Positive Impact
Understanding Impact Investment
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Over the past two years, the domestic market for impact investing has tripled from A$5.7 billion to a staggering A$19.9 billion as investors increase their focus on the sector, and investment managers respond by developing new strategies. Once a niche market, the term 'impact investing' is now receiving significant attention from a variety of investors - from those who want to do good, to those who see the opportunity for uncorrelated returns. With all this growing attention and demand, however, we must be mindful that impact investment offerings are making a real positive impact, and not just applying a label. Key to this is understanding a manager's definition of impact investing, and how it differs from ESG and sustainable investing.

Defining Impact

There are countless definitions of 'impact investing', and the label continues to be applied to many different investment activities. At Conscious Investment Management, we define it as an investment that is made to generate positive and measurable social and environ-mental outcomes, alongside a market standard financial risk adjusted return. A couple of points here deserve clarification:

Investments are made to generate positive outcomes

We believe impact investment should add positive social and environmental impact to the world. Society and the environment should be a better place as a result of an investment capital flow. The need for this benefit is heightened at a time when Covid-19 has affected the world and society has seen widening inequalities.

Investments should have a market standard financial risk and return

It's critical that impact investors, pursuing their social and environ-mental goals, don't compromise returns (or accept higher risks than they otherwise would for the same expected returns). As impact investors, if we were to compromise on our risk-adjusted returns, we'd begin to blur the line between our work and philanthropy. There are already fantastic philanthropists and charitable organisations in the world, and we don't exist to substitute funds flowing to them. Conscious Investment Management requires market returns, providing a substitute for investment portfolios, not philanthropic capital.

Impact and the spectrum of responsible investing

Much of the confusion with the term 'impact investment' comes from its similarity to other socially-minded investment strategies. We think about impact investing as a sub-set of a broader term — 'responsible investing' — which encompasses a range of different approaches to investing. Two popular responsible investing strategies are ESG 'negative' and 'positive' screening.

Negative ESG screening avoids or excludes certain investments that are based on an investor's ethical values. For example, avoiding companies in coal or tobacco companies.

Positive ESG screening seeks to invest into companies that score strongly on environmental, social and governance metrics. This approach might see an investor buying the shares of a mining company that scores well com-pared to its peers in carbon emissions, employee safety metrics, or governance measures.

What are the challenges of impact investment?

Impact investments are different from negative and positive screens because they aim to create additional, positive social and environmental impacts. This 'additional-ty' requirement can be a challenge for impact investors, and it requires deep thought and consideration about two key challenges of impact investment:

1. What are the full effects of an investment? For example, a renewable project (that has good intentions) can be developed with little regard for the supply chain of its solar panels, which may inadvertently support poor labour practices.

2. Would this asset have been financed anyway? If an impact investor expects market rate returns, would other 'non-impact' investors have funded this anyway?

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