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Ep 1 Impact Investing

Greg Morsbach: Impact investing seems to be a very popular phrase these days. So what is it and why is it getting so much attention?

Sarah Forster (00:08): Impact investing is creating a more collaborative marketplace, if you like. Competitors are willing to sit around a table and even co-invest alongside each other. People who get involved in impact investing, it makes them feel good, but it's also who they want to be.

Greg Morsbach (00:23): I'm Greg Morsbach, and a warm welcome to the PAT Cast, the podcast from PATRIZIA, the leading investment manager and partner in global real assets. On this podcast, we offer you updates on a range of hot topics from the real assets industry, from important industry trends to key business developments and key strategic decisions. One such hot topic is impact investing.

Marleen Bikker-Bekkers (00:47): I’m always questioning, are the issues getting bigger or do we all want to be better people?

Greg Morsbach (00:52): That's Marleen Bikker-Bekkers, PATRIZIA's impact investment fund manager. She's on our panel alongside Sarah Forster, the CEO and co-founder of the Good Economy Partnership who you heard from right at the beginning. Mathieu Elshout also joins the conversation. He's PATRIZIA's, head of sustainability and impact investing. So he's well-placed to tell us all about it.

Mathieu Elshout (01:16): So what, what we've done at PATRIZIA, we have tried to come up with our own definition, I would say, but it's very much in line with, I would say with what the industry, as far as there is already an impact investing industry, how they define it. These are investments that are made with a clear and deliberate intention of generating a positive social and or environmental return alongside an attractive risk adjusted financial return. So we refer to it as a dual or even a triple return, a return, a financial return that comes with social and or environmental, positive return as well.

Greg Morsbach (01:56): And then there's obviously also the measurability element of impact investing to define impact investing. What do we mean by measurable or measurability?

Marleen Bikker-Bekkers (04:36): I think so. I think, um, it was never used with that name so much. Uh, so I think that's really, from the time on, of course there have always been ways that you can invest in improving the situation of people and the environment. So I think it's been around for a long time, but it had never really been sort of named and defined that way.

I think from then on, we've really seen that grow. And I think particularly in the real estate sector, it's been more something of the last couple of years where it's been more profound and also the challenges are very much clearer on how real estate can contribute to certain challenges.

Mathieu Elshout (05:14): Actually before 2008 already, what we saw happening is that following the idea that infest us stood up, I wanted to be a responsible investor investing responsibly.

I think we saw the first signs of that. Say participants in, uh, a pension fund for the healthcare sector. They discovered they were infested through the venture funds into a manufacturer of cluster bombs or in tobacco, uh, firms. And they thought, I don't want my pension money to be invested in such activities.

And that's where the whole exclusions started, I would say, for many of the large investors. That was followed by ESG integration, really trying to mitigate ESG risks in the investment portfolio as well. We saw that evolution and I think in 08/09, I remember the days that we were looking into trying to come up with some kind of benchmarking tool to benchmark ESG in our real estate assessment portfolios.

That became GRESB, which is nowadays a well-known sustainability benchmark. And what I see the evolution going on is that impact investing is now come to the table, which focuses even more of our attention in not only reducing risk or reducing a negative impact, but actually wanting to do good, wanting to have a positive return, a positive contribution.

Greg Morsbach (06:45): We've covered the background on how the term impact investing has become so prominent. So what different types of impact investment products are available these days?

Sarah Forster (06:58): You know, we find impact investing products across the whole spectrum in terms of both, you know, risk adjusted returns and impact creation, as well as actually in all asset classes, I would say. So from private equity venture capital, real assets and beyond. And in the early days of impact investing, there was actually a group of specialist impact investing who were very much, I would say sort of impact first.

So some of the first impact investing products were funds often in, in Africa or less developed countries set up specifically to invest in addressing, for example, you know, water and sanitation access to water. There was a lot of investment in micro finance. So that's the provision enabling, you know, poor people to access loans affordably. You also had investing in renewable energy, particularly in, in more rural areas, trying to get, you know, energy out to everyone. So in the early days, that's where a lot of the first ones were. You know, say impact first funds. They were still looking to achieve a financial return, but perhaps not a fully commercial risk adjusted return.

