What are the benefits of impact investing
Impact investing: investments that do good
A still young niche in the financial market is so-called impact investing - in German: impact-oriented investing (WI). This means investments that are reflected in a measurable social or ecological added value and generate returns. Investments are made, for example, in education, health and energy projects and sustainable agriculture. The financial products range from funds, social bonds and microfinance funds to "citizens' shares".
Sustainable investments are in vogue and the SII market is growing rapidly, but it is not easy for private investors to tap into. To date, there are only a few providers of such investments. In addition, BISE proves to be a very flexible term in practice. What do you have to look out for if you want to reconcile philanthropy and the pursuit of profit? How much do you get in the end?
Biallo tip: up to ten percent dividend
What is impact investing?
The term impact investing comes from the world of wealthy benefactors and patrons. The Rockefeller Foundation is said to have shaped him more than ten years ago in the USA. Impact investing describes financial commitment between donation and maximizing returns - commitment with regard to the Sustainable Development Goals (SDG) set out by the United Nations, such as no poverty, high-quality education, clean water, affordable and clean energy and climate protection.
The investments stand out from other sustainable investments in two ways: They are about achieving positive social or ecological effects "as directly, intentionally and demonstrably as possible". And it is about "measuring" and "communicating" these effects. This is how it is defined by the federal Impact Investing initiative, which is supported by foundations, financial service providers and consulting firms. The application of sustainability criteria, so-called ESG criteria (Environment, Social, Governance), by means of which capital is directed past certain industries, for example, is not enough.
- Take social enterprise as an example: Impact-oriented investments flow into start-ups that tackle social problems with entrepreneurial means. One that has won multiple awards is Discovering Hands. The company uses the sense of touch of blind women for early breast cancer detection. The procedure increases the chances of survival for those affected, lowers the costs for the health system, and blind women are integrated into the labor market. Around two dozen health insurance companies are already paying for the examination. The start-up was largely financed by a social impact fund. The fund company holds a minority stake in the non-profit parent company and its subsidiary GmbH. As compensation, she receives loan interest, depending on the operating profit. When the loan is repaid, the fund company withdraws.
How is the market developing?
The niche is still small. In this country, 8.1 billion euros were invested in impact-oriented funds and mandates last year - mostly closed-end funds from institutional investors. That was a good four percent of the volume of all sustainable funds and mandates and three percent of the volume of all sustainable investments, which bundled around 270 billion euros. The Forum for Sustainable Investments (FNG) lists these figures in its latest annual report. According to the survey, impact investments in funds and mandates fell by 38 percent in 2019 compared to the previous year. In 2018, they increased the most of all sustainable investments, at that time the niche grew by almost 150 percent and reached a volume of 13 billion euros.
The global market has reached a volume of more than 715 billion US dollars (2018: 502 billion US dollars), estimates the Global Impact Investing Network (GIIN), in which fund companies, asset management companies, foundations, banks and public organizations have come together .
Most of the money is invested by fund managers. According to the annual report of the GIIN, they account for more than 50 percent of the capital invested in 2019. A good 20 percent come from institutional investors such as pension funds and insurance companies, and 24 percent from development banks.
Far more than half of the new impact investments in 2019 are "private debt". The term stands for debt capital for corporate financing that is granted outside of the capital market, primarily by institutional investors. In terms of investment volume, private debt accounts for 37 percent. In second place is Publicly Traded Debt. They represent 16 percent of the investments and 24 percent of the fresh capital. This is followed by private equity - equity provided over the counter by private or institutional investors.
- Biallo tip:If the topic of sustainability is important to you, you can also contribute to climate protection with your own banking business and ensure a good future: Sustainable banks offer "green" current accounts with which you can do good.
How is impact measured?
As clear as the trend is that the market figures reflect, it is not always clear to investors what their money is doing. "Whether Fridays for Future, the diesel scandal or plastic waste in the seas - we have various topics in the public discussion at the moment. Here and there the public pressure triggers nervousness. Quite a few banks and other financial service providers are trying to jump on the bandwagon," says the coordinator of the federal initiative Impact Investing (BII), Martin Vogelsang, in an interview with biallo.de. There are financial products on the market that "do not meet our expectations of impact investing". Vogelsang sees the danger "that development through greenwashing will take the wrong direction if the social or ecological added value is not measured."
It is up to each product provider to determine how precisely they record this type of return - to what extent, qualitatively and quantitatively. Some have an overarching metric, some define several key performance indicators depending on the project. Others provide general information. This may or may not mean deliberate wishy-washy. In the case of complicated financial products in particular, this may be because it would be too time-consuming to determine their effect more precisely. Nonetheless, the question arises whether we should then speak of BISE.
