Increased Investment as well as Diversification across Impact Themes

As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the final post in a four-part series.

In line with better ESG scoring and standardization, research on asset allocation in impact investing highlights a trend among asset owners and investment managers to both increase the investment volume and broaden the thematic focus of their portfolios. In Eyes on the Horizon: The Impact Investor Survey, co-produced in 2015 by JPMorgan Chase and the Global Impact Investing Network, 67 percent of survey participants indicated that they expected to increase their allocations to impact investments in 2015, totaling $12.2 billion in collective assets. Similarly, respondents projected an increase in sector diversification in their portfolio across the 13 sectors identified for impact investment. In terms of key sector projections, 26 percent of institutional investor survey participants said they expected to increase their exposure to energy, food and agriculture, while roughly 24 percent of respondents planned to increase their investments in healthcare and education. This projected asset allocation shift parallels a reduction in the growth rate of the microfinance and housing sectors, an indication that as the impact investing industry continues to mature, investors have more options and are expanding beyond the impact sectors that were the first to offer market-based investment opportunities.

Further research supports the view that impact fund managers are diversifying impact themes across their portfolios. An analysis of data from ImpactAssetsIA 50, an annual directory of 50 impact investment funds, shows that in 2011, 13 fund managers were solely focused on providing funding to microfinance and financial services, decreasing to only one fund manager exclusively targeting this sector in 2015. On average, in 2015 fund managers had 3.5 different investment focuses, a 60 percent increase from 2011.

In summarizing key impact investing trends and their implications for 2016 and beyond, we believe that an enabling regulatory environment, more investment product choices and better ESG and impact integration are well-aligned to support the sector’s growth. We expect that these factors will incent foundations, pension funds and retail investors to make increasing allocations to impact.  Furthermore, we believe that asset owners and investment managers, with the support of industry thought leaders and ESG service providers, will continue to refine ESG and impact measurement, monitoring and reporting given the increasing body of evidence that these practices contribute to improved investment performance.

We also note that many challenges to mainstreaming impact investing remain, and that overcoming them will require a concerted effort of industry leaders, associations and practitioners. On our own and in collaboration, we must continue creating scalable investment products, working toward uniform ESG integration methodologies, generating risk-adjusted returns, improving liquidity/exits, and educating financial advisors on the market-based, non-concessionary nature of impact investing. TriLinc is committed to its leadership role in helping build a robust, transparent and effective impact industry so that investors can achieve their goals for competitive returns and a better future for our world.

– This post is the final in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.

The Increasing Demand for ESG Scoring and the Benefits of Standardization

As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the third post in a four-part series.

Coinciding with the rise of entrants in the impact investing space is a similarly mounting demand for increased rigor and standardization around ESG reporting. According to US SIF Foundation’s biennial survey, “Unlocking ESG Integration,” the inclusion of ESG factors into portfolio management grew at a rapid pace between 2012 and 2014, reaching almost $5 trillion in US-domiciled assets. However, a key challenge for asset owners and investment managers has been the lack of an effective, uniform and all-inclusive way to measure ESG factors and impact goals.

Ernst & Young’s 2015 global survey, “Tomorrow’s Investment Rules 2.0,” reported that although 71 percent of institutional investor respondents considered integrated reports – which include both financial and ESG information – essential to making investment decisions, over 25 percent said that nonfinancial information had not affected their investment decisions over the past year.  The reason for this was primarily due to the difficulty of verifying and comparing ESG and impact data across firms.

In response, industry players are making strides to develop ESG assessment tools and services, so that investors can use ESG data to more effectively drive investment decisions and portfolio monitoring practices. As of 2014, Bloomberg, one of the largest information gathering and dissemination models in the investment management industry, had gathered and reported ESG data to 17,000 ESG data service subscribers on over 11,000 companies spanning 65 countries.  By adding “non-financial” ESG data to its product offering, Bloomberg has been an active change agent in the sector.

Another new player in the field is Morningstar, which is partnering with Sustainalytics to bring ESG scoring into the mainstream by assigning ratings to global mutual and exchange-traded funds (ETFs).  Resulting from heightened investor demand for more transparent information about ESG practices, Morningstar will test how companies and investment managers effectively gather, report and incorporate ESG information into the analysis and risk profile of their investments.  The new Morningstar ESG ratings will guide institutional firms that create and manage mutual funds and ETFs for the retail market, and will empower “main street” investors to make investment decisions that are both value-based and values-based.

Another industry partnership seeks to offer institutional investors insights into ESG risks, including those not reported through public companies’ mandatory public disclosures. In September 2015, Institutional Shareholder Services (ISS), which provides corporate governance and proxy voting services, began offering its clients ESG screening, analysis and stewardship tools using analytics and metrics provided by RepRisk.  This partnership helps ISS clients – asset owners, investment managers, hedge funds, broker-dealers and custodian banks – manage compliance, reputational and investment risks related to their portfolio companies’ ESG activities.

The burgeoning development of analytical frameworks underscores the demand for the integration of ESG variables into investment management practices.  However, the industry has not yet established a universally accepted approach to ESG methodology, measurement, benchmarking and reporting, as it has for other investment performance metrics.  A growing but still nascent trend, ESG integration will achieve mainstream proportions as sector players assess the various options and coalesce around broadly accepted approaches. Such standardization is crucial to better investment decision-making practices, and will lead to improved risk management and an enhanced understanding of ESG across a portfolio’s performance.

– This post is the third in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.

Retail Investors: Rising Interest and Opportunity in Impact Investing

As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the second post in a four-part series.

As TriLinc looks toward 2016, it is clear that the evolving regulatory landscape is creating a more enabling environment for a myriad of investors to align their capital with their values in pursuit of economic, environmental and social goals.

This environment has facilitated the expansion of impact products available in the market – from social impact bonds, to mutual funds and exchange-traded funds – and has transcended traditional product offerings to more closely meet investors’ specific ESG and impact interests. Until recently, however, few products were specially tailored to retail investors, compared to institutional and high net worth investors. With the arrival of retail, market-rate impact products in the past few years, retail investors at last are receiving due recognition as essential participants in the impact investment space.

Recent studies validate the retail channel’s importance to the sector. A report by the Global Impact Investing Network (GIIN) dated April 2015, “ImpactBase Snapshot: An Analysis of 300+ Impact Investing Funds,” found that 17 percent of market-rate impact funds targeted retail investors. Given the relative size of the retail investing market – roughly 91 million investors according to BNY Mellon – the retail channel represents a significant market opportunity for the impact investing community.

Financial advisors are in agreement. A recent survey by SRI examining financial professionals’ views on impact investing found that over half of surveyed financial advisors either currently offer, or have offered, SRI and/or ESG investment strategies to their retail clients. Perhaps even more revealing is that 73 percent said impact investing would become a “somewhat bigger” or “much bigger” part of their practice over the next five years.

This is in large part because retail investors are driving the demand for impact and ESG products across their portfolio allocations. A study conducted by Morgan Stanley showed that 71 percent of individual investors are interested in sustainable investing.  According to SRI, 58 percent of advisors claimed the foremost reason they offered impact investing to their clients was in response to demand. Millennials, women, and college-educated investors were among the top three investor profiles requesting impact strategies from their advisors, followed by high net worth individuals, baby boomers and senior investors.

With demand for impact investing in the retail space being driven from the bottom up, the development of tailored impact product offerings for retail investors will continue to be of vital importance. As retail investors continue to increase their knowledge and appetite for impact, and gain access to more market-based investment options, they will exponentially increase the flow of capital dedicated to solving challenges facing our society.

– This post is the second in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.