COVER STORY: Impact investing is about making change not dollars

Impact investing isn’t your usual “let’s throw something at the wall and see if it sticks” investing.

Rather than focusing on sufficient returns on acceptable risk, investors want to see what positive impression a business leaves on the world.

Simon O’Connor, CEO of the Responsible Investing Association of Australia (RIAA) said impact investments differ from grants because a financial return is expected, and they differ from mainstream finance because they prioritise measurable social and environmental benefits.

In 2022, Australia’s responsible investment market reached a record $1.5 trillion in assets under management, now representing 43 percent of total professionally managed funds, according to the RIAA.

Even the federal government understands the growing importance of impact investing. In this year’s budget, it committed $199.8 million over the next six years to bolster impact investing within Australia.

Social Ventures Australia reported this funding will support a range of initiatives that incorporate Australia’s largest outcomes fund, place-based programs, working with philanthropy, data-gathering and analysis, and support to grow social enterprises.

David Hetherington, CEO at Impact Investing Australia said impact investing requires a more explicit degree of intentionality.

“You do have to be for purpose. That's not to say that you can't be a more traditional business and still pursue impact, but you have to do it as a deliberate decision,” he explained.  

“You have to put in place the frameworks, the measurement structures and approaches to track what you're doing.”

Reflecting societal needs

As consumers and organisations become more ESG-focused, emerging startups need to ensure they’re reflecting the wants and needs of society.

Damien Kenny, chief of staff at healthcare impact startup Seer Medical said, “It's not that society has changed, we have different expectations, and those of us as citizens want something better; we're seeing our institutions change.”

One example of this would be the Victorian government’s $2 billion investment fund, Breakthrough Victoria which launched in 2022.

Kenny said, “That's made a huge difference. The conversation now in the ecosystem in Victoria is all around very worthwhile startups from clean energy to medical tech It's more than a conversation, it's backed up now by institutional arrangements, by new capital.

“It says to any innovator that has an idea now, don't discount doing something that's good for society. It doesn't have to be just another SaaS product."

What is an impact business?

An impactful business looks to understand the positive and negative impacts of what they do on people, on the planet, and to recalibrate those so they are continually creating more net positive impact, according to Hetherington. 

“It is in particular about removing from your asset portfolio from investments that clearly do harm,” he said.

“Impact investment is about managers and owners of capital deploying their capital to help businesses do that in a way that both provides a financial return. But provides a discernible, tangible and attributable impact.”

To be an impact business, there are certain prerequisites a startup has to have.

Impact Investment fund Giant Leap has invested in over 25 companies that deliver financial returns alongside real and measurable social and environmental benefits

To be considered a worthwhile investment, Adam Milgrom, partner at Giant Leap highlights three key criteria to what determines a business as an impact business.

Milgrom said the first criterion is that the founders need to have intentionality around their impact.

“They have to be driving for a positive outcome,” he said.

The second is that impact should be embedded in the business model.

“A unit of revenue delivers a unit of impact. We want to see a tight link between growing a company because we're looking for these scaling companies and also growing impact,” Milgrom explained.

Thirdly, Milgrom said that the impact should be measurable.

“We can look on a quarterly basis at what the impact of that company's having. The first order impact is the widget or the outcome of the direct intervention the company is having,” he said.

Hetherington noted that a company with ESG targets does not make an impact business.

“All businesses have an impact, they have a positive impact, they have a negative impact. You only start to be serious about those when you measure them and track them,” he said.

“ESG tends at this point not to have that level of intentionality around changing the impact balance towards more positive impacts.”

The difference impact investing makes

Impact businesses are seeing the difference in having the backup of an impact investment fund compared to traditional risk-based investment firms.

Kenny at Seer Medical said having the backing of an impact fund means they have to focus more on just making money.

He said these type of investment firms starts with impact first and then focus on the finances.

“The starting point is how we're optimising our impact. What is great about that is there's not just the feel-good. If you were setting up with a different product, you'd be thinking about where is my consumer and how do I delight my consumer?” He said.

Instead, Kenny said the leadership team and their investors discuss how they solve the problem they have in a meaningful way.

“That's a great conversation around the boardroom. It's a great conversation when talking to prospective investors,” he said.

“We also know now that these things are still profitable. They're businesses that can make money, and by getting capital they can accelerate positive change in society. It is the best job, deploying capital but for purpose.”

Natassia Nicolao, founder at beauty impact business Conserving Beauty told Digital Nation being an impact business adds a “layer of credibility” to her company.

“[It says] what we're doing holds a lot of value and there's a lot of efficacies in the work we're doing behind the scenes and the fact we track and measure that with an impact company.”

Conserving Beauty has both impact and non-impact investors, one being Giant Leap, Nicolao said she can clearly see the difference between the two types.

“It is interesting because even going through the due diligence process with the impact funds versus the consumer funds, the questions are very different and the issues that they raised are different,” she said.

“The consumer side is very curious about digital marketing, average order value and custom acquisition costs, and return on investment, which is all very important things.

"The impact side asked how much water are you going to save over 10 years. What sustainable development goals are available and how are you validating that? Are you going to do B Corp?”

Endless possibilities

There is a significant growth trajectory for impact investments, according to O’Connor at the RIAA.

“As our 2020 research indicates, Australian investors express a strong desire to increase their allocation towards impact investments more than fivefold, aiming for $100 billion over the next five years,” he said.

“This demonstrates a substantial surge in investor interest and signals the growing momentum of impact investing in Australia.”

O’Connor believes the future for impact investments in Australia looks promising.

“The report highlights the preferred impact themes of Australian investors, such as clean energy, environment and conservation, housing and homelessness, education, and health,” he said.  

“These areas present substantial opportunities for impact investments to drive positive change.”

With increasing demand from investors and customers for investments that deliver both financial returns and positive impact, O’Connor said he expects the impact investing market will continue growing and diversifying across different asset classes in Australia.

While impact investing is traditionally made up of green, climate or social impact bonds, impact investing is beginning to emerge in every industry. 

Nicolao at Conserving Beauty said, “In the future, you will definitely see way more consumer goods brands and their verticals will expand.

"We were the first beauty brand for all of these funds. But we'll start to see so many other categories that we wouldn't have thought would be in the impact space before."

As the remit for impact investors expands so too will the amount of funds, Nicolao explained.

“It is going to go broad and wide rather than just narrow in on tech or like renewable energy. Australia in particular has so much innovation that's been untapped and it's cool to see that coming to the forefront and a focus on climate,” she said.

“There's going to be heaps of Australian impact businesses over the next five to 10 years.”