Impact Investment: Why Western Australia should be developing new investment opportunities

The appetite for impact investing is rapidly growing globally, gaining prominence as a serious investment approach that achieves both financial returns and social or environmental goals.

Impact investment is defined as investments made in companies or organisations with the intent to contribute measurable positive social or environmental impact, alongside a financial return.

The rapid growth of the impact market is being driven by changing consumer demands. Over the next few decades, wealth will transfer from Baby Boomers to Generation X and Millennials who are becoming more aware and concerned by agendas such as climate change and social disadvantage. As a result, they are making more conscious investment, purchasing and employment decisions. While companies are being forced to respond to protect their shareholder value, brand and social and ethical accountability.

Since 2016, the impact investment market has doubled each year. In 2017, the global impact investment market was worth $US 230 billion; in 2018, it was worth $US 502 billion; and is now heading towards the first $US1 trillion (Mudaliar & Dithrich, 2019). The World Bank’s International Finance Corporation (IFC) estimates that investor demand now amounts to no less than $US 26 trillion, 50 times the actual size of the 2018 market (Volk, 2019).

Western Australia’s (WA) unique natural resources and social and environmental challenges are elements that impact investors seek to invest in. WA already has a small impact network with a few investment sources, demonstrating the demand for local investments. This includes a $20 million Impact Fund backed by WA Super, intermediaries (Impact Seed), corporate funding (e.g. Rio Tinto) and philanthropy (Minderoo Foundation).

However, more work is required to harness the unmet demand for impact investments by developing more sophisticated investment opportunities and vehicles that enable investors to pursue impact and financial returns in WA.

What is impact investment?

All investments have impact – positive, neutral or negative outcome of people and the planet, and can be classified upon a spectrum.

Impact Investing Spectrum by Sonen Capital

Impact investment is a rising investment class that goes beyond minimising harmful outcomes (responsible investment and Environmental, social, and governance (ESG)) to actively creating positive results that also contribute to social and environmental solutions. Unlike philanthropy, impact investment is an investment, as investors seek to achieve a financial return that is at commercial or sometimes sub-commercial rates.

Impact investors actively seek to place capital in assets, businesses and not-for-profits (such as stocks, micro-finance, private equity, venture capital and impact bonds). They fund industries (such as renewable energy, sustainable agriculture, manufacturing and technology), infrastructure (such as ports, housing, connectivity and utilities) and services such as (healthcare and education).

State of the Australian Market

In Australia, the market has grown exponentially from $1.2 billion in 2015 to over $20 billion today. It is projected that demand for Australian impact investment products will continue to grow and disrupt traditional markets, reaching $100 billion over the next five years (RIAA, 2020).

Investor activity is broadening and deepening in the Australian impact market, with more investors becoming active in impact investing and investors already active in increasing their allocations to impact investing in terms of both dollar amount and number of investments.

This growth trajectory looks set to continue in the medium to long term as investor awareness and interest increases, establishing impact investment as a significant investment class within the next five years. In addition, recent evidence suggests that investors are able to earn higher levels of financial returns achieved on impact investments targeting environmental outcomes – which is clearly a factor in attracting mainstream and larger-scale investment interest (Cohen, 2020).

RIAA’s (2020) analysis and survey of the Australian Impact sector found the following:

  • The total value of impact investment products as of 31 December 2019 was $19.9 billion (including $8 billion in foreign products). Equating to a rise of 249% from $5.7 billion in 2017;
  • Australian investors advise they wish to increase their proportional allocation towards impact investments. Accordingly, the market is estimated to grow fivefold to $100 billion over the next five years;
  • There are 111 Impact investment products widely on offer to Australian investors as of 31 December 2019;
  • Green bonds and environmentally-focused impact investments represent 87% of the total Australian impact investing pool;
  • Social impact investments are valued at $2.5 billion and have increased tenfold from $242 million in 2018. Representing only represent 13% of the total market;
  • Australian impact investors surveyed are neutral on whether they support environmental or social impact projects. However, social impact investments are harder to develop and often work with less sophisticated project proponents;
  • Australia has ten social impact bonds (SIBs), none in Western Australia; and
  • There is a lack of Australian intermediaries who can advise on and create impact investing to stimulate market growth.

Why governments should be interested in impact investment

In addition, the broader rationale for a coordinated impact investment approach, includes the following:

  1. The government does not have the budget or resources to undertake the necessary investment required to address regional and environmental challenges. While the current model of grants has limitations;
  2. Impact investment will help to share financial and performance risk with investors and service providers – allowing better risk management for governments and seeking knowledge and technical assistance from investors and service providers to improve outcomes;
  3. Impact investment encourages innovative, entrepreneurial and scalable outcomes to change the status quo;
  4. Returns on impact investment will be at least as good as traditional investments, and in the future most likely better (Cohen, 2020; RIAA,2020);
  5. Increasing market disruption as young consumers, entrepreneurs and employees seek impact opportunities and influencing the behaviour of investors;
  6. Investors are increasingly looking for impact projects, and there is now a substantial unmet market demand that is not being capitalised and therefore unrealised;
  7. Impact measurement supports an outcomes-based management approach, a WA Government requirement, and a growing determinant for investors and business accountability; and 
  8. The impact revolution has the ability to drive sustainable and development change in WA, improving equality, living standards and environmental outcomes to targeted investment tied to social and environmental outcomes (Cohen, 2020).
References

Cohen, Ronald (2020) Reshaping Capitalism to Drive Real Change. Ebury Press: London

Deloite (2019) The Deloitte Global Millennial Survey 2019 Societal discord and technological transformation create a “generation disrupted.” Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/deloitte-2019-millennial-survey.pdf 

Global Impact Investing Network (GIIN). (2020) Retrieved from: https://thegiin.org/

Landrum, Sarah (2016) Why Millennials Care About Social Impact Investing. Forbes. Retrieved from: ttps://www.forbes.com/sites/sarahlandrum/2016/11/04/why-millennials-care-about-social-impact-investing/?sh=2a44297c59c0

Mudaliar, Abhilash, and Dithrich, Hannah (2019) Sizing the Impact Investing Market. Global Impact Investing Network. Retrieved from: https://thegiin.org/assets/Sizing%20the%20Impact%20Investing%20Market_webfile.pdf  

Responsible Investment Association Australia (RIAA), (2020) Benchmarking Impact Australian Impact Investor Insights, Activity and Performance Report 2020. Retrieved from: https://responsibleinvestment.org/wp-content/uploads/2020/06/Benchmarking-Impact-2020-full-report.pdf

Volk, Ariane (2019) Creating Impact: The Promise of Impact Investing. First edition ed., Washington, International Finance Corporation. Retrieved from: https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/promise-of-impact-investing

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