The world’s largest sovereign wealth fund, Norges, in May divested from 12 companies that explore for oil and gas. While the move is said to be predominantly motivated by the fund’s strategy to shield itself from a long-term fall in oil prices, it follows a wider sentiment shift away from fossil fuel producers in line with a growing recognition of the impact of climate change.
It keeps the strategy of impact investing, where a positive social and or environmental effect can be realised, in the spotlight, and that’s despite—or in some cases because of—uncertainty caused by the on-going Covid-19 pandemic, says Gianluca Romano, global head of indirect capital research at JLL.
“The current crisis is refocusing decision-making on the sustainability of investment opportunities and on building more resilient portfolios to guard against future crises such as climate change,” he says. “However great the uncertainty surrounding the current crisis, a longer-term focus on impact investment remains.”
With widespread financial stimulus packages designed to support economies through the pandemic, there will be substantial opportunities for responsible investment strategies that look to build a better future and a sustainable recovery as the world gradually re-opens for business, says Romano.
In Italy, local asset manager Azimut announced in May that it aims to raise €1 billion for a social infrastructure fund, with plans to invest in care homes, schools and student housing after the country’s economy was ravaged by the COVID-19 pandemic.
While the trend is still in its infancy, with impact-dedicated funds still accounting for less than 1% of global investment, momentum is building.
At the start of this year, BlackRock—the world’s largest asset manager—said it is seeking a tenfold increase in sustainable investments over the coming decade in a move that rocked the industry. BlackRock is not alone. According to the UK National Advisory Board on Impact Investing, one fifth of insurance companies and pension funds, including AXA and UBS, have similar plans.
More recently, an IPE survey of real estate investors—carried out between 2 March and 8 April 2020, and specifically about the Covid-19 crisis from 17 March—found that one in five are continuing to make social impact investments while a further one in three are planning or seriously considering it in the future. The majority surveyed state the appeal of such investments is to improve the risk-adjusted return profile over the long-term.
Making the numbers work is key for this to resonate with the wider market, says Romano.
“The focus for investors on impact opportunities remains largely on potential for enhanced, risk-adjusted returns, in resilient real estate,” he says.
It’s early days, but there is some evidence that ESG-linked funds can outperform. Research from financial publishing and information group Citywire discovered that ESG mirrors of existing funds outperformed their peers during the worst of the COVID-19 induced market downturn in March of this year.
“Significant progress in impact investing is potentially on the cards,” says Romano. “If investors can truly see the benefits over the long-term – then one can expect things to accelerate in the coming years.”