Listed equities can be used as a broadly accessible, liquid instrument for impact investing. These instruments, publicly-traded and broadly regulated, allow for investors to diversify their impact-focused portfolio on the basis of both risk and social objectives.

For investors seeking to engage in and influence the conduct of large, listed companies, owning publicly traded shares can provide a voice and tangible voting power to advocate on behalf of more concrete actions on the part of corporate issuers to improve conduct and prioritise social impact contribution.

Listed equities can be used as a broadly accessible, liquid instrument for impact investing. These instruments, publicly-traded and broadly regulated, allow for investors to diversify their impact-focused portfolio on the basis of both risk and social objectives. For investors seeking to engage in and influence the conduct of large, listed companies, owning publicly traded shares can provide a voice and tangible voting power to advocate on behalf of more concrete actions on the part of corporate issuers to improve conduct and prioritise social impact contribution.

Private debt refers to debt financing that is typically not provided by a bank; the debt instrument is not traded on a public market. The market is very deep, but does have entry barriers given the necessity of established relationships and the capital requirements of target investees. In addition, knowledge and understanding of the market and business model of the investee is a must, which emphasises the importance and necessity of the credit analysis prior to any investment. Loans are usually held to maturity by the lender. However, in microfinance, for example, historical default rates remain remarkably low.

Private debt is an excellent instrument for impact investing as it can be tailor-made and adjusted to impact goals. While the investee selection is the first logical step in which a prospective investor can assess and align impact goals with a target company, those aligned priorities can also be represented in contractual obligations and performance targets that drive home the importance of the impact/​social element of the transaction.

The most common and developed market for impact private debt is in the microfinance sector in emerging markets where lenders are funding microfinance institutions and other financial intermediaries that in turn provide individuals and small businesses with funding for operations and the requirements of daily life. This sector of impact investment represents the foundation of efforts to expand financial inclusion and manifests the belief that providing access to capital for growth can empower individuals and communities and foster sustainable economic development in emerging markets.

Real estate, both for commercial and residential use, ranks amongst the largest and economically most important sectors globally. Investment in real estate can offer strong diversification benefits and, depending on the strategy, equity- or debt-like returns. The illiquid nature of real estate investments requires long-term commitments and a good understanding of market dynamics at the country, regional, and city level.

In emerging markets, for example, real estate is benefitting from strong demographics, urbanisation, and economic growth. Investors’ involvement can range from the development or acquisition of assets to mere lending.

The opportunity for impact is ample. Against the backdrop of demographic growth and urbanisation, affordable housing and suitable commercial properties are still rare. The same is true for facilities with public characteristics such as student housing, crèches, and hospitals. Similarly, there is ample opportunity for quality upgrades and energy efficiency improvements.

Sustainable infrastructure is a key enabler for today’s megatrends such as energy transition, smart cities, urban/​e-mobility and digitalisation. The asset class consists of investments in durable, real assets that are vital for the functioning of modern society with a direct positive impact on quality of life and economic development.
From a portfolio perspective, investors stand to benefit from the possibilities of attractive risk-adjusted return with a strong yield component and low correlation of risk with other asset classes. Infrastructure assets, in general, have shown strong resilience to economic cycles given the generally long-term structure of the investments and the essential nature of services provided.

Assets often rely on predictable cash flows, underpinned by medium- to long-term contracts or regulated revenues. Depending on the risk appetite of the investor, financing can be extended during the development phase of a project, during its construction phase, or can refinance initial financiers once a project becomes operational.

Infrastructure is, at its core, highly developmental.

As infrastructure projects such as those in transport and power generation are key determinants of greenhouse gas emissions, choices made in respect to infrastructure investment have the potential to lock in emission levels and affect the climate for decades.

Private equity is a relatively new asset class for impact investing, developed mostly after the financial crisis, and as of today relatively small in size. Still, private equity impact investments offer a variety of different types of alternatives with varying risk-return and impact profiles, including venture capital, expansion or growth capital, global, regional or, industry plays, or cross-industry themes.

Because it is historically less correlated to public markets, private equity yields the potential benefits of diversification and lower volatility. The potential investment universe of private equity impact investments offers a possibly broader selection of industries and countries than listed equities to qualified and well-positioned investors.

As private equity impact investors are typically focused on a longer time horizon and tend to target essential services (addressing fundamental consumer and business demand), the asset class as a whole is resilient to periodic economic downturns. Returns are mostly driven by company and sector selection rather than market timing, and there is more potential to find value in pricing dislocation.

Private equity investments with an impact focus have excellent potential for value creation both in respect of shareholders and the communities being served by the target company.