How impact investing works

Australia is the world’s fourth-largest holder of pension funds, in no small part thanks to the sweeping compulsory superannuation reform of the early 1990s. By the end of December 2018, its assets totalled $2.7 trillion, and were spread across a diverse group of assets:

  • 49 per cent were invested in equities
  • 32.3 per cent in fixed income and cash investments
  • 14.4 per cent in property
  • 3.9 percent in other assets.

However, the nature of those assets is changing.

More and more individuals see their personal superannuation or other investments not only as a strong foundation for retirement but also as a powerful tool for social advancement.

Over the past decade, the rise of ‘ethical’ or ‘impact’ investment is the observable product of this trend, particularly among those nearing retirement and looking for more ethical options to earn income. In fact, a 2017 Australian Human Rights Commission report found over 80 per cent of Australian investors “base their decisions on non-financial factors” when making financial commitments.

That’s where impact investing comes in. Impact investing aims to balance the twin objectives of acceptable financial returns and positive social change.

The Responsible Investment Association of Australasia (RIAA) predicts that 53 per cent of Australians will consider making impact or responsible investments during the next one to five years. RIAA’s latest benchmarking report found responsible investment funds often outperformed traditional equities, meaning retail investors don’t need to trade off investment performance over their conscience.

impact investing

How does impact investing work?
Australians are engaging in impact investing with two main goals in mind. First, to avoid investments in activities or organisations that the investor considers to be questionable; second, to maximise investments in activities or organisations that the investor believes could lead to positive social outcomes.

For example, the Future Super (Australia’s first fossil-free superannuation fund) uses negative and positive screening. It excludes investments in any companies involved in fossil fuels (ie: mining, burning, or extraction), nuclear energy, tobacco, gambling, intensive agriculture, animal cruelty, and so on. At the same time, it prioritises investments in renewable energy, recycling, resource conservation, sustainable timber production, social infrastructure, and the like.

One important question concerns how impact investment funds determine what is and isn’t considered to be an impact investment. There is no single approach, though most funds publish their own charters, allowing consumers to select between funds with different emphases.

The rise of impact investing is paving new ground
Consumer demand for high-performing and responsible solutions to superannuation management is good news for companies that offer impact investment opportunities. As impact superannuation funds seek to diversify their portfolios, they’ll look for opportunities to draw stable returns from investments that meet the requirements of their charters. For example, Future Super has invested over will invest in consumer credit, the first time for a retail super fund, through RateSetter’s National Clean Energy Lending Market.

RateSetter’s National Clean Energy lending market and South Australia Renewable Energy Lending Market are unique two-sided marketplaces connecting green investors and borrowers. RateSetter’s National Clean Energy Lending Market is open to everyday retail investors, where they can earn up to six per cent interest per annum investing in loans for clean energy products, such as solar panels.

By pioneering these green markets, RateSetter has allowed the Clean Energy Finance Corporation (CEFC) to offer renewable energy loans directly to consumers at scale. In turn, our green markets have enabled the CEFC to pursue its core goal of facilitating increased flows of finance into Australia’s clean energy sector. The CEFC committed $140 million to the RateSetter investment markets, supplying RateSetter with the liquidity and scale necessary to become Australia’s leading provider of interest-bearing renewable energy consumer loans.

Learn more about how you can grow your retirement wealth with RateSetterRateSetter is offering YourLifeChoices readers a $20 bonus if you sign up and invest $100 by 30 April 2020.^

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