And then over the years, what we've seen is actually impact investing has become mainstream. And we now have the development of products that are absolutely seeking to deliver commercial risk adjusted returns, as well as impact. And, you know, we see that within the SME finance space that you'll see investors backing businesses that are, you know, intentionally tackling a social environmental problem. There's obviously a lot going on with environmental tech, but in the healthcare field, we're seeing some interesting impact investing strategies. And, and now I think I would say in, in real estate, you know, there's a real development and here we're seeing, for example, uh, investing in increasing access to affordable housing is a core area.

Greg Morsbach (08:45): Yeah, I think you've teed that very, up very nicely here for Marleen Bikker-Bekkers who obviously has firsthand experience, uh, in impact investing, with impact investing. Marleen, how does, how does that work in practice?

Marleen Bikker-Bekkers (08:59): So for example, where there is limited availability of elderly care places or schools, so that type of real estate, and then we find those places where those are underserved and try to focus on that and, and providing that real estate.

I think this is very important to also to, based on the challenges really clearly define those. So clearly define what is underserved and where you want to invest in. I think for us, for example, our strategy's focused on finding affordable housing and social infrastructure, so where these are lacking, but with that also a green intention and inclusion and connectivity. So a challenge whereby what we've seen, a lot of cities where people are feeling lonely and that you, through your real estate investments, invest in the community where the real estate is.

Greg Morsbach (09:51): And the great news is you have a very specific project in Dublin. Why did you decide to focus on Dublin as a, as a place, which is an excellent place to impact invest.

Marleen Bikker-Bekkers (10:03): So in, in Ireland, there's a very big, uh, affordable housing issue, uh, particularly for the lower to middle income people that has been there for a number of times. And the government has announced that they want to start to solve that problem, but they do not have the resources in place. And also not the knowledge to really develop those homes and create those locations.

And that's where we step in and find underserved locations underserved communities and create these affordable and social housing. Having said that, affordability is not the only focus because we're also looking at the green site. So creating net zero, uh, homes, as well as creating inclusive communities. So every community where we create affordable and social homes, we try to, we see what is lacking in social infrastructure. So for example, our project in Ireland, the public library was on the other side of the city. So together with the local community, with the local government we're bringing the library to our community.

And with that a community centre so that the people in the area can meet, they can mingle just to make the community more sustainable, and liveable. And it, yeah, and it sounds as if you're addressing a lot of the UN SDGs there, the way you are describing it, the access to healthcare, access to education, you know, all of the above. But let's go back to something that Mathieu touched on earlier in this, which is obviously measurability. How tough is the concept of measurability on impact investing and impact investing products to do it in such a way that it's meaningful, and that actually you're not greenwashing?

Mathieu Elshout (11:54): I can think of investors from the Netherlands ABG and BGM who decided they want to address the STGs through what they referred to as SDIs, sustainable development investments.

So investments particularly targeting to contribute to the SDGs. And I would say I would refer that as investing with impact, rather than impact investing because you may need a broader definition, so to say, to really apply to that full group of investments. But what it tells me at least is that they have the intention to have say 20% of their capital investment, invested, which are, you know, many, many, many billions to be defined as SDI, sustainable development investments. They have created their own framework for that because they also recognise that you have to come up with a certain framework to be able to, to demonstrate you are indeed investing in the STIs.

So that is telling, I would say, you need a frameworks and for impact investing, I would say, even a stricter frameworks because the intentionality and additionality also really has to be proven, I would say.

Sarah Forster (13:09): So, yes. I mean, the sort of measurability is at the core and I suppose there's some core concepts and impact measurement that are perhaps useful.

So the idea is, you know, as Marleen has really well expressed is you're, you're investing to help tackle a specific problem. So you identified that problem, it's particularly trying to bring investment to underserved communities. So, you know, you're starting out by saying, okay, this is the problem we're trying to help solve and then what one articulates is something called a sort of Theory of Change. So how is our investment going to help resolve this problem? And, and then really trying to put in place sort of metrics, if you like, around both, you know, your activities, so, you know, as an investor, you're quite a long way up the value chain.

So it could be the, sort of, the nature of the developer you work with or the landlord services or the support services in the community that will add, you know, provide that additionality, how you move the library actually for us would be a really good measure of change that wouldn't have happened if you hadn't been an impact investor with that intention.

So, you know, mapping out the metrics that can measure what you're doing, your activities or the output. So, you know, how many houses, how many places, but also the outcomes. So the outcomes is the idea of, you know, so what, so, you know, how have people benefited, you know, is there a sense of wellbeing in this community and equally, obviously on the environmental side, are we sort of meeting our net zero carbon emission targets?

