Financing the Future

The purpose of this project

This project seeks to deepen discussion on impact investment in Aotearoa New Zealand, and stimulate actions that will deliver immediate value while laying the foundations for a sustainable future.

The challenge of our time

This is a unique moment in history – a time of unparalleled opportunity, connectivity, disruption, and change. While the prospects of humankind, by many measures have never been better, we also face persistent and growing challenges, that are combining to create unprecedented levels of risk in our social, economic, environmental, and political systems.

Helen Clark, in her former role at the UNDP, captured the pivotal nature of our time succinctly: “Ours is the last generation which can head off the worst effects of climate change and the first generation with the wealth and knowledge to eradicate poverty. For this, fearless leadership from us all is needed.”

If we seek a hopeful and desirable future, the challenge of our time is set – sustain the miraculous gains of the modern global economy, while ameliorating the risks and inequalities that have grown with it.

Sophisticated finance for complicated times

Finance has always been the fuel of development, and it will need to be at the heart of the strategies and solutions we deploy to navigate the 21st century. However, given the complexity and interdependence of our world today, the paradigm for investment needs to evolve with the times and move beyond the principle of ‘do no harm’.

We need to rethink the purpose of capital, become more sophisticated in accounting for externalities, and shift investment decision-making from considerations of “risk and return” to “risk, return, and impact.”

To maximise our potential for prosperity and well-being, finance needs to become the fuel for sustainable development. It needs to reflect the interests of society as a whole, and unlock human ingenuity on the common challenges we face. This, in essence, represents the intention and practice of ‘Impact Investment’ – a growing global movement, and the most convincing financing strategy we have to realise a stable and desirable future.

What is ‘Impact Investment’?

Impact investment is built on three core principles: the intention to create a positive social or environmental impact, the expectation of a financial return, and measurement of the impact that is achieved. Impact investments can be made through every asset class, type of organisation, and sector to deliver different combinations of positive social and environmental change.

Impact investing can be understood to be on a spectrum with ‘Environmental Social Governance’ (ESG) and responsible investing. However, where ESG investing represents the intent to avoid risk, impact investing actively seeks to resource solutions and measure the results.

In 2018, the global market size of impact investment was estimated to be around US$228bn. In Aotearoa New Zealand, the market was estimated to be NZ$100m but due to a lack of aggregated market data, this figure doesn’t reflect the true extent of activity.

Impact investment is driving the creation of new markets, increased participation in investment activity (both supply and demand sides), and the blending of different types of finance to create new investment products.

Why now?

The establishment of global frameworks such as the SDGs and the Paris Agreement on Climate Change are driving demand for new finance to tackle the enormous social and environmental challenges we face.

The business sector in Aotearoa New Zealand is aligning with impact through the rise of social enterprise, the growth of tribal economies, and the increasingly progressive outlook of corporates and mainstream business – not least because evidence is indicating that responsible business behaviour results in better performance.

We are also seeing public sector reform, particularly in the area of service commissioning, driving new demand for impact investment, and citizen sentiment requiring institutional investors to consider non-financial returns in their decision-making.

Developing impact investing in Aotearoa New Zealand

There have been a number of significant developments in Aotearoa New Zealand in the last year that will feed into the growth of a domestic impact investment market. These include the establishment of new funds, policy initiatives, institutional strategies, and growing consumer awareness.

However, many of these developments are disconnected from each other and may create duplication / confusion if not collected and coordinated. In addition, while demand for impact investment is growing, it is often cut off from the supply of capital, with much more remaining latent due to constraints relating to resources, culture, and capability.

Given the early stage of impact investment in Aotearoa New Zealand, we believe there should be a dual approach to its growth – focussing on both specific market opportunities and also the development of a whole sector strategy.

In terms of specific market opportunities, we have focussed on areas where commercial opportunities combine with pressing need, potential for scale, and policy priorities. In the report, we explore four such areas through insights from field-based experts and case studies:

• Social and affordable housing
• Forestry and sustainable land use
• Social procurement
• The circular economy

For a longer-term approach, we believe the most effective way to grow a functioning and productive impact investment market in Aotearoa New Zealand is through a systematic and coherent strategy. This strategy should consider all components of the market ecosystem, and develop them concurrently. In the report we recommend that the following factors are considered:

• Development of a policy agenda to align capital with priorities
• Anchoring the supply of capital through the establishment of a wholesale fund and encouraging all institutional investors to allocate a percentage of their portfolios to impact
• Unlocking consumer demand and activating financial citizenship
• Proactively growing the pipeline of investment opportunities
• Building an evidence and knowledge base
• Supporting upskilling and professional development
• Setting strong and clear principles of practice

A critical part of growing the market will be having an independent organising body that can bring all stakeholders into play, and recommend / determine investments into market infrastructure without being conflicted or politicised. We believe the best vehicle for this role is the newly established Impact Investing National Advisory Board Aotearoa New Zealand (IINABANZ), which is also the country’s formal representative on the Global Steering Group on Impact Investment.

Our choice – a call for action

As it grows, the impact investment market in Aotearoa New Zealand offers an opportunity to combine the values of our unique cultural identity with the interests of business innovation, community well-being, and policy priorities.

However, good outcomes will not happen by themselves, and we should be prepared to invest in the design and development of new market infrastructure that will foster the impact and the world that we want to see.

Change is challenging but it’s also inevitable. We need to decide whether we will proactively adapt to the world around us, or be reactive to the inevitable corrections that will come.

The choice offered by the potential of impact investing represents a choice to further evolve our economy – from the individual to interdependence, from extraction to regeneration, from exploitation to empowerment, from division to inclusion, from the immediate to the intergenerational.

Through our savings, vote, voice, and practices – it’s a choice that everyone one of us can make.