Impact investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.
The growing market for impact investments provides capital to address some of the world’s most pressing challenges in sectors such as renewable energy, sustainable agriculture, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Irrespective of the intentions, the term is occasionally met with scepticism, especially when being promoted as an idea for greater adoption in the investment community. “It’s not up to us to save the world”, is not an uncommon response. At Maughan Capital we’ve debated whether various initiatives belong in our portfolio, or whether the broader issue is better passed over for consideration by the Nick Maughan Foundation. It’s true that there is little data to prove that you can “do well by doing good”. However, we’ve come to believe that institutional investors who avoid impact are missing out.
For the UN’s Sustainable Development Goals (SDGs) to be met, an annual $2.5 trillion of additional private capital needs to be invested in emerging economies’ basic infrastructure. Investing in railway networks, food production, clean water, sustainable power and similar projects may well be emotionally rewarding, but more importantly it provides sources of investment returns uncorrelated to traditional asset classes in the markets we are more accustomed to investing in. At Maughan Capital we’ve spent a lot of time researching ‘real assets’ that provide a fair potential return on capital as well as boosting the economies in which they operate. This alignment of our personal values with our capital allocation has in turn diversified our currency exposure and boosted our net Sharpe ratio through the long term – low volatility – nature of such investing.
When it comes to assessing impact investments, while there has been development in constructing an industry benchmark, there is still some way to go. One useful initiative is the Impact Investing Benchmarks, set up in 2015 by Cambridge Associates, in collaboration with Global Impact Investment Network (GIIN). Together they produce quarterly reports that specifically capture the performance of private equity and venture capital funds that target risk-adjusted market-rate returns in the impact investing space. These attempts to quantify social impact in the context of financial incentives and returns aren’t perfect, but they’re a good start.