Impact investors aim to achieve specific, positive social or environmental goals such as creating more affordable housing, or reducing reliance on fossil fuels, but they do so to earn market returns too, while weighing other standard investment considerations such as risk and liquidity.
That’s a key finding of “Impact Investing Decision-Making: Insights on Financial Performance,” a report published last week by the Global Impact Investing Network (GIIN) that assesses investor attitudes toward financial performance based on outstanding studies by outside firms and an analysis of financial performance that was gleaned from its annual survey of impact investors.
“What’s important here, and what we’re delighted about, is that financial performance is an important consideration for impact investors, but they are really looking at it taking into account a number of considerations,” says Dean Hand, director of research at the GIIN.
To weigh impact alongside performance is not unusual in the sense that traditional market investors also weigh a number of things. Risk and return, for instance, are factors commonly taken into consideration in balance with one another.
To invest in an emerging market company might lead to higher returns than a similar investment in a U.S. firm, but it’s riskier, bearing a higher potential of falling apart, so investors have to decide how much risk they are willing to stomach to get the returns they want.
The GIIN’s survey results have shown that impact investors generally get the balance they are seeking—nearly 88% in the most recent survey say that their portfolios meet or exceed their expectations for returns.
But when investors care about creating a positive social or environmental impact, they also weigh traditional investment considerations, such as liquidity—do they need their investment cash back soon or can they wait? If the latter, an investor may be more willing to invest in a private equity fund with a longer time horizon, and a different set of impact outcomes than might be available via a green bond, for instance.
If they are a more conservative investor, too, not willing to shoulder a lot of risk—a highly rated green bond may be just the thing.
The Importance of Manager Selection
The GIIN’s report looked at how impact investments in private markets have performed, culling data from available research by groups such as Cambridge Associates and Symbiotics as well as its own investor survey.
Private-equity impact investments, for instance, can deliver high returns, outperforming the S&P 500 index by 15%, according to a study by the International Finance Corp., although a University of California study found the median impact fund had an internal rate of return (IRR) of 6.4% compared with 7.4% for the median “impact-agnostic” fund.
And results can vary widely. The GIIN’s survey data showed that the top 10% of private-equity portfolios in emerging markets had realized returns of more than 29% while the bottom 10% had returns below 6%.
As a result, the GIIN finds that fund manager selection matters, not just in terms of quality, Hand says, but in helping the investor understand “whether or not they are achieving what they want both in terms of financial performance and impact performance.”
Investors also have to ask the right questions, Hand says. For example, it’s important to ask questions like: What specific impact results a manager is getting? How are those results measured? How do you convey this information to investors?
Where these have been successful, particularly in impact investing, is where the AO and AM work together to derive what results they are looking for, what their objectives are, and how they are going to report on those results.
“Good asset-owner and asset-manager relationships are built on a close working relationship,” Hand says. “Where these have been successful, particularly in impact investing, is where the asset owner and asset manager work together to derive what results they are looking for, what their objectives are, and how they are going to report on those results.”
Performance in Private Debt, Real Assets
According to the report, private debt funds focused on impact have tended to provide low-risk returns, as most investors expect, while delivering stability as well as diversification to impact portfolios.
The GIIN survey data showed average returns for impact debt funds ranged from 8% for developed market funds to 11% for emerging market funds, while Symbiotics data found a weighted average yield of 7.6% for fixed-income impact funds, the report said.
Investing in real assets, such as real estate and timberland, can lead to good returns, but the results vary widely depending on the time horizon as well as the type of investment, the report found. Investors surveyed by the GIIN reported returns ranging from 8% to 23%—again, pointing to the need for investors to select the right asset managers.
To give a sense of how experienced impact investors balance all these factors, the report offers examples from five experienced impact investors.
IDP Foundation, a private nonprofit focused on access to education and poverty alleviation, invests for impact from its endowment as well as through program-related investments. The foundation cares about achieving high impact but also competitive, market-rate financial returns.
The GIIN looked at five major factors the foundation weighs before deciding on an investment: financial return objectives, impact objectives, financial risk, impact risk, resource capacity, and liquidity constraints.
It turns out IDP considers its financial return and impact objectives to be “very important,” while financial risk—or the volatility of expected returns—and impact risk are “important.” The foundation’s resource capacity is less important, as it leans on a consulting firm as an advisor, and screen service to make sure it doesn’t invest in anything that violates its impact goals.
“What we hope by these spotlights is that it will give investors an idea of how those things are actually playing out so they can match that in their own decision making,” Hand says.
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Vacationers scratching their travel itch this season are sending prices through the roof. Here’s how some are making trade-offs.
