Impact investing prepares for its revolution

More than a million species of plants, mammals, birds, reptiles, amphibians, fish and invertebrates are at risk, many within decades. The problem is no less acute in Australia than abroad, according to the 2,000-page report. State of the Environment Report 2021 which was recently published for parliamentary review.

It found that Australia has one of the highest rates of species decline among Organization for Economic Co-operation and Development (OECD) nations. Worse still, we are losing more species of mammals than any other continent.

natural capital

Just as net-zero emissions pledges have created climate change investment opportunities, commitments to end deforestation by 2030 in more than 120 countries (covering 95% of the planet’s forests) will require a boost for investments in “natural capital”.

Investing in regenerative agriculture is an avenue for impact investors who want to tackle climate change and protect biodiversity. This involves financing agricultural practices that rejuvenate the soil where crops are grown, which could lead to positive environmental and financial results.

These come in the form of ecological restoration, potentially valuable carbon credits, and premium-priced vegetables. The product is so sought after that farmers can secure valuable purchase deals. That is, the product is already sold even before it has been cultivated.

While still a small and immature investment area, we expect many more investable natural asset strategies to become available in the coming years – watch this space.

The attractions of social housing

Social housing targets marginalized and vulnerable people in society. Many lives have been greatly changed by safe and secure housing, which provides an escape from domestic violence and homelessness or provides facilities to meet physical and mental well-being needs.

But there is a huge lack of social housing supply in Australia, including care for the elderly, affordable housing and specialist accommodation for the disabled. These are all relatively new sectors of the property and infrastructure market in Australia, in particular specialist accommodation for the disabled which has only been investable for a few years.

In addition to investing in a meaningful cause, specialized disability accommodations can offer investors inflation-linked, government-backed income that helps significantly reduce credit risk. Even investors who do not explicitly seek social or environmental benefits from their investments may be attracted by the high single-digit returns and low correlation to core assets that specialized disability accommodation can offer.

We delved into this sector last year in an article we published in specialized disability accommodation.

Another common theme in impact investing focuses on the empowerment of women and girls under the banner of “gender lens” investing. More than a billion women around the world lack access to credit or a standard bank account. Microfinance loans have helped the rise of some successful women-led businesses. These businesses are often as basic as selling vegetables in a small market.

Another strategy has been the use of social impact bonds to finance programs that reunite families (particularly mothers and children). Again, this is not philanthropy; investments have been structured to fund these causes which can offer market rate returns.

Investors finance such programs in advance, and state governments only pay for successful results. This represents savings for them compared to financing other types of hosting. Therefore, it can be beneficial for the government, investors and reunited families.

The chart above summarizes the four key impact investing themes mentioned above, which we have aligned with the investment strategies that are currently the most prevalent vehicles for achieving these impacts in private markets.

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