A quiet start to the week for SIB News (then again things are frantic in our core domain of exchanges!) but 2 articles looking at different aspects of the impact industry are worth perusing.
Have a good day,
The Major Hurdles To Impact Investing
Charlie Thomas – ai cio
Impact investing won’t be adopted by the majority of institutional investors until several significant challenges have been overcome, according to Nicole Wubbena senior consultant at Hewitt EnnisKnupp.
The approach, which takes social, responsible investing a step further and allocates capital to distinct projects designed to improve society as a whole, has gained traction in recent months, with family offices and high net worth individuals leading the charge.
Sir Ronald Cohen, the founder of private equity giant APAX and godfather of venture capital, is one of the UK’s biggest advocates for impact investing.
In the US, Goldman Sachs launched a $250 million “social impact” fund whose returns are linked to the success of projects such as affordable housing, pre-school education, and how many young criminals commit new offences after leaving New York’s notorious Rikers Island prison.
And the Dutch pension giant PGGM has also written extensively on how it thinks asset owners should tackle impact investing.
However, despite all of the positive noise surrounding the strategy, there are simply too many problems for asset owners to embrace it fully, according to Wubbena.
“What challenges the endorsement of these products by institutional investors is the inability of such offerings to meet various ‘check the box’ standards. These include length of track record, minimum asset levels, fees, liquidity, and risk/reward ratios,” she wrote.
“Given that the field is still considered in the ‘early stages’, few products have track records exceeding three years and remain relatively expensive to traditional products.”
Another barrier is there are fewer liquid equity-like options than debt, private equity, and venture capital-like investments, Wubbena continued.
In addition, the implementation of these purpose-driven investments, particularly for plans that are guided by stringent expectations around investment performance, can prove challenging.
Can ‘Impact Investors’ Save The Day For Cleantech Entrepreneurs?
Rob Day – The Energy Collective
I am writing this column while en route to a meeting of LPs on the subject of “impact investing.” Last week, I also attended a meeting of family office investors on the same subject. Impact investing is a growing trend and discussion topic. Can it make a difference for cleantech entrepreneurs and markets?
First of all, what is impact investing? As always, different people have different interpretations and uses. But at its most general level, it’s the idea of directing investments into projects and startups that are expected to generate positive returns and (wait for it) impacts on some key issue or another, such as habitat preservation or climate change, to pick two examples, but also in non-environmental domains like education, health, gender equality, etc.
Different people in the impact investing community have different expectations about what the financial returns of such investments should be. Some seek risk-adjusted returns at or even above market benchmarks. Others view impact investing as likely generating sub-market returns, but still preferable to a grant in many cases, because the money deployed does largely flow back to the investor, and because of other factors.
Importantly, from the perspective of many investors, the impact investing concept is differentiated from other related concepts like ESG (environment-social-governance) in that it involves proactive investments designed to make a positive difference. ESG and other approaches often got interpreted primarily as “negative screens,” taking some investment areas (arms manufacturing and tobacco are classic examples) off the table, but otherwise leaving most of the investment portfolio the same as before.
So there’s something in all the vagueness of “impact investing” to interest and/or turn off just about anybody. But can it make a difference for cleantech entrepreneurs?
The answer is that it can, but only if done with an eye toward scalability, and if done collaboratively with the broader private sector. And right now, this is a rarity.
Impact investing could play four very powerful roles in cleantech markets.