Profitability vs. Social Responsibility: How impact investing creates a middle-ground

By Motlatsi Mutlanyane, Head of Alternative Investments, and Egon Soontiënsm, Research Analyst at Momentum Investments

Impact investing is happening. A review of investment flows shows there has been significant growth in the commitment and application of impact investments to current global challenges. The Global Impact Investment Network’s (GIIN) 1 2020 GIIN annual survey report estimates the market size of impact investment to be $715 billion (see figure 1).

Governments and philanthropists cannot continue to solve the social and environmental challenges on their own. Hence, institutional investors are expected to adopt the new investment norm of positively influencing the society and environment they invest in to ensure sustainable development. 

The Global Steering Group for Impact Investment (GSG) 2 defines an impact-oriented investment as an investment where risk, return and impact are maximised by positioning measurable social and environmental goals alongside financial goals. The GSG argues that well-executed investments benefit not only the owners of the investments but also the society and the environment in which they are made. It believes these societal and environmental effects should be expressly stated and should be the driving force behind any organisation. It also believes these effects be integrated into all investment decisions of investment managers. 

Impact investing’s capacity to improve lives and to benefit the environment is proven. Properly managed impact investment can offer the best of financial returns and create a positive effect. To place impact investing in context and to differentiate it from other investment approaches, figure 2 shows the investment spectrum with impact investment in the centre.

It is essential to emphasise that impact investing includes profit as one of its main objectives. Hence, impact investment does not trade off financial return for social or environmental effect, but instead aims to identify investment opportunities that combine them. In other words, there is an explicit commitment to social and environmental impact goals while earning a market rate of return. Another key defining characteristic of impact investment is its expressly stated intentionality. Impact investment has, by design, an intentional impact on either the society, the environment or both. This key characteristic distinguishes impact investment from all other investment types classified on the investment spectrum. When viewed this way, impact investment is a universal term, as it can be applied to all investment types and asset classes. 

A common starting point for implementing impact investing in practice is the United Nations’ sustainable development goals (SDGs). The member states of the United Nations adopted the 17 SDGs with 169 targets (see figure 3) in 2015 as part of the 2030 Agenda for Sustainable Development. These goals form part of an extensive globally coordinated action plan to end poverty and reduce inequality, while also protecting the planet, tackling climate change and spurring economic growth. The goals recognise that social and environmental issues affect everyone and thus apply to every country, irrespective of their ‘developed’ or ‘developing’ economic status.

Sustainable development embodies the idea of doing well by doing good. By incorporating social and environmental targets into their investment strategies, investors can align their impact objectives to the SDGs and track their contribution towards achieving these goals. Using metrics that reflect their effect on specific SDGs, investors can address how they are contributing to a sustainable and equitable future.

Momentum Investments has adopted six of the SDGs and we’re aligning our impact strategies with the goals to drive results. These are SDGs 3, 4, 7, 8, 9 and 13. The Momentum Impact portfolios have incorporated sustainable investing principles and guidance throughout their investment cycles to make the achievement of the goals an intentional objective. That is, the principles have been integrated into deal origination, due diligence and investment selection for the three impact portfolios – the Momentum Alternative Energy Fund, the Momentum Social Infrastructure Fund and the Momentum Diversified Infrastructure Fund. 

The Momentum Alternative Energy Fund is invested in sustainable energy companies, which focus on renewable energy, energy efficiency and storage technology. The priority SDGs for the portfolio are 7 (Affordable and Clean Energy) and 13 (Climate Action). The Momentum Social Infrastructure Fund is invested in businesses involved in providing student housing in the higher education sector, quality affordable housing and non-urban shopping centres. The portfolio aligns with SDG 4 (Quality Education) and 9 (Industry, Innovation, and Infrastructure). Finally, the Momentum Diversified Infrastructure Fund is invested in core economic infrastructure including toll roads, telecommunications as well as water and wastewater infrastructure. This portfolio specifically targets SDG 8 (Decent Work and Economic Growth) and 9 (Industry Innovation and Infrastructure). 

Potential investments are identified and added to the pipeline based on investment criteria that include impact targets. First, it is important that the purpose of the target company (or project) is to address a critical problem relating to the environment or a societal challenge. For example, the investment in student housing is through a company that focuses exclusively on addressing the 250 000-bed shortage for students. 

Second, investments must show a direct link to at least one of the six SDGs. Finally, the impact generated by the investment must be substantive and measurable. In addition to these, the investment case must also hold, i.e., it must meet the risk-and return requirements expected for the exposure. Moreover, the investment committee that deliberates on the recommended investments also reviews each proposal’s ESG report.

An investment that meets the investment criteria but not the ESG requirement may still be included if the ESG issues can be resolved through active engagement with the management team of the investee companies. 

By using appropriate indicators, data on impact metrics are collected regularly, and investee companies are monitored to track progress towards their social or environmental objectives. While the impact measurement and monitoring methodology is evolving and may not capture all of an investment’s impact, it captures enough of the impact to track progress toward the SDGs being measured. 

We believe that impact investing is the responsible thing to do and a fundamental part of our commitment to delivering sustainable outcomes to clients. The improvement of society and the environment is vital if clients enjoy the financial returns delivered by their investments, and we will continue to direct our actions to achieve these outcomes.

Mothlatsi is an actuary and holds a BSc (Hon) degree in Actuarial Science and an MBA. He was previously Head of Customised Solutions at RMB Asset Management (Pty) Ltd and an investment consultant at Towers Watson in the UK. Prior to that, he was employed at Legend Capital and was responsible for Treasury Risk and ALM Advisory. One of his previous roles included managing the debt origination unit at WipCapital. He began his career as a bond options trader at Investec Bank.