BUSINESS
07/14/2015 06:18 pm ET Updated Jul 14, 2016

Impact Investing: The New Frontier

This first appeared in Generosity Magazine.

It might be the new buzz word of investing, but leading investment advisors say impact investing is here to stay and what's more: it's a model that everyone should be participating in.

Forecasts estimate that over the next decade the market for impact investing is expected to reach $32 billion in Australia and up to US$1 trillion globally.

Jessica Roth, founder and director of the Social Impact Hub and impact investment consultant, predicts that the impact investment sector is on the cusp of massive growth. "There has already been a near-doubling of impact investment funds globally in the past five years," she says.

A new way of doing business is emerging, one that harnesses the power of capital markets to deliver social and environmental change. Impact investing is a growing field of investment that intentionally creates positive social and/or environmental impact as well as financial return, and measures both.

So, why should you get on board?

Danny Almagor, CEO and co-founder of Small Giants, Australia's first certified B-Corporation, and non-executive chair of Impact Investment Group explains that impact investing, "Is not about a niche way of doing things - this is about a paradigm or responsible and impactful action. It's like saying: Who should try to be fit. Duh! Many people aren't, but I haven't yet met anyone who said they shouldn't try. It is simply a better way to live. Be fit and invest in impact!"

John McKinnon is currently a director of his private ancillary fund, the McKinnon Family Foundation, and began his career in the finance industry. After holding several positions in funds management, asset consulting and superannuation consulting, John co-founded the Australian office of Grantham Mayo van Otterloo LLC in 1995. As a hard hitter in the traditional investment space, he is a strong believer in impact investing.

"It seems crazy to me [for philanthropic foundations] to use only five percent of the funds for "good" while investing the rest in ventures that may well be causing the very problems we are trying to solve."

"It is a simple efficiency question. It allows much more capital to be employed in finding solutions to society's problems. Furthermore, some issues are better solved via investment and business approaches than via grants and philanthropy. So it is also a question of effectiveness and sustainability."

David Murray is in strong agreement. His Australian Financial System Inquiry, released in December 2014, recommended the further development of the impact investment market and encouraged innovation in funding social service delivery. Further, he also supported law reform to classify a private ancillary fund as a "sophisticated" or "professional" investor and provided guidance for superannuation trustees on the appropriateness of impact investment.

Changing times

As government cuts hit the social services sector, more sustainable and reliable levels of funding for these crucial organisations are needed.

"Government and philanthropy alone can't fund all of this and the gap is getting wider," says Daniel Madhaven, CEO of non-profit Impact Investing Australia. "Impact investing offers a way--not the only way--toshift the paradigm about what we expect from businesses we invest in towards consciously contributing to the solutions."

Almagor echoes the sentiment. "Most people see their philanthropy and volunteering as the area where they actively invest in solving the social and environmental problems we face. But the status quo isn't working for us," he says. "There is no downside to this way of investing."

When debating the financial returns impact investing delivers, Almagor is ready to take on the naysayers.

"The only argument I have heard about not doing it is that the returns are lower. Well, tell them to call me and we can have that discussion. The industries that are the main growth industries are deeply aligned to impact investing. Sustainable agriculture, renewables, sharing economy, electric vehicles, organics, aged care. I see plenty of places to make money and make a positive impact."

John McKinnon encourages investors to try the impact investment model. "Find a low-risk impact investment and add it to your portfolio. Learn about it. Involve yourself in its social impact story. Start to see your investments not as a separate activity to your spending or philanthropy but as an integral part of your overall financial life and understand that they all have an impact, for better or worse."

Opportunities in impact investing in Australia are growing quickly. The NSW Government recently launched its Social Impact Investment Policy and has committed to supporting two impact investment transactions a year.

"There are opportunities across asset classes and at different points of the risk spectrum. Impact investing is an investment approach, not an asset class. It is simply a lens through which investment decisions are made," says Jessica Roth.

Danny Almagor, Daniel Madhaven, John McKinnon and Jessica Roth are Program Advisory Committee members for the Impact Investment Summit Asia Pacific, which will be held in Sydney on 19-21 October 2015. For more information, visit the Impact Investment Summit website.

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