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Starting off with impact and asset allocation

Our last newsletter, “Impact Investing and the Mainstream” generated some return mail. Thanks! It’s always a pleasure to hear back. We'll take this opportunity to build on the responses. 
As we noted, about 99% of Australian investment funds are yet to be moved into impact investing. Yes, some will be having a positive impact but they are unlikely to meet the impact criteria defined by the sector. Nonetheless, the amount of funds allocated to impact investment is rapidly growing. That means there are a lot of newcomers who are figuring out how to integrate impact with the familiar investment models and practices which have been useful over decades.
Asset Allocation Models & Impact
The most widely applied framework for portfolio construction is a simple asset allocation approach - with stocks for growth, bonds as a more defensive investment, and some allocation to property and cash. When balances start to get larger advisors will often look for some 'alternatives' allocation (more about alternatives in a moment).
Newcomers to impact sometimes decide to carve out a dedicated 5, 10 or 20% allocation specifically for impact investments.
As we have said before, anything more than nothing is a good start. That’s especially true when only 1% of Australian AUM is invested for impact. But as we have also said; impact is more of a lens than a standalone asset class.
Start on the right foot.
Let's accept that it is hard (and probably unwise!) to shift a whole portfolio to impact in a single day. New impact investors are more likely to start a bit slower. 
We admire new impact investors who get started by shifting a portion of their assets to impact, within each of their asset classes.
It can be done! There are more and more impact options across all asset classes:
  • In Stocks: we're convinced by arguments that engagement and activism can have excellent impact, and investors can find options for that fairly easily.
  • In Bonds: we do believe that it’s impactful to provide capital for social and green initiatives, government and corporates. Indeed the vast majority of Australian impact FUM as counted by the Responsible Investment Association Australasia (RIAA) sits in this asset class.
  • In Property: IIG has offered impact property, with assets that have managed environmental upgrades and driven high standards through construction. We also see increasing “green” ambition and results sector-wide.
The Alternatives Allocation
Advisors have often struggled to find investment products that fit the 'alternatives' allocation; investments that aren't highly correlated with other asset classes. Even leaving aside impact considerations, many advisors would aim to fill about 20% of a traditional portfolio with alternatives products.
As it turns out, impact investments often fit nicely within an alternatives allocation, and IIG has experience managing these kinds of investments: We have a great venture capital operation, we’ve offered compelling renewable infrastructure products, and we’ve structured private debt offerings. (You may see where this is going.) We have also formed relationships and partnerships with other managers whose investments fit in the ‘alternatives’ space.
Last week, the AFR interviewed Daniel about how to grow the impact investing market. He mentioned that we are preparing a new fund, which is designed to fulfil that alternatives role within wholesale investors' traditionally allocated portfolios. The fund will draw on our experience in impact finance generally, and alternatives investments specifically.
So, the point we wanted to make today is this: Although impact investing isn't an asset class itself, impact investments may help build out the 'alternatives' allocation within a broader portfolio.
If you want more information, or want to be pointed in the right direction for readings about getting started with impact investing, please do get in touch. We'd be happy to help. And we will be in touch shortly with much more about IIG’s Impact Alternatives Fund. 
We should make clear; this is not personal advice. If you are considering an investment in any product, IIG's or otherwise, you should seek the appropriate financial advice, and read the disclosure documents before making your decision.
Get in touch if you want to know more.

News from around the ecosystem
Including an interesting climate-finance-legal case. 

  • Australian Sovereign Bonds Attract A Climate Case 
    A fifth year law student, Katta O'Donnell, has filed a class-action suit accusing Australia of failing to disclose financial risks from climate change. She bought some Australian sovereign bonds, which mature in 2050, and says the disclosures were insufficient. 
    The case has been widely reported, reaching the Guardian, the BBC, The Financial Standard, Lawyers Weekly, and the NY Times.

    Regular readers of this newsletter may remember the case of Mark McVeigh, who is suing the superannuation fund REST with similar lack-of-disclosure complaints.
    The two cases have the same legal team(!) and the barrister, a QC, is a former federal court judge. Still, it would be powerful to have a big, conservative legal firm in the line up.
  • HESTA, the superannuation fund, puts $19m into residential aged care village pioneering a new approach for people with dementia. 
    CEO Debby Blakey told ProBono News that even a tiny slice of the almost $3 trillion super industry started investing for impact it would make a huge difference to tackling big social challenges like dementia.

     “We hope our investment in important projects like Korongee encourage other large investors to contribute to Australia’s impact investment market,” she said.

    “This will make a huge difference in how we address significant social challenges like dementia, and also help create jobs and opportunities for our members who work in health and community services.” 
    Read the full article

  • RIAA: "Responsible investment prevails over virus adversity" - In The AFR
    CEO Simon O’Connor draws together research by AXA Investment Managers, reports by Blackrock and their own consumer research, to show that responsible investments have out-performed, and they're want consumers want. 

Carol Sanford has worked with Fortune 500 and new economy executives  designing and leading systemic business change and design. 

She's the founder of;

The Small Giants Academy is pleased to present this conversation event. Through a socratic and contrarian approach, backed by research, case stories and testimonials, Carol will challenge and educate us as leaders to reimagine everything they currently know about strategic thinking, leadership, management and work design.
Get your tickets here

The Impact Summit's Virtual Program Continues!

  • Workshop - Emergence: Climate change and renewal opportunities post Covid-19
    Wednesday 9 September 2020
    An exploration with climate action leaders and investors, mapping the acute need and opportunities as we navigate through and emerge from economic collapse.
Hit their website for more
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If you are considering an investment in any investment opportunity referred to in this newsletter, you must read the relevant information memorandum in its entirety. If you are in doubt as to your status as a wholesale client (as defined in the Corporations Act), you should contact IIG or your financial or legal adviser. If this email provides financial product advice, it is limited to general advice to wholesale clients only, and does not take into account your current or future financial circumstances. The content of this newsletter is to be read subject to the following disclaimer on our website (with references to "website" to be read as references to this newsletter). Use of any private information is governed by our privacy statement.
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