‘Super’ Opportunity for Funds to Make a Difference

A lure to draw cautious Australian superannuation funds to the impact investment space is an opportunity to align members’ values and actively contribute to the communities in which they live, new research suggests.

Impact Investments: Perspectives for Australian Superannuation Funds from the Entrepreneurship & Innovation Research Group at the University of Sydney Business School contends that Australian superannuation funds are, with due care, able to pursue and benefit from impact investment.

The report said that superannuation funds “face an industry environment in which they are regarded as being out of touch with the communities in which their members live.”

“Many such communities face entrenched disadvantage and disenfranchisement. Impact investment, properly and carefully managed, has a contribution to make.

“Impact investing allows asset managers to meet a growing demand from individual and institutional clients that investments should align with social and environmental values.

“Those willing to engage early and contribute to the building of the market can build an enviable competitive advantage,” the report said.

In Australia the market potential for impact investment is estimated to be $32 billion over the next  decade, but the report raised questions over whether this benchmark would be reached.

“The number of active investors and level of capital committed so far is small relative to the pool from which engagement is necessary if such market potential is to be realised. In particular, active take-up by institutional investors will be crucial to the success of a long-term impact investment market,” the report said.

“Institutional investors, while indicating a willingness to consider impact investment, are hesitant to move forward. Many are challenged by the misperception that investing for impact necessitates a financial trade-off,” the report said.

The report emphasised the role the unique legal positioning of superannuation funds has had in hindering takeup of impact investing, suggesting fund trustees are concerned with whether or not impact investing sits within regulatory regimes.

Superannuation funds exist solely to assist individuals to accumulate retirement funds and are legally bound to exercise due care and act in the best interests of the members as a whole, using investment strategies with regard to such things as risk, return, cash flow, diversification, liquidity, valuation data, tax, costs and the liabilities of the fund.

“Understandably superannuation fund trustees having so many hoops to jump through in respect of their investment activities may be tempted to place impact investments in the ‘too hard’ basket,” the report said.

“… as market momentum builds and collaborative effort is made to develop product to accommodate the needs of superannuation funds, the pathway to pursuing impact investment will be eased.”

While ready impact investment product was currently scarce in Australia the discovery of investable opportunities required focused effort,  the report spotlighted those impact investment opportunities being packaged in forms to appeal to superannuation funds.

It said packages were being designed to offer market rates of return and some had their financial position ‘de-risked’ by government commitments, such as those investments made under the Federal Government’s Social Enterprise Development and Investment Funds (SEDIF) project.

“As the market currently stands, investable products in the impact investment space are unlikely to flow across the desks of managers at any significant pace or volume. It is necessary for superannuation funds to collaborate with all stakeholders – other investors, intermediaries, government and impact enterprises – to build a pipeline of opportunities that can be translated into investable product.”

Private individuals, charitable foundations and family offices together with international development banks have predominantly championed impact investment to date.

The majority of capital for impact investment currently originates in the US and Canada, the United Kingdom and Europe, and Oceania.

The report can be downloaded here.