I mean, I would say measurement is better defined within the environmental sphere because it's more, it's easier to standardise, sort of environmental metrics. In the social sphere, it depends really on what you're doing and, you know, stakeholders will have different views on what social value looks like. Someone has to take into account stakeholder perspectives.

I think the other, you know, point to make and which we always, you know, we're a sort of specialist impact advisory firm and which we always highlight is it's not just about impact measurement, but what we call impact management. So this idea, you know, a bit like financial management is a discipline. You know, you're thinking through your investments, how they're performing financially, we say impact, you know, management is a discipline.

You're thinking, in every investment, well, how could I enhance the social value or environmental value? What could I do in a way to do more than I might've done that the market would have made me do anyway? And so, you know, through your screening, due diligence, performance review process, you're always looking at how can I manage the impact.

Marleen Bikker-Bekkers (15:32): Yeah we often also say it's a mindset. It's a change of mindset because you do make different decisions because you don't only have your financial goals in mind, but you also have your social and environmental goals in mind with every decision that you make. So it's, it is a change in mindset.

Greg Morsbach (15:50): It's a great concept, um, the concept of impact investing in terms of that dual return, which we've already touched on. But if we look at the pluses and minuses of impact investing, I mean, are there any minuses, are there any downsides to it?

Mathieu Elshout (16:06): So the negative could be that we're still maneuvering in, which is quite a narrow investment spectrum, so to say, it's not that the opportunities are that readily available. The need probably is there, but it's difficult to find the right opportunities. And certainly for, you know, these huge investors, they have problem to get capital to work, so to say, so there, they may struggle more, but we are definitely looking for these opportunities where we feel we can indeed deliver, well the social and environmental return, as well as the financial return. We have to look for these examples. It's not that they are that readily available.

Marleen Bikker-Bekkers (16:47): It requires a lot of work, a lot of thinking, a lot of work together with, uh, housing associations, governments, communities. Um, so I think that's a challenge you'd really need to work and work through, uh, a lot of elements with these types of institutions.

Greg Morsbach (17:04): Just in terms of the sort of things that clients and potential investors are generally saying to you, you know, you are trying to pitch to them for new business. What's the general atmosphere and the general mood among the industry?

Mathieu Elshout (17:18): Let's zoom in on the affordable homes. I think what we see is that many investors would love to contribute to resolving that. And we speak to large investors, pension funds as well as insurance companies. And we also find that they are allocating, say, uh, up to 20% of their investments, of their AUM, towards impact investing or what I referred to, as investing with impact, including affordable homes. But they also struggle sometimes to then define what is affordable homes.

And we know that is indeed not easily defined. Because it's different in each and every country where you are investing. So trying to deliver on that need, the willingness also from investors to invest in affordable homes and for us to then identify the possibilities and explain, you know, what we feel is affordable. That is, uh, very important because we definitely don't want to be accused of greenwashing or whatsoever. We want to deliver true impact in that sense.

Sarah Forster (18:23): I suppose one of the challenges you know we see is that, um, you know, as it's become, if you like in Vogue and there's quite a lot of demand for sort of impact investing or SDG type products, you know, there is a risk of sort of impact washing.

So we're seeing quite a lot of funds just literally wrapping their existing products with some SDG stickers and saying, you know, and, and really, you know, it's wrapping paper, frankly. There's also quite a lot of data in the market that isn't necessarily telling you if this investment really is, is making, you know, a real world difference to helping tackle problems.

So what we believe, actually, some of the best impact investing opportunities are actually in the private capital markets, including real estate. Where you're actually doing, you know, you're investing in tangible, real economy sectors where you can actually measure tangible, real world outcomes. You know, that benefit people and places and the environment.

Greg Morsbach (19:19): I'd like to turn our attention now to the future. Although the term impact investing was first used in 2008, it's clear that within the real assets industry, it's still a fairly young concept. So how will it evolve over the coming years?

Mathieu Elshout (19:35): What you see currently already, and I think that will only increase is there's quite a lot of pressure coming from the public domain, so to say, uh, from participants in pension funds. They feel, and that is also thanks to, uh, increased transparency, and I think it will only further increase, not just for the pension schemes insurance companies, but for the whole financial industry. This increased transparency will enable people to put more pressure on whatever financial point they see and they feel they want it to act in a different way. So you will see, you know, uh, Extinction Rebellion, but you know, people on the street asking for affordable homes, the fossil fuel industry to be, to be reduced. So that increased pressure, I would say, from society, will lead, I feel to a growing impact investing industry as well, but also with a growing pressure on investing with impact. And what I think what we will see more and more in the future, a targeted approach as well from say venture funds that they want their money to be put to work, where participants are coming from, from a certain sector, for example, or their money to be invested locally because they feel it should also help to resolve issues which are nearby where they are, close to their local community.