- Example of impact measurement: Investors who specifically support individual projects can find out, for example, how many megawatts of green electricity or hectares of organic farmland are added, how much electronic waste is recycled or how many people with disabilities get a job.
Numbers don't always tell you something about the effect. "It may well be that you create social or ecological added value with a certain technology on paper, for example, but that you have not considered all possible consequences - any negative developments - from the outset," explains Vogelsang. One example from many: "I still remember a telemedicine pilot project in India. So and so many people should have access to doctors via the Internet. After a while, it turned out that most of them do not use the technology because they are directly involved want to talk to a doctor. "
What returns does impact investing bring?
According to the GIIN's annual investor survey, 85 percent of fund managers aim for "risk-adjusted" returns at market level, 14 percent expect results below that. The opposite picture emerges with foundations: 33 percent pursue the market average as their goal, 68 percent have lower returns in mind. 15 percent of all investors - in addition to fund managers and foundations, others were surveyed - expect a slight increase, close to capital preservation.
Impact-oriented capital is found primarily in the energy sector (16 percent), microfinance (8 percent) and other financial services (12 percent). This is followed by investment goals "Agriculture and Food" (9 percent), "Housing and Healthcare" (8 percent each) and "Water, sanitation, hygiene" (6 percent).
From a follow-up survey on the effects of the corona pandemic, the GIIN deduces that investors continue to have "relatively positive" expectations. As a result, however, the overall picture has shifted: 46 percent of all investors surveyed expect that their portfolios will not perform as expected due to the crisis. 34 percent believe the return targets will be achieved. Only 16 percent expect that their investments will not achieve the desired effect. In terms of impact, 18 percent even speak of "outperformance".
One must also see that high costs reduce returns. Financial service providers have more work to do with these investments than with conventional ones. In the case of funds, for example, this can be seen in the management and administration fees and sales charges.
Performance of microfinance funds:
|IIV microfinance fund||0,53%||2,96%||7,12%|
|BIB SUSTAINABLE FINANCE (SICAV) - KCD MIKROFINANZFONDS III||2,25%||5,98%||10,12%|
|GLS ALTERNATIVE INVESTMENTS MICROFINANCE FUNDS||1,01%||3,64%||n / A|
|Dual Return Fund - Vision Microfinance *||0,35%||1,21%||4,04%|
Source: own research / Onvista.de, performance without distribution as of September 30, 2020, * October 12, 2020
Which investments are suitable for private investors?
Those who want to invest in an impact-oriented way come across a wide variety of providers. In addition to banking and financial service providers, these are small companies and organizations that channel money into projects in their region or city alone. The spectrum of forms of investment is broad, and products of the gray capital market make up a not inconsiderable part. The question of the investment risk then comes to the fore more than the question of the effect and return.
Financial products for retail investors include:
Microfinance is the generic term for financial services for low-income people. First and foremost, it concerns the granting of small loans in emerging and developing countries. The loans are intended to help, for example, with setting up or securing a business.
Microfinance funds give investors' capital to so-called microfinance institutions in the respective countries and acquire unsecuritized loan receivables. The institutions lend the money to people who are turned away by banks because their creditworthiness seems too low. The economics professor Muhammad Yunus is a prominent pioneer in microfinance services. He founded a bank for small loans in Bangladesh in the 1980s and was awarded the Nobel Peace Prize in 2006.
A number of such funds are available to private investors in Germany. The "IIV Microfinance Fund" has been on the market since 2011 and is managed by Invest in Visions GmbH. In 2015 the "KCD-Microfinance Fund - III" followed, behind it stands the bank in the diocese of Essen, and the "GLS Alternative Investments - Microfinance Fund" of the Ökobank GLS. Two products from the Austrian C-Quadrat Asset Management GmbH were approved here in 2016; they operate under the name "Dual Return Fund - Vision Microfinance". In April of this year, the "Microfinance & Impact Fund" of the investment company Monega came out - shareholders are, among others, the Sparda banks.
Overall, microfinance funds have shown positive performance in recent years, with relatively low volatility. The pioneer in the German market has achieved an average annual performance of 1.85 percent since it was launched.
The running costs, however, are up to around two percent. They are already included in the performance. It should be noted that fund units - unlike equity funds - cannot be returned overnight. For example, the funds in the table above are only traded once a month. Other funds can even only be bought and sold quarterly. In addition, investors must observe notice periods.
In terms of impact, investors learn how many micro-entrepreneurs in which countries receive loans, how much the loans are on average, how high the proportion of women and men among the recipients is, and how many of them live in the city or in the country. In 2017, the Scope rating agency came to the conclusion: The funds "promote the long-term provision of financial services for workers who are considered poor regardless of their occupation". The specialist magazine Ecoreporter attested a "high social impact" in a comparative test of microfinance funds.
