Impact investing will continue to grow, fuelled by retail investors: Temasek

Singapore

THE growth of impact investing - a market estimated to be worth some US$715 billion - will be fuelled much in the coming years by retail investors, said Temasek's head of Impact Investing, as the attractive returns earned by those already in the space act as a beacon for such individuals.

The growth of the market, however, could prove to be a double-edged sword: while more capital can be directed towards social and environmental causes, as funds pour in, the eventual size and scale of the market could begin to undermine the very intentionality and purpose of such investing.

"In the coming years, I believe you will see a continuous growth in AUM (assets under management) in impact investing, (and) a lot of that growth will be fuelled by retail investors," said Benoit Valentin, who is also Temasek's deputy head of Europe, Middle East and Africa, in an interview with The Business Times.

"I'm convinced that a number of emerging adults or households will be willing to support that effort, and managers will find ways to channel that retail money into impact investing. And all of that has been made possible because impact investing is returning commercial returns.

"Otherwise, it's difficult to bet only on people's good deeds and charitable works," he added.

Impact investments - defined by the Global Impact Investing Network (GIIN) as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return - have been growing steadily in recent years.

The total size of the market has been estimated by the GIIN to be US$715 billion as at the end of 2019, growing from US$502 billion the year before (when the GIIN first came up with its methodology to size the market). And it's been predicted to continue growing at a fast clip.

The brisk expansion will, however, pose its own threat.

"One potential challenge - and to me it remains a long-term question - is whether you can still genuinely (make a positive) impact at very large scale, or would you risk losing the intentionality? If you grow too big, would you have enough impact-heavy opportunities above a certain size?

"Most of the fund sizes these days are in the hundreds of millions (of dollars). If they grow to billions in size, they will have to look for larger opportunities. And then, would we be missing the plot? Would we be missing the impact angle there?

"But," Mr Valentin stressed, "at the end of the day, it's positive."

To date, capital has been directed towards many of the world's most needful causes, in areas such as sustainable agriculture, renewable energy, micro-finance, and in providing services such as housing, healthcare, and education to those in need.

For example, Global Partnerships - whose mission is to expand opportunities for people living in poverty - has deployed US$488.3 million, since the launch of its first fund in 2005, to 161 social enterprise partners, "bringing meaningful impact to an estimated 23.2 million lives in 26 countries".

And LeapFrog Investments, with which Temasek recently entered into a US$500 million strategic partnership, invests in businesses in Africa and Asia, with a view to helping them achieve growth, profitability and impact. It has, to date, received over US$2 billion from global institutional investors, and its companies reach 212 million people across 35 countries with healthcare or financial services.

Bringing about positive social or environmental impact also has to be "combined with commercial returns, which is a long-term condition of successful impact investing; in order to generate a sustained flow of capital into impact investing, you have to generate returns," Mr Valentin noted.

And Temasek is characteristically fastidious when it comes to evaluating who or what it invests in or partners with, with an eye on the outcome. "We triangulate the equation: the fund (we invest in) has to have a good track record, the right intentionality and the scale. So, it's a combination of profit, purpose and scale.

And its guiding principle - "the North Star", as Mr Valentin terms it - would be investing in funds that "serve the underserved", as was the case with LeapFrog.

"And so, the geographies (we will be focusing on) will be primarily Africa, India, South-east Asia, and Latin America, eventually."

As for how it assesses the success/failure of its impact investments, Mr Valentin explained that Temasek looks at this on both the macro and micro levels.

"The longer-term objective for us is to help catalyse the industry and accelerate the growth in AUMs for the overall industry - that's one measure of success. And so, we are working with other stakeholders in Singapore to help set up what could be a centre of excellence for impact investing.

"At the micro level, if you look at ABC (World Asia, a private equity firm dedicated to impact investing, set up by Temasek Trust in 2019) and LeapFrog, when they make an investment, they are extremely clear as to what they want to get out of it. They will have KPIs (key performance indicators) and each KPI will be in terms of both the financial as well as the social and environmental impact.

"We look at how we can help the fund deliver those KPIs - which is important because you're not only riding a wave, you're accelerating the growth of a company that is serving the underserved; by providing capital, you are shaping that growth.

"And so, success will be measured by the extent to which the funds that we've invested in are delivering on the KPIs they have set for themselves. You cannot predict success, but you need to define the conditions of your success."

As for how Temasek navigates the risks posed by greenwashing - where funds convey a false impression about how environmentally or socially impactful their investments are - Mr Valentin said the state investor is in a position to take its time to scrutinise its potential targets carefully.

"We are under no time pressures, so we can be extremely picky.

"But I would also like to add a bit of perspective to the worries that have been generated over greenwashing. Even if some funds are not as impactful as some others, even if we may not invest in these funds, they could still be doing the right things for the communities on the planet. So we need to be cautious to not overreact to this greenwashing scare."

Referencing Ronald Cohen, a leading impact-investing innovator and advocate, who said that impact creation is "a chain reaction", Mr Valentin said he recognises that "every single player in that chain... is contributing to the greater good".

"We want to be part of that chain. And our capital has to be fuel to that chain reaction. That's the overall picture of what we want to do in impact investing."