The term “impact investing” (II) has recently become popular for investors in the know. According to the Global Impact Investing Network, the term refers to investments in companies, organizations and funds that hope to generate a measurable, beneficial social or environmental impact alongside a financial return. Sound familiar? It should. Similar terms have been used for years to describe responsible investing (RI).
So what’s the difference? Impact investors actively seek to invest in companies or projects that provide solutions to social and environmental problems. In contrast, although responsible investors consider environmental, social and governance (ESG) criteria when they’re selecting and managing investments, the publicly traded companies they invest in do not exist solely for those purposes.
As with any new type of investment, there’s keen interest in the financial community. Financial advisors, for example, are using impact investments increasingly to attract new clients and expand existing relationships. In fact, according to the recent State of the Nation: Impact Investing in Canada report authored by MaRS and Purpose Capital, interest in II is increasing and gaining traction across the country.
II already has an impressive list of accomplishments, the report notes; in particular, it points to the Community Economic Developments Investment Funds (CEDIF) model predominately used in Nova Scotia, as well as Renewal Funds, Resilient Capital, Solar Share and Toronto Atmospheric Fund as examples of successful impact funds.
These and other similar investment funds are investing in environmental sustainability, renewable energy, organic and natural foods, aboriginal business, affordable housing, youth and disadvantaged employment and other projects delivering public good.
Although Royal Bank of Canada led the way for chartered banks when it announced a $20-million commitment for impact finance in 2012, most big banks and large financial services institutions have stayed largely on the sidelines. “The amount of capital they have deployed is far below their economic clout,” the report states. Why? It’s a sort of chicken-and-egg situation in which the large financial institutions will not meaningfully participate until there are more funds providing a variety of market-appropriate risk-adjusted returns offered by fund managers with a decent track record.
“As client awareness grows, it can be expected that advisors within these [banking] institutions will be encouraged to develop a more sophisticated understanding of the latent and actual demand from retail and institutional clients,” the report says, adding that the government needs to play a part as well ensuring that Canada Revenue Agency regulations enable, rather than frustrate, the participation of foundations, charities and non-profits.
Still, there are other challenges that remain: the majority of impact investment products are offered to a narrow investor class of institutional and mostly high net-worth private investors. Products for retail investors remain limited due to a variety of factors, including incomplete information on consumer demand and preferences.
Patti Dolan, a financial advisor in Calgary who specializes in RI, sees II as the next wave, but she and other like-minded advisors are limited in the products they are able to offer and the advice they are able to give to their clients. Nevertheless, Dolan sees a significant role for advisors in building the II market; she suggests advisors educate themselves and join industry organizations to get the support they need.
“If advisors actually offered these products to their clients, they would be surprised how much interest is out there,” she says.
Ocean Rock Investment Inc.’s Meritas Mutual Funds have been using a form of II since the fund company started in 1999 (the term “impact investing” was first used in 2007). Gary Hawton, Ocean Rock’s president, refers to it as community investing (CI), allocating up to 2% of the assets in each of its portfolios toward community development initiatives both domestically and internationally.
II and CI are used interchangeably, Hawton says, with II denoting a conscious decision to create an investment with a specific social or environmental impact while CI is often regionally focused, but still designed to help alleviate an issue. “In both cases, a financial return is also part of the equation.”
In choosing impact or community investments, Meritas looks for organizations that are experts in their area. “Effectively we have ‘subadvisors’ for our community investments just like we do for our funds in general,” Hawton says. “The investments need to provide us with a reasonable financial return while providing above average social or environmental returns.”
Globally, community investments are fairly easy to find, “especially investments that meet our social criteria,” Hawton says, suggesting that impact investments may also be out there, just waiting for the chance to be uncovered by savvy social finance types.
“There are thousands of opportunities to make long-term investments that help alleviate the enormous inequities in the world and there are lots of organizations that are working hard to do so,” he says. “It makes sense to us that this would be an asset class for all Canadians to consider as part of their portfolio.”