Investment With a Conscience: The Rise of Pension Fund-Based Impact Investing
For pension funds, impact investing is not only investment with a conscience, it’s a stable financial choice that shows steady returns and weathers wider market fluctuations. And it’s what pension holders are increasingly asking for, says Tim Macready, CIO of Brightlight, an Australian impact investing company that has already invested A$150m (£80m) in pension funds in more than 200 companies in emerging markets.
Impact investment – investment that strives for social or environmental impact alongside financial returns – has its founding in private philanthropic foundations in the USA, including the Rockefeller Foundation. The movement has harnessed philanthropic capital in new ways to deliver social outcomes at a larger scale than traditional grant funding. To reach true scale, however, it is critical for the impact investment movement to expand into the institutional investment space. And there are encouraging signs in this direction. At pension funds such as Christian Super in Australia, impact investment is becoming “democratised” through fiduciary institutions that represent the collective interests of a large membership constituencies of individuals often of very modest middle income means, but collectively represent large pools of capital.
This is precisely the story of Christian Super and its recently formed sister company, Brightlight – an impact investment firm focused on institutional investors. Christian Super is composed of around 27,000 pension fund members, who are all similarly aligned to goals around faith-based investing to produce flourishing communities in Australia and around the world. And they are not alone – globally, pension funds are the strongest growth category of source of capital for impact investments. This is the beauty of fiduciary mutual funds. Together, the aggregated funds can create large groups of impact investment mandate-aligned investors, who can pool assets together to deliver impact at scale.
Consider the statistics – according to the Global Impact Investing Network, the fastest growing and largest category of impact investing assets under management by investment source is from pension funds and insurance companies. Of the estimated US$502b (£380b) in impact investment funds under management, 32% are investments made (largely through fund managers) by pension funds and insurance companies. Foundations and family offices are now only around 17% of capital invested into impact investment. Development finance institutions continue to be a significant segment (19% of capital), and in a sense they represent the collective will of governments and their constituency tax-paying public.
The ultimate in democratisation of impact investment is the member constituency of pension funds whose members can collectively voice how their funds are deployed. This is precisely how Christian Super developed its more than A$150m (£115m) assets under management impact investment portfolio – they simply asked their members a decade ago what outcomes they would like their investments to achieve. The resounding message back from the membership was, in effect: “We want to positively impact the world around us – including the most marginalised – by ensuring strong social outcomes while protecting and promoting good stewardship of the environment.” That led to a clear investment mandate. As the investment team pursued deals that would align with this new mandate, they soon came across inclusive business enterprises within the portfolio of fund managers, such as Business Call to Actionmember Big Tree Farms, who work with coconut farmers in Indonesia to manufacture and export coconut sugar to the US market (via Patamar Livelihood Impact Fund), and Cloud Factory, who train and connect African and Nepalese youth to outsource business processing jobs.
Taking forward an impact investment mandate also enabled Christian Super to invest in the formation of Brightlight, an affiliated impact investment firm established to service the rest of the market in Australia. Christian Super has demonstrated that inclusive business investments embedded into a diversified portfolio can deliver market rate returns to members while achieving strong impact outcomes aligned with the sustainable development goals (SDG).
Consider this: Christian Super is a small pension fund managing around A$1.5b (£1.3b) amid a vast ocean of pension funds in Australia, which is the fourth-largest holder of pension fund assets in the world with an estimated A$2.7tn (£2tn) in superannuation assets. Many of these funds have a democratised membership constituency aligned with a strong commitment to social justice and environmental sustainability. If the pension industry as a whole can give voice to the collective members of these funds – especially with the growing segment of millennials who rate highly in terms of commitment to impact investments – we could see a dramatic increase in capital that can be deployed for SDG-related impact outcomes.