Impact funds focused on the timber sector – raised between 1997 and 2014 – outperformed conventional timber funds by delivering nearly 80 percent higher returns through June of last year, according to a new report from Cambridge Associates and the Global Impact Investing Network.
As of the end of June 2016, the 18 impact timber funds analyzed produced a pooled net internal rate of return of 5.9 percent compared with 3.3 percent for 24 conventional funds over the same period, the report found.
The impact funds – defined by their intent to generate social and environmental returns alongside a financial one – outperformed the comparative data set (of conventional funds) across all capitalization sizes.
The three impact funds below $100 million in capitalization performed the strongest of any group, returning 8.9 percent IRRs. But on a comparative basis, the 11 impact funds in the $100 million-$250 million range outperformed conventional funds by the greatest margin, by nearly 1.5 times, with 6.6 percent versus 2.7 percent returns, respectively (see chart).
The impact timber funds also saw a stronger performance in comparison to the two other asset classes the study measured, real estate and infrastructure, which showed only mixed results versus their respective conventional counterparts.
As potential reasons for this, the report noted that impact investing in timber was more prevalent, making up more than one-third of the capitalization of the total private timber sector over the vintage years analyzed. Compared to infrastructure, timber is also a more established sector, with some fund managers having been in the sustainable timber business for more than 30 years.
In addition, “both the impact and comparative universes [for timber] are characterized by a smaller number of firms managing a series of funds following the same or similar strategies across multiple vintage years, whereas the other sectors analyzed exhibit a greater diversity of fund managers and strategies pursued,” the authors noted.
While the report recognized the shortcoming at this relatively early stage in measuring impact investing among funds – “there is no standard taxonomy to categorize impact objectives” – inclusion in the databases required “passing rigorous screens for impact intent and strategy,” while targeted funds were subject to additional review by Cambridge’s research team.
The impact objectives of the funds included sustainable timber production, land conservation and biodiversity conservation, and participating impact fund managers were required to submit both annual audited financial statements as well as quarterly cashflow statements.