So I think that will further shape impact investing in the future. It becomes more locally focused, perhaps, and more sector focused. Sarah, you said earlier, that impact investing is something that right now is in vogue. Do you think that impact investing is, is something that we are paying a lot of attention to because it's in Vogue right now, and do you think that there will come a point in time in the future where the interest will fade slightly and it will be the next big thing?

Sarah Forster (21:38): Well, I sincerely hope not, you know, it is in vogue, but for me, it really, this is actually impact investing is, is about as sort of a paradigm shift, a shift in the culture and behaviour of the financial markets to look beyond financial returns, to actually sort of delivering, you know, social and environmental benefits.

So I do think it is something quite systemic actually in the way even incentives operate, right? Fee structures, asset ownership. You know, I think there's quite a lot to drill into, into our financial models as well. You know, we often say that impact creation goes hand in hand with financial structuring and how risk and returns is shared.

So I think, no, I think we'll see a lot of innovation. I think we'll see a lot of new product development as has been done here by PATRIZIA. I think that will only grow. I think there'll be more demand for authentic impact product. I think that's, um, important to keep it connected to 'is this really solving these problems' and tracking that.

And I think there's enough momentum in the market now that this will grow. And, and that, that momentum, I think what's interesting is coming from all stakeholders across the ecosystem from asset owners, asset managers, consultants, and ultimately the people whose money this is. You know, what, what we always say is that financial markets are managing people's money, right? It's our savings. It's our investments, it's our pensions. So, you know, and most people want to live in a better world. So I think that pressure that Mathieu mentioned is very true, but I think the reality is most people don't know where their money is invested, right?

Greg Morsbach (23:12): And are we seeing a shift in terms of attitudes, Generation Z, Generation Y, that these generations will truly drill down very, very accurately and precisely where their pensions are invested?

Sarah Forster (23:26): I think there is a generation. So clearly the younger generations have been the ones, you know, out on the street protesting about the lack of action on climate change. So there is no doubt that there is an activist group there that I think will absolutely drive this agenda forward. I think the role of data and technology will play an important role in that, you know, you can share information more easily now around investment opportunities and performance data. So if we begin to see, you know, data being shared, not just on financial, but also impact performance. and then there's benchmarking and sort of if you like rating of, of product against its impact authenticity. I think that will help drive capital towards impact investing.

Marleen Bikker-Bekkers (24:10): And then we haven't even spoken about changes in regulations. I mean, what is now happening with the EU regulation on sustainability is like very, very big change in regulation, which hasn't taken place for many years. So I think that's also helping and making things clearer.

Sarah Forster (24:30): And that I think is a fundamental point. You know, one cannot argue that the financial sector can solve the problems of the world. It can't right. I mean, government policy, consumer behaviour, other organisations who are so active in, in many of these issue areas. So it's just saying, I think that what's new and different is bringing private capital to the table as an active player in wanting to contribute to solving social environmental problems, which previously they didn't really think that was their job. They thought that was the job of the public sector or the nonprofit sector. And I think that's what's new and different is bringing in capital, including institutional investment to the table and saying, you know what? You can sit together with public investment and social investment and, and you know, this confluence of capital towards solving problems is what we need. And this partnership approach as Marleen said.

Mathieu Elshout (25:20): I think it comes back to where we started the conversation is that from the investors, the awareness of having, you know, wanting to become a responsible investor, we can't resolve the issues without the financial sector.

That's for sure they can't do it on their own, yeah, I also agree, but we can't do it without them either. And I think that recognition is there. The financial sector realises they have to contribute as well. And with them on board, I would say a lot more is possible.

Greg Morsbach (25:50): Thank you to our guests, Sarah Forster, Marleen Bikker-Bekkers and Mathieu Elshout.

And thank you for listening. I'm Greg Morsbach and you've been listening to the PAT Cast from PATRIZIA. You can subscribe to the show on Apple Podcasts and Spotify, or wherever you listen to your podcasts. And don't forget to head over to our website patrizia.ag to find out more. Stay safe and healthy, until the next time.

This podcast is produced by OG Podcasts. Find out more at ogpodcasts.co.uk.