Private impact investment funds — specifically private equity and venture capital funds — that pursue social impact objectives have recorded financial returns in line with a comparative universe of funds that only pursue financial returns, according to a first-of-its-kind analysis from global investment advisor Cambridge Associates (CA) and the Global Impact Investing Network (GIIN).
The Cambridge Associates Impact Investing Benchmark is the first comprehensive analysis of the financial performance of private investment funds that have both social impact and financial objectives, CA and GIIN claim. It provides performance data on a quarterly basis.
The benchmark includes 51 private investment funds of vintage years 1998 to 2010 that have the specific objective to create positive, measurable social impact and to produce risk-adjusted, market-rate financial returns. The funds included focus on social impact objectives such as financial inclusion, economic development and education.
For perspective, CA measured the benchmark against a comparative universe of 705 funds with no social impact objective in the same industries, geographies and asset classes and of the same vintage years.
The results could be a boon to the burgeoning impact investing sector — the benchmark exhibited market rate returns — and stronger performance in a number of vintage years, sizes and geographies of focus. Until now, measuring return on investment from impact investments has been a limiting factor in its expansion.
“There’s a view among some investors that impact investing necessarily entails a sacrifice in financial return,” Jessica Matthews, managing director at CA said in a statement. “However, this data helps to show that is more perception than reality.”
This could lay the groundwork to generate critical financial performance data for the impact investment industry, according to Amit Bouri, CEO of the GIIN.
“This demonstrates that market rates of return are achievable through impact investing,” Bouri said. “We hope this will strengthen the credibility of impact investing for a broader set of investors.”
Impact investing funds launched from 1998 through 2004 performed in line with or better than the comparative universe of non-impact investing funds, CA and GIIN say. Funds launched in more recent periods are trailing the comparative universe but their returns remain largely unrealized.
Smaller impact investing funds often outperformed smaller funds in the comparative universe of non-impact investing funds. For all vintage years, for example, impact investing funds that raised under $100 million returned a pooled 9.5 percent net internal rate of return — outperforming similar-sized funds in the comparative universe of non-impact investing funds in each vintage year grouping except 2008 to 2010.
Conservation investing, a subset of impact investing that focuses on environmental endeavors, totaled approximately $23 billion in the five-year period from 2009 to 2013, according to a report released late last year by EKO Asset Management Partners and The Nature Conservancy's NatureVest division. During the same period, private investments accounted for almost $2 billion of this market — an amount that is growing at an average of 26 percent annually, and is expected to reach more than $5.6 billion by 2018.
Meanwhile, the S&P Dow Jones Indices (S&P DJI) expanded its family of Environmental, Social and Governance (ESG) indices this week with the launch of the S&P Environmental & Socially Responsible Indices.
The new Indices are designed to offer investors greater exposure to securities meeting sustainability investing criteria while maintaining a risk and performance profile similar to their respective underlying indices — the S&P 500® and the S&P Developed BMI Ex-U.S. & Korea LargeMidcap. The Indices have been licensed to Goldman Sachs Asset Management (GSAM), which worked collaboratively with S&P DJI to develop the sustainability criteria used in these Indices.
“The demand to integrate long-term sustainability strategies into portfolios is increasing, particularly for those investors who are conscious about their own environmental and social responsibility as well as those who are compliant with the United Nations’ Principles of Responsible Investment,” said Alka Banerjee, Managing Director at S&P Dow Jones Indices. “By drawing upon broad market, widely recognized indices like the S&P 500 and S&P Global BMI, we are able to offer the market a unique perspective on the performance of companies that have a strong profile in addressing environmental and social challenges.”
Members of the indices are selected using a rules-based methodology where stocks engaging in fossil fuel heavy industries or in the production and sale of tobacco, cluster bombs, landmines, nuclear and other military armaments are excluded. The eligible companies are assigned Environmental and Social dimension scores (E&S Scores) provided by RobecoSAM. 75 percent of the stocks with the highest-ranking E&S Scores in each sector are selected as constituents.
“Our clients are increasingly interested in aligning their investments with their core values. That’s why we worked with S&P DJI to help them develop these environmental and socially responsible Indices,” said Monali Vora, a managing director in Goldman Sachs Asset Management Quantitative Investment Strategies team. “These Indices have the added benefits of being both diversified and broad-based while seeking to maintain low tracking error to the parent index."
S&P’s announcement confirms the trend of the growing relevance of ESG investing. Assets employing sustainable investing strategies surpassed $21 trillion in 2014, according to a recent report. Blackrock, the world’s largest asset manager, released a guidebook with Ceres last month describing strategies for investors to engage companies on ESG issues.
And we continue to see large banks designate portions of their portfolios to green bonds. In May, Bank of America issued its second green bond for $600 million as part of its $70 billion commitment to support environmental business. Several other banks recently announced sustainable investment programs including Citigroup, which committed $100 billion to finance climate-change mitigation activities, and Deutsche Bank and Barclays, which both committed €1 billion to green bonds. In March, Morgan Stanley released a study saying that sustainable investments are actually outperforming traditional investments.
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Founder & Principal Consultant, Hower Impact
Mike Hower is the founder of Hower Impact — a boutique consultancy delivering best-in-class strategic communication advisory and support for corporate sustainability, ESG and climate tech.
Published Jun 25, 2015 10pm EDT / 7pm PDT / 3am BST / 4am CEST