The rise of impact investing

Efforts to reduce the harmful impact of human existence on the environment are not new. The environmental or ecology movement has its roots in the nineteenth century. But it is only relatively recently that the political and social mainstream has paid more attention to the issue. The fact that the majority of organizations embed environmental and social governance (ESG) in their business processes, underlines the importance the subject has assumed in recent years.

But the debate is constantly evolving. Recently, it has become increasingly nuanced which, for investment asset classes such as real estate, means a shift to a much broader purview. It is no longer sufficient to think solely of how best to manage limited resources sustainably or how to meet harmful gas emission reduction targets.

The focus now is on adopting a more active and intentional approach to investment strategy

The focus now is on adopting a more active and intentional approach to investment strategy—one that is both measurable and contributes to creating a better or additional outcome than might otherwise have been delivered. Hence, the notion of ”impact investing.” The buzz phrase of the moment is very consciously imbued with a deliberate sense of purpose.

We believe that this is a concept that sits comfortably with Aberdeen Standard Investments’ (ASI’s) general approach to real estate investment. All of the specific properties that we own and manage around the world provide local communities with useful spaces. However, we are acutely aware that buildings are but one element of creating communities.

As investment managers, we think that returns are also key. The diagram below demonstrates where impact investing currently sits on the typical investment spectrum.

According to the most recent Global Impact Investing Network Annual Survey, the size of the global impact investing market doubled from US$114 billion in 2017 to US$228 billion in 2018. In our view, the implication is that asset managers will likely seek to create new investment products in an effort to meet demand.

Challenges

In ASI’s recent Challenging Perceptions research paper, we explored the link between ESG integration and financial returns in the real estate sector. The findings indicated that sound ESG integration delivered at least market returns. The paper highlighted that a positive environmental and social benefit could also be achieved.

Indeed, there is general consensus among real estate investors and asset managers that a positive link exists between ESG risks and opportunities. The question now, however, is where does good ESG integration end and impact begin? How can one avoid the risk of ”impact washing”?

ASI’s proprietary ”ESG momentum” tool plots where a particular real estate fund and its underlying buildings sit on the ESG investment spectrum, versus the house view of major global drivers for change. This provides a helpful reference point for plotting a fund’s progress and momentum in creating solutions that combat the long-term challenges of climate change, growing social inequalities, and unsustainable production and consumption in a tangible, measurable way.

The tool facilitates the creation of a social or environmental benefit which aligns with any specific fund’s investment strategy, the risk appetite of that fund’s clients, and the needs of a particular local market or community where it is active.

From ASI’s point of view, this process is the start of ensuring that the principles of impact investing become a standard consideration across all our real estate funds. In fact, over time, it is generally expected that issues that today are considered ”impact” will become more mainstream in the not- too-distant future.

Regarding indirect real estate investment, we think that the ability to deploy capital into relatively niche vehicles that may have a specific mission or purpose is an effective way to access impact opportunities. Examples of these types of investment vehicles include the provision of affordable homes; accessible homes for wheelchair users; or utilizing circular or alternative construction materials./p>

Clearly, positive impact doesn’t occur by accident; it is the result of intentional investment that addresses a specific environmental or social issue.

Thinking ahead

We feel that impact investing, in its present guise, should continue to evolve and change, and authentic commitment will play a key role. For example, rather than simply offering impact funds or ESG strategies to clients, asset managers that genuinely believe in the principles of impacting investing will need to ensure that their own operations meet the standards that they expect of their investments.

This will always be the litmus test for those whose strength of belief will help to innovate and move things forward. The other option is to simply follow the market and tick a box. But history, and future commercial success, may judge the merits of that approach quite harshly.

Important Information

International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.

Risks associated with investment in securities of companies in the real estate industry may include: declines in the value of real estate, overbuilding and increased competition; increases in property taxes and operating expenses; changes in zoning laws; casualty or condemnation losses; variations in rental income, neighborhood values, changes in interest rates and changes in economic conditions.

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RISK WARNING

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.

AAM Group