Interest in impact investing increases

Impact investing has gained momentum in recent years as both an investment strategy and an approach to addressing social and environmental challenges.

“People have realized it isn’t just how much money they make, but how they make their money,” said John Bai, chief investment officer at NEI Investments in Toronto. “They want to be a part of the solution.”

Bai places impact investing on a spectrum: on the far right lies traditional investing, which focuses solely on financial return; philanthropy is on the far left, which prioritizes societal gains. Impact investing sits directly in the middle.

“It’s that sweet spot. You have a firm eye on the societal benefits — the impact — but are also generating positive rates of return,” Bai said.

Investor interest has skyrocketed.

The 2018 Canadian Impact Investment Trends Report showed the market growing rapidly, up to $14.75 billion at the end of 2017 from $8.15 billion at the end of 2015. By the end of 2019, the global market was estimated at US$715 billion, according to the Global Impact Investing Network’s 2020 Annual Impact Investor Survey. While impact investing has historically been limited to institutional and accredited investors, it has become increasingly available to retail investors.

In June 2020, NEI Investments introduced its first suite of impact funds in Canada, and according to Bai, interest from both advisors and their clients is “tremendous.” (The NEI Global Impact Bond fund, for example, had $180 million in assets under management as of April 6.)

In October 2020, the Dream Hard Asset Alternatives Trust changed its name to Dream Impact Trust to reflect its increasing focus on real estate investments “that generate strong financial returns and positive social and economic investments,” according to a release. The trust, which trades on the Toronto Stock Exchange, has a market cap of about $414 million as of April 7.

Impact investing is growing in step with environmental, social and governance (ESG) investing and responsible investing (RI), but holds a much smaller portion of the market. Kelly Gauthier, managing director and partner at Rally Assets in Toronto, an impact investing firm, said that smaller share is due to factors such as limited access, lack of awareness and inconsistent terminology.

“The language is not consistent,” said Gauthier. “It has made it a lot harder to differentiate, and for advisors — let alone investors — to be able to see the difference between the good strategies and the less good strategies.”

Impact investing differs from ESG and other RI strategies in its intentions, said Gauthier. For example, ESG tends to focus on identifying the negatives and avoiding them, while impact investing does the opposite — it intentionally seeks to have a social or environmental impact that is both positive and measurable. However, Gauthier said that data on the impact of investments is still not readily available, and both investors and advisors need to be wary of greenwashing.

“Folks in this space are recognizing that as a barrier. It is important to open up those lines of communication to educate investors about what is actually in the market, and for advisors to do their homework to unpack some of these issues on their own,” Gauthier said.

But the question remains: Can impact investing actually have an impact?

“The truth is that investing at large most definitely has an impact,” said Paul Lacerte, managing partner at Raven Indigenous Capital Partners in Vancouver.

Raven released the Raven Indigenous Impact Capital Fund earlier this year with the intention of generating equity and equity-like capital for Indigenous entrepreneurs. The fund’s initial target was set at $5 million, but attracted $25 million in capital commitments from institutional investors across Canada and the U.S. by the time it closed on Jan. 31.

“There is big muscle in the investing community to shift people’s lives and the way that we treat the planet,” Lacerte said. “We are setting the stage incrementally and responsibly for broader deployment.”

Retail impact funds can offer investors the opportunity to contribute capital to challenges in sectors such as sustainable agriculture, renewable energy, microfinance, and basic services like housing, healthcare and education.

“You can expect a healthy financial return as well as a social and environmental return, which will give you that blended bottom line,” Lacerte said. “I think there is a massive amount of untapped potential out there.”

Gauthier adds that as investors become more aware of impact investing, it needs to be treated as another lens through which they look at their investments — instead of as an asset class itself.

“It’s going to be less about growing impact investing as something that is separate from the rest of the market, and more about understanding and integrating these concepts into finance, period,” she said.