An Insight on Impact
24 February 2016 at 10:56 am
When industry superannuation fund HESTA pledged $30 million to an impact investment fund in 2015 it made headlines as the single largest investment of its kind in Australia, but the fund says it’s only scratching the surface of what can be achieved.
In September last year HESTA announced it would commit $30 million to the Social Impact Investment Trust managed by Social Ventures Australia (SVA), and earlier this year the first investment, of $6.7 million, was made to Horizon Housing.
While the industry fund for the health and community services sector is ahead of the pack, HESTA CEO Debby Blakey said that, as a $32 billion fund, the investment was relatively small.
“What we need to recognise that this is a small allocation if you look at it in relation to our total portfolio, but we’re mindful where the development of the local impact investment market is at, and it’s really very early days,” Blakey said.
“We feel the allocation is appropriate for the current size of the market, but we are focussed on the long-term development of the impact investing market.
“We want to ensure that we show leadership in this and that the capital we invest is in line with the set of capabilities before hopefully giving rise to the growing pipeline of opportunities.”
As impact investing gains momentum, and greater financial credibility, she said that HESTA would look to make more significant investments.
“This is just the first investment, and obviously in deciding where to invest and how we want to invest there are a few things we needed to look at and one of them is that we needed to have investment returns in line with other investments, that have a similar risk and return outcome,” she said.
“And also we needed to be able to set measureable impact goals which we could track over the course of the investment, and we were able to do both of those in a very positive way with Horizon Housing.
“We have a framework that’s been developed to assess the impact and to really measure them. From our point of view it’s got to be measureable.”
Blakey said that the process for creating the fund began at a board level, and it was decided that collaboration was important to maximise the success of the investment.
“We’ve had conversations at a board level and at a management level for some time about the desire to have an impact investment, to look at opportunities that would obviously deliver the return that we’d be looking for, but also a measurable social impact,” she said.
“Through that process we started exploring options and I think it became clear to us that we needed good expertise to do that, and that’s why we’ve specifically partnered with SVA on this, so that they bring expertise and skills and experience to the partnership that we’re obviously relying on from a social impact point of view.”
At the time of HESTA’s $30 million commitment, SVA CEO Rob Koczkar said that he hoped other large investors would be encouraged to show similar support.
Australia wide, superannuation funds have more than $2 trillion under management, which theoretically has huge potential for impact investing.
But Blakey said that one of the barriers to engaging in the space is the current inability to scale due to the infancy of impact investing.
“As a very large institutional investor we’re used to investing in very scaleable assets, and, by its very nature, impact investing is probably not going to be at that same scale,” she said.
“I think that’s one of the reasons why [other] funds have possibly not jumped into this, because they generally are going to be small opportunities.
“I think that’s one of the challenges, you’ve got to manage it appropriately given the small allocation.”
More broadly, Blakey said that responsible investment is “extremely important” for HESTA.
The super fund was one of the original signatories to the United Nations-backed Principles for Responsible Investment.
The principles are based on environmental, social and governance (ESG) factors, which the UN said was key to long-term sustainable returns.
“We believe that if we’re to deliver really good long-term returns for members then we have to absolutely be responsible about where and how we invest, and so taking environmental, social and governance considerations into account is very, very important,” Blakey said.
“And not only that, but it does also align with our membership because we are the fund for health and community services in Australia.
“Our members spend their lives caring for others, they spend their lives supporting others, and if you consider the empathy scale our members are at the high-end of the empathy scale, and because of that, us being responsible investors aligns very well with our members.”
Blakey said that while HESTA had been “working in the space for a long time”, the fund’s approach to responsible investment has developed and now heavily focuses on engagement.
“I think what’s matured is our understanding of what [responsible investment] does actually mean and how we want to engage and how we want to have positive engagement with companies and with organisations and really try to influence how they invest,” she said.
“A lot of our engagement is through independent experts… because we believe there’s real benefit – rather than every super fund or every institutional investor doing their own engagement it’s really good to come together and do it as a group.
“As we’ve grown, and we’re a $32 billion fund now, we have done more direct engagement.
“For example we’ve done surveys with our investment managers, most of our investments are done through third-party investment, and we’ve [asked] them how they monitor certain risks.
“It might be bribery and corruption, or there might be a particular risk that we engage with all our managers and talk about, and we feel that that goes a huge way to raising the profile and the awareness of what it means to be a responsible investor.”
Blakey also said that HESTA’s governance model ensures that the fund makes responsible investments.
“We have 13 board members including one of them being an independent chair, and we work very closely with the board,” she said.
“We have a representative trustee model, so 12 of our board members are nominated from employer and employee bodies in the health and community services sector, and they have a real passion about responsible investment.
“We also have an asset consultant that we work very closely with, Frontier, and they in fact work very closely with the HESTA investment management, but they also report through to the board.
“And I think that’s enabled us to play a really active role in responsible investment and the way that we do consider key environmental, social and governance risks and opportunities.”
She said that while investment decisions come with risks that must be managed, there are also “tremendous” opportunities.
“It’s about really thinking about the important ESG issues for investors and the potential impact they have on financial returns over the medium to long-term,” she said.
“If you think, for example, climate change, I think there are risks we need to be aware of, there’s also an opportunity in the changing climate conditions and government policy regarding carbon pricing and renewable energy targets.
“So there are a lot of opportunities of positive things that we can actually do as a responsible investor.”
Along with responsible investment, HESTA, like other union-sponsored funds, has a history of divesting from ethically questionable corporations.
HESTA was the first big super fund to divest from tobacco, and, more recently, it was part of a group of funds to sell its stakes in Transfield offshore immigration detention centres.
But Blakey said that the fund doesn’t operate with a specific policy relating to divestment or scaling-down assets.
“Our policy is all around active engagement, it’s all about engaging with companies, engaging with organisations, engaging with sectors,” she said.
“Any decision to sell down on an investment will be a last resort where we honestly believe we’re not able to achieve the change we need for that particular category or for that particular asset.
“An example would be tobacco, where we felt it was the right thing to do given the impacts of tobacco, and especially being the fund for health and community services.
“But we don’t have a policy about divestment, divestment is just a consequence as a last resort where our engagement has not achieved the outcomes that we would want.”
Blakey said making responsible investment decisions comes down to the benefits for HESTA members and, in turn, the fund itself.
“At the end of the day, the thing we absolutely focus on is the net-benefit to our members. So our mission is really very, very simple, and it’s all about supporting our members and to make a really difference in [their] retirement outcomes,” she said.
“We firmly believe that it’s our fiduciary duty to be responsible investors and to take environmental, social and governance factors into account, because that’s what it means to be a good fiduciary.
“But.. we take a lot of pride in the fact that we can show leadership in this area and we can be active owners. We invest a lot of money into global markets and into Australian markets, and it’s really good to have specific principles and commitments to being an active owner.
“These are very exciting times for funds because I think more and more institutional investors are developing their understanding of what it does mean to be responsible asset owners.”