Update Magazin II/2019 Download the complete magazine

1 What are impact investments? A new philosophy of investing!

Impact investments have the explicit intention of achieving positive, measurable, social or environmental impact alongside an attractive financial return. They can be carried out in both emerging and also developed countries, and target a return range from below market (36% of the currently allocated impact capital) to market rates (64% of the market), depending on investors' strategic objectives. The impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture and food production, energy efficiency, affordable and accessible basic services including housing, healthcare, and education conservation or microfinance.

Against this background, impact investments constitute a new investment philosophy that is a logical extension of traditional investment approaches. Instead of solely focusing on return and shareholder value maximisation, impact investments aim to maximise the total benefit to all stakeholders, without favouring one over the other. Impact investors follow the thought that such philosophy consequently leads to an increase in return, whilst minimising risk.

2 Private impact investments at Allianz Global Investors

At AllianzGI we are convinced that impact investments can deliver significant benefits to an institutional portfolio. However, we believe that such benefit is most likely to materialise when the impact investment strategy is applied holistically. We have established three principles that define our impact investments in the private markets. First, the intention of the strategy must be to generate a positive social and/or environmental impact and at the same time generate attractive financial returns. Secondly, there must be a causal connection between the investment and the impact generated. Finally, the impact needs to be identifiable and measureable, and must be reported on a regular basis to ensure validation of such impact.

3 Measurement as key hallmark for private impact investments ensuring transparency and accountability

Given the continuous risk of “impact washing”, transparency and accountability regarding the generated impact are of utmost importance when carrying out impact investments. Thus, the key feature of impact investments is an investor's obligation to continuously measure and report the social and environmental performance of the underlying assets, to ensure transparency and accountability.

Investors' approaches to impact measurement can vary depending on their objectives. Whilst the market is clear about the process stages in which impact has to be measured, the detail of measurement and applied techniques are far from being standardised.

Those process stages are widely acknowledged to be the following:

1. Definition and presentation of social and/or environmental objectives for each investment to investors
2. Setting key performance indicators and goals related to these objectives, using standardised indicators wherever possible
3. Monitoring and managing the performance of investments against these objectives
4. Reporting on social and environmental performance to relevant stakeholders
   
   

4 A fast-growing market with significant potential

The impact investment market is a fast-growing space which is becoming increasingly popular in the illiquid alternative market. According to the Global Impact Investor Network (GIIN), reported impact AuM rose from USD 120bn in 2016 to 500bn in 2018 (+400%). The cumulative investment gap in order to reach the United Nations Sustainable Development Goals (UNSDGs) by 2030 is assumed to be around 12 trillion, representing a significant investment opportunity(see Chart A/).¹

This growth outlook is attributable to two main drivers, both evolving bottom-up and top-down processes. First, a general change in how private businesses operate. 87% of international CEOs² are, for example, rethinking the strategy of their businesses in light of the UNSDGs. Creating sustainable business models that address important clients’ and environmental needs is nowadays paramount for being “truly client-centric”, and hence essential for the long-term success of a business. These developments will consequently create additional bottom-up investment opportunities for impact investors.

Secondly, international agreements such as the UNSDGs or the resolutions of the Conference of the Parties in Paris in 2015 (COP 21) can be seen as a top-down growth driver. These agreements are expected to transform into a new or at least stricter regulatory framework that should facilitate the development towards more sustainability. The associated actions following the Paris Agreement, for example, are expected to result in a potential for investment of around 23 trillion US dollars by 2030.³

A/ Estimated market potential of impact investing

Sources: UN Principles of Responsible Investing, UN Development Programs, World Economic Forum

5 Challenging the low return myth

Historically, impact investments were driven by philanthropic capital, and as a result impact investing can be confused with donating capital. Now is the time to bust the myth.

According to the GIIN 2018 Annual Impact Investor Survey, 64% of the 229 Survey participants who primarily focus on impact investments target competitive, risk-adjusted market returns, and hence speak in favour of the proclaimed shift (see Chart B/). Moreover, 91% of investors confirm that their investments have outperformed or were in line with their return expectations, confirming the proposition that impact investments can help deliver both financial return and impact (see Chart C/).⁴

We believe that investors need to understand impact investments as an important part of their asset allocation. As a private market strategy⁵, impact investments aim to deliver the benefits of non-listed alternative investments such as attractive return potential, low correlation, and inflationlinked revenue that offer investors an attractive risk-return ratio. However, in addition to that, impact investments also deliver a positive contribution, as investments contribute to society and the environment, and address global challenges.

Source: GIIN (Global Impact Investing Network, 2018): Annual Investor Survey)
This is for guidance only and not an indication of future results

C/ Performance relative to expectations
Number of respondents shown above each bar; some respondents chose ‘not sure’ and are not included

Source: GIIN (Global Impact Investing Network, 2018): Annual Investor Survey)
This is for guidance only and not an indication of future results.

1) United Nations Principles for Responsible Investment, United Nations Global Compact (2017): The SDG Investment Case, https://www.unpri.org/download?ac=5909.
2) Based on a survey of more than 1,000 CEOs across more than 100 countries and 25 industries, also see: UN Global Compact-Accenture Strategy CEO Study (2016): Agenda 2030: A Window of Opportunities, https://www.unglobalcompact.org/library/4331.
3) UN Global Compact-Accenture Strategy CEO Study (2018): Special Edition: Transforming Partnerships for the SDGs, https://www.accenture.com/_acnmedia/PDF-74/Accenture-Transforming-Partnerships-for-the-SDGs- UNGC-Accenture-Strategy.pdf.
4) Global Impact Investing Network (GIIN): About Impact Investing, What You Need to Know About it, https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing, accessed 21.05.2019.
5) The performance of the strategy is not guaranteed and losses remain possible.

Investing involves risk. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management‘s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. There is no guarantee that the strategy will succeed and losses cannot be ruled out. Investors may not get back the full amount invested.

The volatility of fund unit prices may be increased or even strongly increased. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.

This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.

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