by Amrita VK Vatsal, Managing Director, EFM
There is a long-held belief by investors that positive social and environmental performance comes at the cost of financial performance. But the impact investment sector has spent the last decade trying to persuade investors otherwise — that, in fact, investment strategies that pursue environmental and social impact can do so without compromising their fiduciary responsibility. And, now they’ve got the research to prove it.
A new report just released by Cambridge Associates, an institutional investment consultant, independently evaluated the financial performance of funds invested in timberland, real estate, and infrastructure asset classes over a 17-year period. Now, for the first time, real asset investors can directly compare the performance of impact funds to traditional funds in the same sector over a meaningful period of time.
The report found that timberland funds that used impact investment strategies outperformed traditional funds by nearly 2X overall, across vintage years, and across all fund sizes. In addition, smaller funds of less than $100 million outperformed larger funds. Small can be beautiful when it comes to funds — they can be more responsive to specific events and pursue markets that have not yet become mainstream.
EFM (Ecotrust Forest Management), an impact investment timberland fund manager and subsidiary of Ecotrust, contributed data to this benchmarking study. With more than 12 years of experience investing in the timberland sector and 75,000 acres under contract and management, firms like EFM have been pioneering strategies that allow public value creation to coexist with private profits. We think that the outperformance is largely due to the fact that impact investment strategies use a broader lens to evaluate and screen investments and this approach has the potential to unearth economic value or risks that are largely overlooked by the traditional investment process.
Considering the social and environmental dimensions of an asset, in addition to traditional financial screens, can often lead to a broader set of opportunities that results in deal flow, new partnerships, diversification of revenue, and lowered operating risk. For example, rare endangered species habitat doesn’t have to be harvested but can be “sold” via a conservation easement. Implementing a carbon project can avoid infrastructure development costs and create revenue with lower operating risk to surrounding communities and water resources. Creating public value via investments in underserved communities or protection of resources can often attract public and philanthropic funding in the form of tax credits or low-cost financing. A growing body of evidence suggests that more and more firms in the timberland sector are integrating these strategies into their investment models, while some firms like EFM have made impact investing the cornerstone of their investment strategy.
This report by Cambridge Associates cracks the door open a little wider to new possibilities for investing with impact!