Impact investing has grown rapidly in Canada and will continue to expand as institutional investors get a better understanding of its value, according to a new report from the Responsible Investment Association.

The report, which surveyed 87 organizations in Canada between April and August 2016, coincides with the country’s third annual Responsible Investment Week.

It found 62 per cent of respondents expect impact investing to grow over the next two years and that many have already adopted the trend. From 2013-15, assets under management tied to impact investments grew by 123 per cent. In 2015, survey respondents identified more than $9.2 billion of assets under management as impact investments.

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The report — which referred to a definition of impact investing as investments with an “intention to generate a measurable, beneficial social and environmental impact along with a financial return” — attributed the growth to a higher demand from institutional and high net-worth investors, the increased availability of impact investment products and a better understanding from investors about how such investments can generate positive social and environmental impacts.

But apart from that, impact investing is “not just the right thing to do, it’s the smart thing to do,” says Tomicah Tillemann, director of the Bretton Woods II program at U.S.-based think-tank New America. The program works with institutional investors to reduce their risk and volatility exposure through socially responsible investments.

Tillemann, who will be delivering the keynote speech at this year’s social finance forum hosted by Toronto’s MaRS Discovery District on Oct. 28, adds that pension funds are in a particularly good position to take an interest in impact investments.

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“These asset owners are so large and long term in their approach to investing, that in essence if something bad is going to happen anywhere, it’s going to affect them,” he says. “They have exposure in virtually every sector and virtually every geographic.”

On the flip side, says Tillemann, “if something good is going to happen anywhere, [institutional investors] stand to take a piece of that upside.”

For instance, the 2013 Ebola crisis likely affected institutional investors that had wide exposures across various sectors, according to Tillemann. “If you were a pension fund with exposure to airline stocks, you took a huge hit because the valuation of those equities plummeted due to uncertainty over whether people would continue to get into an aircraft.”

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But if pension funds had engaged in impact investing, they could have mitigated the huge loss that resulted from the outbreak, Tillemann suggests. “That’s a case where you could have invested a little bit of money in health infrastructure and pharmaceuticals in West Africa and created conditions in which it’s much less likely there would have been an outbreak to begin with.”

An organization may also engage in impact investing by directing capital to traditionally underserved communities. For instance, the report cited a B.C.-based credit union that holds treasury investments in social housing, certain consumer loans and residential mortgages. The company also owns buildings that are environmentally friendly or include affordable housing units.

When it comes to some of the barriers to impact investing, Tillemann cites a lack of knowledge or education, as evidenced by the perception among many investors that impact investments automatically mean less profit. “There was a perception that the only way to do meaningful impact investment was to sacrifice returns,” says Tillemann. “But the more data we get, the more clear that that’s not the case.”

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Indeed, the Responsible Investment Association’s report showed that 65 per cent of survey respondents target competitive returns at or above market rates. Of that group, 96 per cent said their impact investment’s performance either met or exceeded their expectations.

But despite data suggesting otherwise, the investors surveyed noted risk and performance concerns prevent them from demanding more impact investments. They also attribute a lack of viable products or options in the market as a barrier to impact investing.

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Tillemann admits there’s a “relative scarcity of good financial instruments that have enabled institutional players to deploy capital efficiently and effectively at scale.” While green bonds and the private space have provided some opportunities, Tillemann says there has been limited activity when it comes to public equities that foster socially responsible investments.

However, he expects that to change and notes recent innovations that have made impact investments more accessible, such as Convergence Blended Finance, an online Canadian platform that connects private, public and philanthropic investors to deals in emerging and frontier markets. In addition, Tillemann cites the development of new indexes that contain companies whose core businesses help address one of the United Nations’ sustainable development goals.

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Some institutional investors, such as Asian pension funds, are already switching their baseline investment index to a socially responsible investment one “because they found it was generating higher returns and lower volatility,” says Tillemann.

The Responsible Investment Association’s report confirms the growth of public equities as a conduit for impact investments. While they comprised only three per cent of impact investments two years ago, the report found about 20 per cent of Canadian impact investment assets are in public equities.

As impact investing becomes more prevalent, so will the data surrounding its performance metrics, says Tillemann. “In another decade or two, I don’t believe we would think of this as impact investing or [socially responsibly] investing. This will just be smart and long-term investing.”

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Copyright © 2020 Transcontinental Media G.P. Originally published on

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