But these investments are not without controversy. "The borrowers pay high interest rates, often 20 to 30 percent," says Heidi Pätzold from the Hamburg consumer center. Investors should take a close look at where the money ends up. It is questionable "whether small loans help sustainably against poverty or whether they represent a new poverty trap," the financial expert points out and refers to scientific studies. The economist and social researcher Philip Mader criticized in a widely acclaimed study: "Microfinance does not make poverty better for the poor [...] but it does make it more useful for the wealthy than before."
Open impact funds
Equity, mixed and bond funds with the addition "Impact" in their name are aligned according to ESG criteria. With these criteria, investments are made according to the inclusion, exclusion or best-in-class principle. Depending on the fund provider, individual sustainability goals (SDG) are defined in more detail. In the case of widely diversified financial products, the question is to what extent they "as directly as possible" (see Section 1) have a social or ecological impact and whether this is measured.
Ökobanken have set up funds that largely correspond to the definition of SII. Take Triodosbank, for example: It advertises two equity funds and a fund that invests in corporate and government bonds, as well as three mixed funds. "We define the ESG criteria very strictly, and we only invest in companies that offer solutions in areas of transformation towards a sustainable society," says bank spokesman Florian Koss. Such transformation areas include "circular economy", "social inclusion", "mobility" and "climate and energy".
The money house uses the "ecological footprint" as a yardstick for the effect. It documents how much lower the CO2 emissions or water consumption are due to the investments or how much less waste is generated - compared to values for indices such as the MSCI World. "With 1,000 euros, a few hundred kilograms of CO2 can be saved per year, which is quite an impact," says Koss.
However, there is by no means an impact parameter such as the CO2 equivalent for all cash flows. "We are in the process of developing comparable key figures for other areas," says Julian Mertens, spokesman for the GLS Bank, which also offers equity and mixed funds. According to its own information, the bank had experts calculate for its “climate fund” whether it would comply with the Paris climate protection agreement. The result: If all companies operated like those on which the fund relies, global warming could be limited to around 1.5 degrees by 2050, they say.
A number of other banks and financial service providers have impact-oriented funds in their programs. Funds that pursue UN sustainability goals without an impact measurement are not always easy to distinguish from this. Name affixes such as "Gender Equality", "Clean Water" and "Clean Energy" mostly refer to sector or theme funds.
Social Impact Fund
They are considered to be examples of impact-oriented investing. Behind this are venture capital companies that act as intermediaries between start-ups and investors. So far there are only a few of these "intermediaries" in Germany. The fund company from the very beginning was Bonventure, which was launched in 2003. Their funds are European Social Entrepreneurship Funds, EuSEF for short. Special requirements apply to these. Last but not least, this affects the minimum investment amount. According to the EU regulation, every investor in an EuSEF must acquire shares with a value of at least 100,000 euros. Bonventure generally requires an investment volume of EUR 500,000.
"Above all, it is wealth management companies of wealthy families - family offices - and wealthy private investors who inquire with us. More and more people from the generation of heirs, so-called 'NextGens', are investing in an impact-oriented manner", says Jochen Herdrich, partner at Bonventure. He describes the investment approach as follows: "ESG criteria alone are not enough for us. What we do is high-impact investing in social enterprises with a clearly measurable social or ecological impact."
Bonventure is currently launching its fourth social entrepreneurship fund. The first expired in 2017. "The fund achieved the planned goal of" preservation of capital - after deduction of all costs "for investors, says Herdrich. This is also becoming apparent for the second fund, which will end in two years. For the third fund, Bonventure expects a return after deduction of the Costs between three and five percent for the investors.
Fundraising for the fourth fund started in early 2020.The first subscription phase will end in the coming weeks, and further capital is to be raised by mid-2021. "For our fourth fund, we expect a net return for investors of between five and eight percent," says Herdrich.
There is no mutual fund and there is no planning to do so. The effort is "too high in view of the bureaucratic hurdles".
These are bonds that are used to finance green projects. Issuers are commercial banks and other companies as well as cities and states. There is no binding regulation on how the proceeds will be used. There are the "Green Bond Principles" (GBP) that issuers can adhere to. In many cases, the money is used to build photovoltaic systems, wind farms or energy-efficient houses.
Green bonds work like ordinary bonds. Investors receive interest payments and their capital back at the end of the term. The investor risk depends crucially on the creditworthiness of the issuer. Green bonds can have very different legal forms, also as products of the gray capital market (see "Participations").
