Impact investment takes time and effort but it can be richly rewarding.
The Global Impact Investing Network (GIIN) describes impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. Capital is allocated to themes ranging from sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education. Of the themes most relevant to the real estate investment sector, 28% of capital is allocated to financial services (and microfinance), 8% to housing and 5% to infrastructure.
GIIN’s estimates of the current size of the global impact investing market, in its April 2019 Sizing the Impact Investing Market report, show it to have grown at a significant pace in recent years – reaching $502bn (£390bn) by the end of 2018. GIIN has identified a diverse range of organisations involved: family offices and foundations might be expected but there are also pension funds and 800 asset managers on the list of 1,340, and more than 50% are relatively new entrants, only making their first impact investment in the past decade. In fact, GIIN’s 2018 survey of its members had already found that of the 64 respondents that also make conventional investments, 84% reported that they are making more impact investments, and 72% said there is greater buy-in from internal stakeholders to have an impact investment arm. An example of this shift in interest and acceptance was Zurich Insurance Group’s announcement in November 2017 that it would more than double its commitment to responsible and impact investing from US$2bn to US$5bn, aiming to eliminate 5m tons of CO2 emissions annually and improve the lives of 5m people.
I am also seeing this shift in practice, with several mainstream investment managers newly exploring impact investment ideas. This is partly because there is now far greater acceptance among pension funds that fiduciary duty requires consideration of material environmental and social factors in investment decision-making, rather than precluding it.
Practical examples
There are interesting examples of impact investing in the UK real estate sector, worth highlighting to illustrate the range of approaches being taken. Two funds focused on carbon reduction, set up many years ago, are Columbia Threadneedle Low Carbon Workplace Fund and Impax Climate Property Fund, while the well-known impact investor Bridges Fund Management, founded in 2002, holds multiple property investments looking at both social and environmental performance.
Golden Lane Housing, the housing arm of Mencap, used £11m of social investment to buy supported homes for people with a learning disability, and was the first issuance on the Retail Charity Bond platform. New Communities Partnership was launched in 2016 by Kier Living, The Cheyne Social Property Impact Fund and The Housing Growth Partnership to deliver 10,000 new homes in the UK. Resonance has around £150m under management in a range of funds including real estate. Finally, Triple Point Social Housing and Civitas are two of the new batch of social housing REITs drawing much attention.
Challenges
The latest GIIN market survey provides an encouraging update to one of the most common remarks I hear – “show me the money”. Of the 82 respondents who have been reporting for the past five years, total assets under management (AUM) have grown from $30.8bn to $50.8bn. More than 70% of total respondents exceeded the capital investment targets they had set themselves for 2017, to a total of 8% over target. Some 64% target a
risk-adjusted market rate and these saw a 17% gross return for equity investments in developed countries. The remainder of the field investing in below-market-rate investments still saw a gross return of 7%.
Given the rapid growth in the market, another challenge is the crucial principle of ongoing measuring and reporting of the social and environmental performance and progress of underlying investments – particularly given the multiple methodologies in existence for impact measurement. Now that more large mainstream investors are getting involved, existing impact investors are increasingly concerned about dilution of mission – “impact washing” as it has been termed. Some 80% of GIIN members agreed that “greater transparency from impact investors on their impact strategy and results” would help mitigate this risk.
Where next?
Recognising the measurement challenge for social sustainability issues, I’m working with Big Society Capital to support them in developing a social impact measurement framework for consistent use across the real estate sector.
The framework will provide simple effective tools for real estate investors to assess the social performance of their investments in a consistent way. I’ve seen tools like this, for example, the Global Reporting Initiative (GRI), European Public Real Estate (EPRA) and Global Real Estate Sustainability Benchmark (GRESB) indicators, work well over the past 20 years; a common approach across industry allows for a managed process of innovation which ensures rigour and avoids duplication of effort.
My initial research with Big Society Capital found a total of 166 indicators just for housing investments. The detailed key performance indicators range from the straightforward “number of new units of affordable housing” and “number, value and area of community facilities financed” to those requiring more engagement at ground level, for example “number of formerly homeless individuals housed”, “number of beneficiaries supported to develop new skills”, “response rate to tenant requests for repair/complaints” and “tenant ability to save regularly”.
When you get down to the details like these, you start to realise one of the real personal challenges with impact investment: the decision-maker will inevitably be required to invest more personal energy and time in understanding the messy and muddy realities on the ground than in standard investment processes. Impact investing was never designed to be a comfortable tick-box exercise, it involves sometimes eye-opening and even emotional encounters with the challenging realities of life for many people, and to the damage inflicted on our ecosystems.
On a positive note, involvement in purpose-driven impact investment brings far more than financial benefits to both those investing their capital and those managing those investments. If you’re looking for an exciting new challenge this year, investing for impact could well be it.
Beth Ambrose is director of upstream sustainability services at JLL
