Impact and the emergence of a 'third axis'.

By Keith Barrett

The role of impact investing, or social impact or ethical investing, is growing around the world, with European asset owners taking the lead.

With Dutch funds making large allocations into the impact space, there has been an evolution in the understanding of the theme across the world.

“What we’ve seen in the last couple of years is much more convergence about what [impact investing] is,” says Rosemary Addis, Executive Director and Chair of Impact Investing Australia.

“We’re talking about investments that are designed to have some form of positive impact, and that that impact is being tracked or measured in some way.”

The emerging consensus has led to clarity around the ABC of impact, Addis said.

“A, are we trying to avoid harm; B, are we trying to create more benefit for more people on the planet; or C, are we trying to contribute new solutions?

Once you map out what you can put into the ABC of impact, it’s only about 30 per cent [of capital].

That means there’s about 70 per cent of capital in the world where we need to ask that question.”

Richard Brandweiner, CEO of Pendal, highlighted the changes underway in the perceptions of investing, around the emergence of a “third axis”.

He explained that back in the 50s, there was only one axis — returns. Then in the 70s, the measuring of risk emerged and became part of the analysis of any investment, and became the second axis.

“The concept of the third axis is that in the same way that the risk axis was always there, we just didn’t know about it, the third axis has always been there we just haven’t known about it, and that is the externality of the investment decisions.

These investment decisions that pension funds and fund managers have been making are generating returns, they come at some risk, and virtually all cases come with non-financial risk and return outcomes.

“It might be that in the future, the next generation will start looking at all investments mindful of all three axis in the way that we were trained to look at two of them. That third axis exists regardless of impact investing as a concept, it just is.”

The growth of interest and in impact investing comes from many places, but for a super fund, it can come from the members themselves. Debby Blakey, CEO of the $44 billion fund HESTA, says the desire to invest in impact investments is both what the members want, and aligned with the fund’s core investment beliefs.

“From our point of view, it has to start with the member. We’re stewards of members’ money, and it’s really interesting because when we talk to our members, they really care about these things,” Blakey said.

“Our members are nurses, childcare workers, aged care workers, [and] they have a very strong sense of social justice and protecting the environment. Starting with them, there’s a very strong 'why’ for us.”

As wealth has consolidated into the corporate world, it has become even more important for strategies to emerge that find ways to use that capital for outcomes that are broader than direct returns.

“Global capital is a dominant force on the planet and it is a relatively recent phenomenon,” Phil Vernon, Managing Director, Australian Ethical said.

“At the corporate level, it’s gone beyond the political sphere. We invented democracy, but we didn’t invent this thing that’s evolved, where global capital, corporations, and the funds that give them capital are effectively the dominant force on the planet.

“How do you make sure that the decision makers behind that are looking after the planet, and society?

“Impact investing isn’t an asset class — it’s a thing the whole financial services sector should be thinking about.”

There were differing views on the role of government in the process. While investments like the session Chair Michael Traill’s work with Good Start early learning centres need government participation as an essential component of the process, others didn’t consider government at all in their investment decisions.