Issue: June - Aug 2013
Mobilising capital for social impact
SA is buckling under such structural issues as housing, education, income disparity; job losses and energy shortages. Sometimes the problems seem so large that people don't know where or how to start in making a difference.
Impact investing partly offers a solution. It allows institutions to invest in impact funds that seek to generate competitive financial returns while addressing environmental, social and governance (ESG) needs.
At present, SA pension funds invest only around1% of their total assets in ESG. Impact investment funds can help trustees to grow this figure following the changes to Regulation 28 of the Pension Funds Act and the challenges set by CRISA which have increased awareness of incorporating ESG factors into fund managers' investment processes. What is more, individual members of retirement funds can feel they are contributing to the country's future.
What is impact investing?
Still in its infancy but. driven by initiatives globally, it is rapidly becoming formalised through an Impact Rating and Investment Standard ("IRIS"). Although impact investing could be categorised as a type of socially-responsible investment (SRI), it differs in certain ways. It does not entail negative screening which focuses primarily on avoiding investments in "bad" or "harmful" companies. Instead. impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.
With the vision of "creating shared value" and defining itself within the national discourse around SA's structural issues. Three years ago Mergence Investment Managers launched a suite of impact funds: the Mergence ESG Fund, the Mergence High Impact Debt Fund and the Mergence SRI Fund. They've all performed above their benchmarks. Showing that impact investing can marry ESG priorities with targeted returns. More recently, Mergence launched a renewable-energy fund.
Mergence's impact funds address SA's structural challenges in such areas as housing, education and energy. They're innovative 'debt funds' where the return on the debt investment is similar to the return on a listed bond.but with lower volatility. In comparison to a private-fund, a debt fund invests in more mature businesses where it can make a direct impact. Further more, it provides certainty of cash flows to investors.
The Mergence impact debt funds typically invest in unlisted debt instruments of sustainable businesses/projects that are already established and can support SA's objectives. For example, the Mergence High Impact Debt Fund has 14% of its assets invested in the education sector, 20% in transport and 21% within the housing sector.The latest debt fund supports renewable-energy projects that have high proportions of local content.
What about returns?
It is a natural reaction for trustees to think that they will need to give up some financial return if they are to take ESG issues seriously in their funds.This is not necessarily the case. A 2012 report by Deutsche Bank Climate Change Advisors surveyed over 100 academic studies of sustainable investing from around the world. It concluded that ESG factors are correlated with superior risk-adjusted returns.
Mark van Wyk
All the companies studied showed that those with higher ESG ratings have lower costs of capital. and the great majority of them experienced share-price out performance.
Contrary to intuition or assumption, this is strong evidence that investors should actually favour ESG-focused funds. Not only do they have beneficial social impacts. but they are inclined to generate attractive returns over the longer term too.
Mergence is a black-owned impact investment manager in SA. Through its debt impact funds, it can help institutional investors gain access to ESG investments: mobilising, monitoring and accounting for the money invested; and ensuring that the required rate of return is achieved within the risk profile of the investor.
For information on how to invest in the Mergence impact debt funds, please contact portfolio manager Mark van Wyk on 021 433 2960 or email@example.com