What is the role of financial institutions in creating social impact?
Recent trends towards sustainable investing strategies and impact investing have reflected a changing public ethos towards the role of businesses and corporations in our society.
Millennials in particular, have been behind this seismic shift in investment perspective. No doubt, with an estimated $30 trillion in wealth expected to shift from the baby boomer generation to millennials in the next 30 years, its certain that greater change is yet to come.
This article explores how financial services are evolving to cater to this trend in people’s attitudes and how these innovations are crucial in ensuring the long-term viability of sustainable investments.
Asset Management and Private Equity
Over the past decade, impact-investing funds have amassed more than $77 billion in assets under management, with notable investment managers, Bain Capital, BlackRock and JP Morgan Chase, amongst many others, have added impact products to their portfolios.
But besides the capital itself, what else can such investors and asset managers do in the development of social impact investing?
In a late 2016 article by McKinsey & Co., one of the highest priorities outlined is clarifying impact measurement standards. Across a broad spectrum of impact-investing funds, it was found that the majority employed more than one impact-measurement framework. Fund managers have tended to use more than one framework as no single framework at present, can capture all the metrics required for portfolio assessment. Naturally, with a greater number of frameworks, more and more complexity is built into the impact-investment ecosystem. Consequently, the ability to then benchmark performance for funds across peers and over time, is diminished. It’s evident that for the long-run sustainability of impact-investing, that fund managers, investors and industry bodies must work together to devise a uniform set of metrics.
Further on the issue of measurement, as with any mention of any assessment of impact investing or the like, the second inevitable question always returns to the quantification of softer social and environmental measures. One interesting effort that one investment manager has had can be seen with TPG Global’s US$2bn ‘Rise Fund’, supported by non-other than Bono of U2, Richard Branson, and a veritable coterie of media and tech fame. The Rise Fund has partnered with consultancy, the Bridgespan Group, to attempt to quantify the “impact multiple of money” and to put the impact generated in dollar terms. While such dollarised attempts at quantification has met its fair share of criticism, it does leave one wondering about the potential for impact-adjusted hurdle rates of return – a significant step towards the long-term professionalisation of the emerging impact industry.
With greater discipline, improved measurement and collaboration by investors, fund managers and the impact industry, socially conscious investing may one day become a greater option towards a wider gamut of investors and pool of capital. But to reach this goal, it’s evident that significant work in innovation and research lies ahead for impact investors.
Debt and Green Bonds
Another significant development in financial services for social impact is the growth of the green bond industry. Green bonds refer to debt that is issued to fund projects and developments that create a positive environmental outcomes or refinance existing debt to fund projects with such a focus. For instance, in April this year, Woolworths announced an issuance of a $400 million bond issuance to fund a series of projects as part of their sustainability strategy. The proceeds from this debt will go towards placing solar panels on roof of their supermarkets, improving energy efficiency of their stores and adding HFC free fridges. The issuance was led by Citibank, ANZ and JP Morgan and brings the total green bond issuance in Australia to $9.9 billion since they were introduced in 2014. In a report published by Moody’s, global green bond issuances are expected to grow 20% to USD 200 billion in 2019. Given that the global issuances were only USD 2.6 billion in 2012, the green bond market has grown at a staggering rate over a very short period of time.
The growth of green bonds can be attributed to their appeal to both a broad array of investors as well as the unique value proposition they offer issuers. For non-ESG investors, those that are indifferent to the environmental, social and governance measures of investments, green bonds offer an opportunity to gain exposure to assets which will attract a higher valuation in the future as businesses that issues the bond adopts a more sustainable business model. Thus, green bonds are an instrument that allow non-ESG investors to manage concentration in risk while maintaining liquidity. For ESG investors, who invest with an ethical and socially responsible mindset, green bonds allow these investors to target the impact they make with their capital. Furthermore, they provide exposure to green assets that align with their investment strategy.
For bond issuers, the green bond market is frequently oversubscribed – the Woolworths green bond earlier this year received $2 billion worth of bids. This gives issuers access to a market with a high demand for debt. Issuers can also capitalise on the green credentials provided by the projects to meet the demands for a more sustainable business model that many external stakeholders now require. More recently, there have also been a wider array of assets that are eligible for green financing as the standards become clearer which increases investor confidence in green projects and provides issuers with more flexibility in the projects they can finance.
Green bonds have been crucial in making it easier for businesses to strive for a more sustainable practices and the industry still has tremendous scope to grow. There is potential for these bonds to expand into asset classes that are traditionally supported by the asset-backed security market such as electric vehicle infrastructure, green mortgages and even green fintech. In 2019, there are also expectations of the first collateralised green bond which will allow the combination of different types of green debt into a single package which can be sold to investors. This is expected to greatly increase the accessibility of green debt to investors.
As the businesses and consumers continue to become more socially conscious, we can expect the financial services industry continue to embrace the growth in this sector and offer innovative products which will be the key to ensuring that these projects have the capital necessary to become viable.
Authors
Bilal Ibrahim | Vice President of Operations
Neil Du | Finance Director