Agriculture draws most investors among impact sectors

GIIN research director Abhilash Mudaliar tells Agri Investor the entry of mainstream investors into the impact segment is viewed largely positively, despite fears the label could be diluted.

More impact investors have an allocation to food and agriculture than to any other sector, according to a survey by the Global Impact Investing Network.

The eighth annual Impact Investors Survey presents a snapshot of activity, trends and perceptions within the global market for investments into companies, organizations and funds made with the intention of generating social and environmental impact alongside a financial return.

Based on a survey of 226 respondents managing $228.1 billion in impact investing assets, the report showed participating fund managers raised $18.7 billion last year and expect a 20 percent increase to $22.5 billion in the year ahead.

The report describes a fast-developing market in which LPs’ demands for increased attention to ESG considerations have drawn in a growing number of “conventional investors” that have enhanced the credibility and professionalism of the market while heightening fears in some corners of the potential for risks to its integrity.

“It is becoming increasingly unacceptable to invest without regard for the social and environmental impacts of one’s investment choices,” GIIN research director Abhilash Mudaliar wrote in the report. “Fundamental norms governing the role and purpose of capital in society are changing and impact investing is at the forefront of driving this transformational shift.”

Ag within Impact

Mudaliar told Agri Investor that the AUM of the participants who responded to the survey has seen a 13 percent annual growth in the five years he has overseen the report. When combined with a steady stream of new entrants in the market, this has helped lead to a total of roughly $35 billion in impact investments in 2017, he said.

Impact investors have been motivated to concentrate their efforts in a diverse range of sectors, Mudalir added, including financial services, energy, housing, education, healthcare and conservation, among many others.

“Food and agriculture ranked fifth in terms of total AUM allocations by sector, but in terms of the number of investors that have an allocation to any sector, food and agriculture ranked number one,” Mudaliar said.  “More investors have an allocation to food and agriculture than to any other sector, but it ranks number five in terms of total assets, probably because the size of the allocations are a little bit smaller than in other sectors.”

Of 229 organizations responding to GIIN’s survey, 57 percent have some investments in food and ag, and there are indications that the sector’s role within the space is growing. Over the past five years, 23 percent annual growth in food and agriculture impact investments has outpaced the 13 percent annual growth in impact investing overall, said Mudaliar.

Rapid growth in impact investing has brought about some fears of “impact-washing” – investors adopting the label without following through on what it implies.

Yet the entry of large, mainstream investors into impact investing is largely viewed as a positive development that has brought with it more capital, capability and credibility, according to Mudaliar.

“The need for impacting investing capital and scale of the challenges that impact investors are trying to address are significant and an order of magnitude still greater than the volume of capital that’s coming into the industry,” he said.

Roughly one-third of investors target concessionary returns, according to the survey, with the remainder seeking market-based returns from their impact investments.

“One of the prevailing myths about impact investing is that it necessarily entails or requires a cut in financial returns. There’s a growing body of evidence that’s been produced in recent years – that produced by the GIIN but also Cambridge Associates, the Wharton Business School, and McKinsey and other organizations – all of which show that for investors that are seeking risk-adjusted market-rates of return, those opportunities are available and feasible in the impact investing market.”

Metrics developing

Mudaliar said that the GIIN has made it one of its central areas of focus to help develop a system for measuring and managing the social impact of their investments in an efficient and standardized way. For agriculture, the organization has developed a resource called Navigating Impact – Smallholder Agriculture, which provides distinct measurements appropriate for eight different strategies within the sector.

“There are some investors that are focused on improved access to agricultural inputs. Others are focused on helping farmers improve market linkages or enhance farm profitability or food security or even pricing for their crops,” Mudaliar said.

Specific metrics the GIIN suggests might be appropriate for the asset class, according to Mudaliar, include agricultural yield, producer price premiums generated, sales volume and sustainable management of land, among others.

While three quarters of investors responding to the GIIN survey report incorporating the UN’s Sustainable Development Goals into their measurements of impact, Mudaliar said the precise ways in which the broad developmental aims laid out in the goals will be used to determine the influence of specific investments is still “very much evolving.” The goals have provided a framework that has energized investors in the sector, he said, adding that many firms have started to structure new capital raises around specific SDGs.

“The actual metrics that sit under those 17 goals, are a very long list and they vary from one country to the next. Thinking about how best to track one’s impact performance becomes a somewhat more complicated process,” he noted. “That’s more of a work in progress.”