The Global Impact Investing Network has seen an uptick in impact investment allocations in recent years. Its chief executive, Amit Bouri, says the increase has been particularly marked among long-term pension funds and other large, institutional investors. “If you are investing for the long term, you have to think about the social and environmental impact of your investments,” he says.
Concerns around inequality and the climate crisis are transforming the way that institutional investors manage their portfolios, with many now allocating to impact strategies. “This is being driven by a number of different factors,” says Shami Nissan, head of responsible investment at Actis. “These include increased participation in the market of high-net-worth individuals, rising numbers of women at the helm of investment decisions – studies have demonstrated that women are more inclined to invest for impact as well as financial returns – and the increased knowledge and concern among pension plan stakeholders around environmental and social issues.”
A GIIN report shows infrastructure to have been one of the biggest beneficiaries of this trend. Among the institutional investors surveyed, the asset class topped the list for growth in allocations – these increased from $336 million in 2014 to $2.3 billion in 2018. The absolute amount of capital going into infrastructure impact strategies remains small but the rise in capital allocated is significant.
The same report found that 29 percent of respondents were planning to increase their allocations to infrastructure impact strategies, with 48 percent looking to do the same in energy impact strategies – some of which could arguably be included in the infrastructure sector.
So could we reach a point where all infrastructure funds make impact investments? In many ways, infrastructure has more potential to generate a positive impact than many other investment types. “Infrastructure has some inherent impact characteristics as it has the potential to deliver significant benefits to communities and, in some cases, the environment,” says Nissan. “You are putting in place a large asset that is usually too large not to impact communities and environments and so there is a huge opportunity for enlightened, and progressive investors to ensure positive outcomes.”
This is particularly the case in emerging markets, where infrastructure projects have the potential to transform lives. “Infrastructure, by its very nature, is impactful, particularly in the markets where we invest,” says Chris Chijiutomi, director and head of infrastructure equity at CDC Group. “It is the building block for economies.
“If you build a road, you are opening up markets and trade corridors and you are creating both a direct and an indirect impact – you’re creating jobs through construction, but also enabling the movement of goods and people. If you double the hours of available power in a market such as Nigeria, you are creating safer neighbourhoods by enabling street lighting to function. You are enabling a shop to open up for longer.”
The fact that infrastructure funds often work in collaboration with governments is another factor in driving the asset class towards more sustainable practices. “Many governments do not have the resources to meet the infrastructure needs of their populations,” says Bouri. “With many governments seeking to meet climate goals and some looking to the United Nations Sustainable Development Goals, they will have influence over private funds.”
Best of intentions
True impact investment requires intentionality: funds need to set out to create positive impacts on society and the environment, rather than these being by-products of their investments.
Although some firms have launched impact strategies and vehicles over recent years, it is still some way from becoming a mainstream movement. “There are not many funds that we see explicitly talking about impact yet,” says Chijiutomi, though he adds: “This will come.”
Many firms may need to demonstrate an intended impact in order to attract institutional investors. This may require a significant increase in a firm’s resources and a major improvement in the systems dedicated to measuring the impacts that its investments are having. “Funds not able to generate impact may find that this becomes a gating issue for some investors, because we are seeing some implement wholesale policy changes,” says Nissan. “They are not just allocating a proportion of their assets to impact strategies, they are applying impact to every dollar they invest.”
It is clear that impact will become an ever-more important aspect of infrastructure investment. Many firms are already having to carefully consider how they can bring benefits to society and the environment. Yet it is not quite clear that all strategies will bear the impact badge.
“Some infrastructure funds won’t necessarily become impact funds,” says Chijiutomi. “If they invest in assets that are already built, such as an airport in a developed market, you may make it more efficient, but it would be hard to make an impact case. These types of investment are about optimising efficiency for financial return.”
Nissan agrees: “I think everyone will become more thoughtful and rigorous when it comes to impact. But I’m not sure all funds will be able to make the leap from ESG, which is more about risk mitigation, to impact, which requires intentionality from the start.”