
For instance, pension funds managed by Alexander Forbes Investments have made allocations to the Alexander Forbes Investments South Africa Private Markets portfolio, a multistrategy, multi-managed diversified portfolio that provides exposure to impact sectors including clean energy, infrastructure, microfinance, education, retirement accommodation and affordable housing.
Futuregrowth Asset Management, which manages assets on behalf of pension fund clients, runs a number of funds focusing on socially responsible or developmental assets, including the Infrastructure & Development Bond Fund, which makes investments that facilitate infrastructural, social, environmental and economic development in South Africa.
The fund includes the SA Taxi transaction, which has provided loans to the taxi industry over the past 10 years. This has contributed to the creation of 130,000 direct and 220,000 indirect jobs for drivers, managers and service providers, while also providing transportation options for South Africans.8
Sanlam Investments Alternatives serves as another example, offering pension funds the opportunity to invest in its Affordable Housing Fund created to develop clean, safe and habitable communities for the disadvantaged.
Sanlam has also established Climate Fund Managers, a joint venture between Sanlam InfraWorks and the Dutch Development Bank, FMO, which offers other impact investing vehicles for pension funds including the Climate Investor One Fund, a global climate fund that invests in clean energy projects in emerging markets.
When pension funds aim to make a difference in the communities they serve, impact investing can help promote country-specific agendas while delivering positive financial returns for institutional investors in pension funds.
Rich, Anna. "The case for impact investing," Personal Finance, 1 Aug. 2019, https://www.iol.co.za/personal-finance/investments/the-case-for-impact-investing-30024081