Capri Coffer socks away $600 a month to help fund her travels. The Atlanta health-insurance account executive and her husband couldn’t justify a family vacation to the Dominican Republic this summer, though, given what she calls “astronomical” plane ticket prices of $800 each.
The price was too high for younger family members, even with Coffer defraying some of the costs.
Instead, the family of six will pile into a rented minivan come August and drive to Hilton Head Island, S.C., where Coffer booked a beach house for $650 a night. Her budget excluding food for the two-night trip is about $1,600, compared with the $6,000 price she was quoted for a three-night trip to Punta Cana.
“That way, everyone can still be together and we can still have that family time,” she says.
With hotel prices and airfares stubbornly high as the 2023 travel rush continues—and overall inflation squeezing household budgets—this summer is shaping up as the season of travel trade-offs for many of us.
Average daily hotel rates in the top 25 U.S. markets topped $180 year-to-date through April, increasing 9.9% from a year ago and 15.6% from 2019, according to hospitality-data firm STR.
Online travel sites report more steep increases for summer ticket prices, with Kayak pegging the increase at 35% based on traveler searches. (Perhaps there is no more solid evidence of higher ticket prices than airline executives’ repeated gushing about strong demand, which gives them pricing power.)
The high prices and economic concerns don’t mean we’ll all be bunking in hostels and flying Spirit Airlines with no luggage. Travellers who aren’t going all-out are compromising in a variety of ways to keep the summer vacation tradition alive, travel agents and analysts say.
“They’re still out there and traveling despite some pretty real economic headwinds,” says Mike Daher, Deloitte’s U.S. transportation, hospitality and services leader. “They’re just being more creative in how they spend their limited dollars.”
For some, that means a cheaper hotel. Hotels.com says global search interest in three-star hotels is up more than 20% globally. Booking app HotelTonight says nearly one in three bookings in the first quarter were for “basic” hotels, compared with 27% in the same period in 2019.
For other travellers, the trade-offs include a shorter trip, a different destination, passing on premium seat upgrades on full-service airlines or switching to no-frills airlines. Budget-airline executives have said on earnings calls that they see evidence of travellers trading down.
Deloitte’s 2023 summer travel survey, released Tuesday, found that average spending on “marquee” trips this year is expected to decline to $2,930 from $3,320 a year ago. Tighter budgets are a factor, he says.
Too much demand
Wendy Marley is no economics teacher, but says she’s spent a lot of time this year refreshing clients on the basics of supply and demand.
The AAA travel adviser, who works in the Boston area, says the lesson comes up every time a traveler with a set budget requests help planning a dreamy summer vacation in Europe.
“They’re just having complete sticker shock,” she says.
Marley has become a pro at Plan B destinations for this summer.
For one client celebrating a 25th wedding anniversary with a budget of $10,000 to $12,000 for a five-star June trip, she switched their attention from the pricey French Riviera or Amalfi Coast to a luxury resort on the Caribbean island of St. Barts.
To Yellowstone fans dismayed at ticket prices into Jackson, Wyo., and three-star lodges going for six-star prices, she recommends other national parks within driving distance of Massachusetts, including Acadia National Park in Maine.
For clients who love the all-inclusive nature of cruising but don’t want to shell out for plane tickets to Florida, she’s been booking cruises out of New York and New Jersey.
Not all of Marley’s clients are tweaking their plans this summer.
Michael McParland, a 78-year-old consultant in Needham, Mass., and his wife are treating their family to a luxury three-week Ireland getaway. They are flying business class on Aer Lingus and touring with Adventures by Disney. They initially booked the trip for 2020, so nothing was going to stand in the way this year.
McParland is most excited to take his teen grandsons up the mountain in Northern Ireland where his father tended sheep.
“We decided a number of years ago to give our grandsons memories,” he says. “Money is money. They don’t remember you for that.”
Fare first, then destination
Chima Enwere, a 28-year old piano teacher in Fayetteville, N.C., is also headed to the U.K., but not by design.
Enwere, who fell in love with Europe on trips the past few years, let airline ticket prices dictate his destination this summer to save money.
He was having a hard time finding reasonable flights out of Raleigh-Durham, N.C., so he asked for ideas in a Facebook travel group. One traveler found a round-trip flight on Delta to Scotland for $900 in late July with reasonable connections.
He was budgeting $1,500 for the entire trip—he stays in hostels to save money—but says he will have to spend more given the pricier-than-expected plane ticket.
“I saw that it was less than four digits and I just immediately booked it without even asking questions,” he says.
Self-tracking has moved beyond professional athletes and data geeks.
What this ‘median’ 7-figure price tag scores across Australia.