Halfway between investment and philanthropy sits an emerging capital market that focuses on assets that make a triple bottom-line impact.
While not new, the so-called ‘impact investment’ market – investment products that deliver solid financial profitability and that exhibit social returns and environmental sustainability – is gaining momentum.
‘The opportunity this presents to the property sector is huge,’ says Woods Bagot director Mark Mitcheson-Low.
‘And perhaps no other asset class has such significant potential to deliver triple bottom-line returns and make such profound impact.’
Trend: Profits with a purpose
Three phenomena are helping to drive strong and steady growth in the impact investment sector.
First, investment markets are subject to the demographic exit of silent generation and baby boomer investors.
These markets are simultaneously being influenced by generation X and millennial-generation sponsors, who exhibit a strong preference for investments that enable progress, generate jobs, improve the environment, and improve society.
According to Deloitte, for example, 45% of millennials want to use their wealth to help others.
Second, baby boomers are transferring an unprecedented amount of generational wealth to heirs.
In North America alone, Accenture expects that over USD 30 trillion will be inherited from baby boomers over the next 30 to 40 years. This generational transfer of wealth into the hands of generation X and millennial-generation investors will equip the impact investment sector with a huge amount of capital.
And third, women are increasingly taking control of private wealth and becoming responsible for investment decisions.
The Bank of Montreal recently reported that the U.S. has just passed the tipping point where women now control 51% of personal wealth. Morgan Stanley highlights the significance of this, as females are nearly twice as likely as males to consider the impact of their investment as well as its rate of return when making an investment decision.
The first to capitalise on the trend of impact investing were university schemes like the University of Michigan Social Venture Fund and institutional trusts like The Rockefeller Foundation.
Such organisations are strongly incentivised to consider social and environmental returns alongside a strong financial yield.
Then came dedicated impact investment firms like Sonen Capital and Impact Investment Group – the early adopters that anticipated a sizeable capital market from investors concerned with addressing social and environmental challenges.
Now, the impact investment market is transcending from niche to mainstream as institutional investors like the global investment management houses JPMorgan Chase & Co. and AMP Capital jump on board.
…consciousness of the impact on the environment is continuing to grow. At the same time higher social standards are being demanded of governments and corporates.
Dr Shane Oliver, Chief Economist, AMP Capital
Source: AMP Capital
Most recently, BlackRock, Inc., the world’s largest investment management firm, established its own BlackRock Impact unit to focus on investments that deliver triple bottom-line returns.
Many clients are looking for investment opportunities that advance social and financial goals at the same time. While the roots of this movement can be traced back many years, the frequency and complexity of these mandates are increasing.
Laurence Fink, Chief Executive Officer, BlackRock, Inc.
Source: BlackRock, Inc.
The adoption of impact investing into mainstream market rhetoric demonstrates a high level of confidence that future growth will be strong.
Morgan Stanley’s chief executive James Gorman expects that the impact investment market will exceed USD 10 trillion by 2050.
Innovation: Learning the impact language
The property sector is already familiar with the vocabulary of sustainability and ethics, having learnt the language of environmental, social and governance (ESG) rating systems.
But the property sector must learn the dialect of the impact investment market – which is fundamentally different than the ESG market, says Chris Lock, co-founder and chief executive officer of Impact Investment Group.
Unlike ESG initiatives which aim to reduce negative externalities, impact investments actively seek to create positive environmental and social contributions.
‘For example’, says Lock, ‘an ESG investor would avoid dealing with investments related to firearms, alcohol and tobacco.’
‘But an impact fund would look for an investment that intends to generate positive social and environmental returns – or that exhibit a future potential to do so.’
Lock points to Impact Investment Group’s recent acquisition of a 9-story, 16,600m² (178,680ft²) office tower in Brisbane from Lendlease.
As well as projecting an internal rate of return of 12%, the ‘Kings Gate’ tower is one of the most environmentally-sustainable buildings in Australia. In addition to deploying strategies to reduce energy consumption and carbon emissions, Impact Investment Group will also establish a Catalytic Capital Fund to provide first-loss patient capital for high social impact investments in the local area.
On the other side of the world in the Netherlands, GuusBerkhout has long been bullish on using impact investment principles in the property sector.
Berkhout, who manages the Triodos Real Estate Fund at Triodos Investment Management, assures investors that social and environmental benefits do not come at the expense of financial returns.
When asked if having to choose between financial profitability and sustainable advantages, Berkhout says that ‘the underlying assumption in this question is that there is antagonism between profitability and sustainability’.
‘I don’t think you have to choose between profitability and sustainability. I think they reinforce each other. More sustainability will lead to more profitability: a more sustainable building is less risky and can generate more cash flow than a general building as tenants are theoretically willing to pay higher rent for these buildings.’
In other words, an impactful building carries a lower risk profile because it is socially and environmentally future-proofed. And this building will simultaneously return a higher cash flow because of the reduced operational costs associated with environmental efficiency.
A lower risk profile plus a higher cash flow equals a net increase in asset value.
Lock concludes that whilst the impact investment market is gaining global traction, ‘Impact Investment Group hopes that market growth accelerates over the coming years to produce a stronger pipeline of impact investment real estate opportunities.’
‘We would love to see more of the kind of product delivered by Lendlease at Kings Gate,’ says Lock. ‘And we are open to working with developers to deliver product tailored to the impact investment market.’
Matthew Lynch