Taking socially responsible investment from concept to critical mass

Beyond reaching institutional investors, socially responsible investment (SRI) assets need to develop sufficient scale and momentum to attract interest from the wholesale markets.

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By Lorna Greene, Director of Debt Syndicate and Origination Asia, National Australia Bank

Investment models are being transformed as more businesses and investors seek to channel capital into activities that generate positive social or environmental outcomes. Worldwide, there are now almost US$23 trillion of assets being managed under socially responsible investment (SRI) strategies, according to the Global Sustainable Investment Alliance1. Even in Asia, where the concept is newer, SRI assets grew 16% from 2014 to 2016.

This trend has been driven in part by regulatory and reputational forces. But it is also based on growing recognition of the ‘shared’ value concept, which views social and financial gains as inextricably linked. Businesses, for example, may gain early-mover advantage by identifying and addressing unmet social needs such as affordable housing or waste disposal. By factoring in social or environmental performance, investors can be better positioned for the long term.

Some lessons in helping impact-driven investment thrive may be drawn from a region where it has made exceptional headway. From 2014 to 2016, socially responsible assets grew 247% in Australia and New Zealand, and now account for half of assets under professional management2. Crucially, this growth has not come at the expense of financial returns, offering proof of the shared value concept. Of 92 Australian impact investments analysed by Impact Investment Australia in the past five years, all showed positive returns. The actual return range on debt instruments reached 3.25%-17%3.

At the same time, the sustainability shift faces challenges. Measuring impact is a complex and at times controversial process. Markets remain squarely focused on short-term metrics. Based on the Australian experience, following are some of the key changes that will be needed to ensure shared value is more firmly embedded in business and investment strategy.

Measuring outcomes, not output  

When looking at services or infrastructure with a social component, an approach should be adopted that emphasises the tracking of measurement and performance indicators — including benefits to society — and channels funding to providers demonstrating the optimum outcomes. A key mechanism to ensure best practice is contestability; that is, evaluating which services are best provided by the public sector and which are best delivered by the private or not-for-profit sectors. Business, government, academia and not-for-profits all have an important role to play in gathering and communicating the data to support contestibility and outcomes-based funding models.

Shifting to a long-term mindset  

Sustainability requires a long-term view, but in many respects short-termism is intensifying. The prevalence of quarterly reporting cycles, investor pressure for quick returns and political transitions can all hamper the development, launch and funding of initiatives that produce lasting change. Addressing this requires narratives that emphasise the social and business value of long-term strategies and challenge short-term investment, political and performance decisions.

Connecting capital at scale

For all the recent progress, most sustainable investments are still relatively small, limiting opportunities for institutional investors to participate. Yet recent deals indicate the potential demand is significant. In March 2017, NAB launched the first social bond to specifically promote workplace gender equality. It was fully subscribed, drawing a total of AU$500 million from funds and groups everywhere from the UK to Singapore.

Tapping into demand for sustainable assets will require more reliable benchmarks and data on their composition and performance, as well as a degree of scale and liquidity that will allow institutional investors to gain exposure. The exponential growth of the green bond market in China — from virtually zero a few years ago, it now accounts for around 40% of global issuance — indicates this critical mass may not be far off 4.

Beyond reaching institutional investors, SRI assets also need to develop sufficient scale and momentum to attract interest from the wholesale markets. A number of green bonds — and NAB’s recent social bond — have demonstrated this is achievable. NAB is also developing platforms that will enable investors to gain exposure to SRI portfolios through tradable units, another important step in enhancing the growth of the asset class. These efforts are part of an overall focus on sustainability that has seen NAB achieve for the fifteenth year running one of the highest scores in the banking sector globally in the Dow Jones Sustainability Index, which tracks the environmental, social and governance performance of corporations worldwide.

This is a welcome recognition of the investments we’ve made in enhancing transparency and reducing environmental impact within our own operations. But we are also conscious of the need to embed sustainability more firmly as a practice throughout the industry. The rapid emergence of sustainable assets presents an unprecedented opportunity to move closer to this goal, and foster value on multiple fronts.

For more insights, please read the full report: A new architecture for social good (PDF, 1.1 MB)

The article is first published on The Asset: Taking socially responsible investment from concept to critical mass

1 http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf

2 Ibid.

3 https://impactinvestingaustralia.com/wp-content/uploads/Benchmarking-Impact.pdf

4 https://www.climatebonds.net/china-green-bond-market-2016