Supply and demand are increasing - Germany is one of the largest green bond markets. In 2018, the Frankfurt Stock Exchange introduced a segment for green bonds. Around 150 bonds are listed. They are traded on European stock exchanges and are included in trading in Frankfurt. Indices such as the "Solactive Green Bond EUR USD IG Index" and the "Bloomberg Barclays MSCI Global Green Bond Index" depict the global market.
BISE takes place to a large extent on the gray capital market. Company investments, loans with subordination agreements, profit participation rights, registered bonds - the range of financial products is diverse. Direct investments and crowd investing are also handled outside of the regulated financial market.
"It is not uncommon that investors who invest in green projects in this market do not see their money again," says consumer advocate Heidi Pätzold. The Hamburg consumer center has compiled more than 50 cases in which providers of risky environmental investments have gone bankrupt, investments in wind turbines, solar systems, tree plantations, wood pellet factories and hydropower plants. "Billions in fixed assets are being destroyed," warns Pätzold.
The risks are often impossible for investors to keep track of, and promises of returns are difficult to question. The Federal Financial Supervisory Authority (Bafin) has the products of the gray capital market on its radar, but it only checks whether the providers provide all the prescribed information about their products and whether the information is coherent. It does not check this information for correctness and it does not look at the profitability of the projects.
But even on the gray capital market, high returns are not always sought. "The social impact has to be seen as a return. We say that to our shareholders in no uncertain terms," emphasizes the founder and board member of Regionalwert AG in Freiburg, Christian Hiß.
There are five regional value companies nationwide - the other four are active in the Rhineland, Greater Munich, Hamburg and Berlin. There are start-up initiatives in Lake Constance-Oberschwaben, in the Münsterland and in Austria in Krems. The companies finance small businesses in their region, the majority of which are start-ups; Agricultural, production and service companies that operate according to ethical and ecological aspects.
"We have a total of 80 indicators that we use to determine the effect and about which we inform our investors. In agricultural projects, for example, we record how soil fertility is developing and how many old varieties are being grown," says Hiß. As further examples, he cites "the number of jobs that a start-up creates and how many apprentices are trained in a company".
Around 3,000 investors have acquired a Regionalwert share - a registered share with restricted transferability. The five AGs have a share capital of a little more than ten million euros.
Expert interview: "Separating the wheat from the chaff"
How interesting is the market for private investors? What are the risks? Bernhard Rathgeber specializes in sustainable financial products. He is deputy chairman of the board of Ökofinanz-21 e.V., a nationwide network of independent investment advisors.
How often do customers ask you about impact investing?
Bernhard Rathgeber: To date, impact investing has hardly played a role for private investors. That market is a niche in the sustainable investment market - a niche within the niche. The people who are interested have usually already dealt intensively with ethical-ecological financial products. And they ask very specifically.
Which forms of investment are you interested in?
Rathgeber: What customers ask about every now and then are microfinance funds, which is also the most obvious. It is a liquid form of investment and it is relatively safe. Microfinance funds spread their capital widely. In contrast, with project participation, for example in wind or solar parks, the risk for private investors is difficult to assess.
What should investors look out for?
Rathgeber: In the case of microfinance funds, one should first take a look at who manages the fund and according to which criteria: In which countries does the capital flow? How solid are the local microfinance institutions? What does the group of recipients look like? As far as participations are concerned, there are a number of regional projects in this country. It is advisable to get someone on your side who has specific knowledge, for example with projects in energy or agriculture and also with fund investments. It is important to separate the wheat from the chaff. Whether fund or participation - an important point is always the costs.
How much money do you have to bring to do good?
Rathgeber: From the point of view of risk diversification, I would recommend using only a small part of the assets for impact investments - between five to ten percent. Then the question arises what the minimum investment volume is in each case. In the case of project participation, that is often several thousand euros. For someone with 30,000 or 50,000 euros in fixed assets, I don't find something like that interesting. He should opt for other ethical and ecological investments.
How much good does someone do who puts their money into such other investments?
Rathgeber: It can be very different. Most sustainable funds pursue avoidance strategies - using exclusion criteria it is determined that no capital flows into certain industries and companies; for example coal companies, armaments industry and companies in which inhumane working conditions prevail. But there are no standards. Each fund provider can define for himself what "sustainable" means. Some are not as consistent as investors imagine.
Do you have an example?
Rathgeber: The market for ethical and ecological investments has gained tremendous dynamism, especially as a result of the climate debate and the issue of the CO2 footprint in the past two years. A lot of fund providers are going out now and saying our products have a great carbon footprint compared to an index. However, as an investor, it is not easy to see how this footprint is achieved. The fund may only do well because it is investing in nuclear power rather than coal. Does the investor actually approve of that? You have to look very carefully at the financial products.
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