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Impact investing prepares its revolution

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More than a million species of plants, mammals, birds, reptiles, amphibians, fish and invertebrates are endangered, many within decades. The problem is no less acute in Australia than overseas, according to the 2000 pages 2021 State of the Environment Report which was recently released for parliamentary review.

It found that Australia has one of the highest rates of species decline among Organization for Economic Co-operation and Development (OECD) countries. Worse still, we are losing more mammal species than any other continent.

Natural capital

Just as net zero commitments have created opportunities for investing in climate change, commitments to end deforestation by 2030 from more than 120 countries (covering 95% of the world’s forests) will require campaign for investments in “natural capital”.

Investing in regenerative agriculture is an avenue for impact investors who want to fight climate change and protect biodiversity. This involves funding agricultural practices that rejuvenate the soil where crops are grown, potentially leading to positive environmental and financial outcomes.

These come in the form of ecological restoration, potentially valuable carbon credits and premium priced vegetables. The product is so sought after that farmers can make valuable purchase deals for it. That is to say that the product is already sold before it has even been cultivated.

While still a small and immature area of ​​investing, we anticipate that many more natural asset investing strategies of this type will become available in the years to come – watch this space.

The benefits of social housing

Social housing targets the underserved and vulnerable people in society. Many lives have been changed immeasurably by safe and secure housing, providing escape from domestic violence and homelessness or providing facilities to meet physical and mental well-being needs.

But there is a massive shortage of social housing in Australia, which includes aged care, affordable housing and specialist accommodation for people with disabilities. These are all relatively new sectors of the Australian property and infrastructure market – particularly specialist disability accommodation which has only been investable for a few years.

In addition to investing in an important cause, specialized disability accommodations can provide investors with inflation-linked, government-backed income that helps significantly reduce credit risk. Even investors who are not explicitly looking for the social or environmental benefits of their investments may be attracted by the high single-digit returns and low correlation to traditional assets that specialized disability accommodations can offer.

We went into this area in depth last year in an article we published on specialized accommodation for people with disabilities.

Another common theme in impact investing is focused on empowering women and girls under the banner of gender investing. More than a billion women in the world do not have access to credit or a standard bank account. Microfinance loans have contributed to the growth of some successful businesses run by women. These businesses are often as basic as selling vegetables in a small market.

Another strategy has been the use of social impact bonds to fund programs that reunite families (especially mothers and children). Again, this is not philanthropy; the investments have been structured to fund these causes which can offer market rate returns.

Investors fund these programs upfront, with state governments paying only for positive results. This represents savings for them compared to financing foster families. So, it can be a win/win/win situation for the government, the investors and the families together.

The table above summarizes the four main impact investing themes mentioned above, which we have aligned with the investment strategies that are currently the most prevalent vehicles for achieving these impacts in private markets.