Impact Investing 101
Providing access to energy for remote, underserved communities. Repairing infrastructure and buildings to improve resilience against climate-related shocks. Developing skills-based trainings and creating new job opportunities. These are just some of the initiatives that governments, NGOs, non-profits, and philanthropic foundations help finance around the globe each year. But who is to say that initiatives that address social and environmental issues should be the sole responsibility of governments and NGOs? Why is that the accepted status quo? Enter impact investing.
Impact investing is an emerging investment market that is changing how social and environmental issues are being addressed. Rather than leaving the responsibility solely to governments and NGOs, impact investing, a subset of socially responsible investing, pursues investments that generate social and/or environmental benefits in addition to positive financial returns. Broadly speaking, impact investing has gained traction in recent years because it allows investors to invest in funds that align with their own social and environmental goals and priorities while maintaining competitive financial returns.
Since this market has been unlocked, investors have noticed favorable financial returns with rates that appeal to a variety of investors, leading to market growth.
Trends in Practice
The impact investing market is bigger than you might think and is growing rapidly. The Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey, which provides an overview of the impact investing market, featured 229 investor participants in 2018 representing $228 billion in impact investing assets under management. This number, according to Amit Bouri, CEO of GIIN, is largely seen as the floor and has continued to grow since the first survey was released close to a decade ago. What’s more, the impact investing community is attracting more mainstream investors. According to the GIIN Survey, a third of respondents are “established in the ‘conventional’ investing markets”, enhancing the integrity of impact investing while also opening opportunities to increase the flow of capital. Finally, impact investors are largely happy with their investments, and according to the survey, the majority of these investors have met their impact and financial expectations.
As with all good things, it is critical not to overlook potential red flags. Industry growth should be measured and sustainable and continue to refine the metrics and standards by which it defines and evaluates success. By becoming more mainstream, impact investing has brought certain challenges. These challenges include “impact washing”, whereby investments assert nonexistent or exaggerated positive environmental or social impacts. One proactive way to fix this issue, according to GIIN Survey respondents, is through “greater transparency from impact investors on their impact strategy and results”. With new tools, such as the Principles for Responsible Investment’s Impact Investing Market Map and IRIS, an initiative of the GIIN focused on developing a catalogue of impact investing performance metrics, making more informed and action-oriented decisions has become more accessible than ever.
Connecting the Dots
For the real estate industry at large, impact investing could translate into more funds pursuing investments that align with top-down social and environmental goals and help mitigate risks. These can include requiring new acquisitions to meet specific energy performance criteria, ensuring that the acquisition due diligence process includes conducting climate-related risk and resiliency assessments, supplying more affordable housing, or mandating that a minimum number of new jobs created by a project pay a livable wage.
For GRESB, it comes down to increasing transparency and continuing to produce more quantifiable, comparable, and transferable metrics. With close to 70 investor members, GRESB Real Estate provides a platform to proactively evaluate performance and help to influence decision making while advancing the performance of the over 900 real estate respondents. Continuing to enhance the compatibility of GRESB metrics with other rating schemes and impact measurement tools will further strengthen the impact investing market and help quell potential concerns of “impact washing”.