Impact Investing: The Way Ahead?
By Abigail Fernandes
On September 20th and 27th , millions of people took to the streets to strike for climate action. This mass protest was a way of expressing a public sentiment that “Business as usual is no longer an option”. However, Charities and Governments around the world do not have enough capital to meet the challenges faced by the environment. Where then can we find enough capital to help the government tackle this issue? One of the best solutions to this ever-existing crisis is “Impact Investing’. The term was coined more than a decade ago but begun to gain momentum only since the last year. It refers to an agreement entered into by entrepreneurs, companies, organisations and philanthropists to invest in markets that create a social or environmental impact and generate returns. This in turn creates a win-win situation for the environment and the investors at large.
Why Impact Investing Now?
The benefits of Impact Investing are manifold. The future of human beings and the environment are interdependent. The temperatures of our planet are rising, and the icebergs are melting and the on area that is bound to get impacted is our ‘Big Businesses’. As rational beings we need to have a strong compulsion to protect our dying planet that has so much to offer. Impact Investing ensures that businesses are held accountable for the activities undertaken. Institutional Investors can see to it that the companies that they invest in are minimising risks and maximising opportunities that are presented by climate change. Thus, enabling a cleaner and greener environment. Investing in sectors like solar energy and wind power can put an end to the use of fossil fuels and help companies find new efficient ways of meeting the energy needs of the society. A greener future can be good not only for the planet that we live in but also to our wallets. A 2018 study by GIIN found that more than 90% of impact investors reported that their investments were meeting or surpassing their projections.
Growth Avenues for Impact Investing
With the growth of Impact Investments rapidly increasing, some of the best options for impact investing are iShares Global Clean Energy ETF, First Trust ISE Global Wind Energy Index Fund, Gree Mutual Funds like Amundi, Calvert Green Bond Fund, Brown Advisory Sustainable Growth Fund. These investments have a proven track record of positive returns while being beneficial to the society. The growth in these avenues is only going to increase as people now have the option of investing in hedge funds, private foundations, banks, pension funds, and other fund managers. Another way of investing is by adding a Donor Advised Fund (DAF) to one’s impact strategy. An investor gets a multiplier effect on his investments while investing in a DAF. The Fund invests only in companies that create a social impact and then those investments give back up to two to five percent returns to the DAF.
The US municipal finance sector is need of environmental impact bonds as climate change has become very important to protect their community from the bad effects of climate changes. Environmental impact bonds offer a solution to this problem. These securities are municipal bonds that transfer a portion of the risk involved with implementing climate adaptation or mitigation projects from the public agency on to the bondholder.
A good example for this is quoted from an article in The Harvard Business Review regarding a $25 million bond issued by the municipal water board in Washington, D.C. in 2016.The water board used the bond to fund the construction of green infrastructure to manage stormwater runoff and improve water quality. The return to investors is linked to the performance of the funded infrastructure, which allows DC Water to hedge a portion of the risk associated with both constructing green infrastructure and, once it’s in place, how well it works. Investors receive a standard 3.43 percent semi-annual coupon payment throughout the term of the tax-exempt bond. Towards the end of a five-year term – at the mandatory tender date – the reduction in stormwater runoff resulting from the green infrastructure is used to calculate and assign an additional payment If the results are strong (defined in three tiers; tier 1 being best performance) the investors receive an additional payment ($3.3 million) – bringing their interest rate effectively to 5.8 percent. If the results are as expected, there is no additional payment. And if the infrastructure underperforms, the investors owe a payment to DC Water ($3.3 million) – bringing the interest rate to 0.8 percent.
Impact Investing is and will be the future. However, investors should choose not to invest in companies that have a negative impact on the environment. The more investors give importance to impact investing, the better companies with a mission of environmental sustainability will perform. Hopefully this should encourage more and more environmental conscious investors to grow their investments and improve the world in one motion. Thus, rewarding businesses for their commitment to a higher calling.