Money and morality: A harmonious existence in impact investing?
Impact investment is becoming a popular alternative to more traditional forms of investment. The impact investment model, which aims to provide investors with a financial return whilst delivering a tangible social or environmental benefit, is seen as a more morally responsible form of investment. Yet, there is also a common perception that greater societal rewards are linked to investment shortcomings in the form of lower returns.
If the perception of lower returns is correct, why does this niche sector continue to grow at a fast pace?
Over recent years, it is possible that investor priorities have shifted to more benevolent opportunities, although the prospect of a return will always distinguish impact investment from truly philanthropic giving. A more likely explanation for the impact investment trend is that a number of factors, such as economic growth, the introduction of impact investment tax incentives, the instability of other key investments such as oil and gas and evidence of respectable impact investment performance have all contributed to the expansion of the market.
What impact investment opportunities are available to investors?
Impact investments can be hugely diverse in nature, providing the investments produce a wider benefit. Investments can be made in both emerging markets (EM) and developed markets (DM). Eyes on the Horizon, an impact investor survey published by the Global Impact Investing Network (GIIN) and JP Morgan in 2015, shows a roughly equal split between the two.
The survey also analysed the geographical location of assets under management in both the DM and EM impact investment markets. North America, where projects include the provision of healthy school meals to poorer schoolchildren, was shown to dominate the DM impact investment market, accounting for around 80% of all DM impact investments. By contrast, the EM impact investment market was shown to be far more diverse. The highest percentage of EM impact investments, approximately 29%, were made in Sub Saharan Africa, with Latin America and the Caribbean (22%) and Eastern Europe, Russia and Central Asia (20%) following close behind.
A recent report by Cambridge Associates, in partnership with the GIIN, identified six key impact themes targeted by impact investment funds. These were:
- Providing financial services to populations that otherwise lack access e.g. micro-finance, SME finance and community banking.
- Creating jobs in areas of need, improving job quality and workforce development.
- Improving standards of living and economic conditions including basic infrastructure such as transportation and telecommunications.
- Developing access to environmentally friendly or health products and services such as organic or locally sourced foods.
- Funding agriculture to create sustainable practices and yield improvements to feed more people at a lower cost and improve the livelihoods of smallholder farmers.
- Expanding access to education and improving educational outcomes by investing in innovations or business models.
Aside from helping others, what benefits can be obtained from impact investment?
UK Tax Incentives
The social value of impact investment is rewarded with the availability of a number of tax reliefs. Social Investment Tax Relief (SITR), an incentive under the personal tax system, has been available since 2014 under the Finance Act. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) also enable social organisations to receive the same tax-advantageous investments as commercial firms.
The 2015 March budget further boosted impact investment by providing for the so-called Social Venture Capital Trust Scheme (Social VCT) and granting Social VCTs the same tax advantages as VCTs, namely tax-free dividends and capital gains tax free disposals.
Impact Investment Performance Statistics
Recent performance statistics published by GIIN demonstrate that market-rate returns are attainable for impact investment. Out of the 51 impact investment funds surveyed, the benchmark returned over the full period analysed (1998 – 2010) was 6.9% versus 8.1% in comparative non-impact investment funds. EM funds, particularly those focusing on Africa, have outperformed DM funds, returning 9.1% to investors to DM fund's 4.8%. EM funds in Africa have performed especially well, returning 9.7%.
Although the statistics show that impact investment returns overall do lag behind comparable funds, investors may consider that lower returns are offset by either the social benefit of the fund or the associated tax breaks. We expect that the popularity of impact investment will fuel more investment opportunities and will continue to be a worthwhile alternative to investors seeking more than just returns.