Insights

Sustainable Investing, no GameStop.

The trend of unprecedented events continues in US equity markets. The rise of the retail investor and the democratization of equity investing creates volatility and significant market impact, but these are short term trading mechanics and a far cry from creating sustainable returns. Importantly, increased volatility points to the need to diversify investment portfolios.

Impact performance

Beckon Capital believes that having a positive impact drives sustainable positive financial returns and there is proof for this assertion. Measuring performance requires a long-term consistent definition and the definition of impact investing makes measuring performance problematic. To help, we do have relevant broader return metrics and fund flow information.

Beckon Capital invests in a new asset class, impact growth equity.

I share six proof points that when combined powerfully point to the significant opportunity of growth equity and impact investing in Australia. These proof points demonstrate the strong demand for sustainable assets, the attractive return profiles of impact investing and growth equity – and the underinvestment in both in Australia.

Proof point 1. “Sustainable” fund flows demand continues to increase.

During 2020, flows into sustainable open-end and exchange-traded funds available to U.S. investors reached $51.1 billion. That was a significant increase over 2019, when flows were $21.4 billion, and nearly ten times the increase over 2018, when flows were $5.4 billion.

Sustainable fund flows constituted nearly 25% of overall net flows into stock and bond mutual funds in the U.S. in 2020. Demand continues for sustainable investments.

The number of signatories to the Principles of Responsible Investing (PRI) continues to grow topping 3000 in 2020 and representing almost USD 120 trillion in assets. PRI signatories commit to incorporate ESG into their investment analysis and decision-making processes.

The global flow into sustainable assets in 2020 dominated by European flow.

Given the extreme growth in ESG flows, it begs the question, “are we near a saturation point”? A Blackrock study suggests investors plan to increase sustainable investments in every region:

https://www.blackrock.com/corporate/literature/publication/blackrock-sustainability-survey.pdf

Proof point 2. ESG Fund performance suggests sustainable investing does not come at the expense of financial returns.

According to Morningstar, 75% of sustainable equity funds outperformed their traditional peers and more sustainable funds (42%) performed in the top quartile than the bottom quartile (6%).

This follows 2019, when 35% of sustainable funds finished in the top quartile and 66% in the top half.

Proof Point 3. The growth in impact investing.

Impact investing is a more outcomes-based approach (the externalities generated by a business), whereas, ESG investments are based on risk mitigation. Growth in impact investing indicates further demand for impact investments.

The Global Impact Investing Network (GIIN) routinely measures the size of the global impact investing universe. They estimate as at June 2020, the global impact investing market managed USD 715 billion in impact assets, up from USD 355 billion in 2016.

Proof point 4. Impact return investments.

The GIIN surveyed 98 market rate seeking investors on the returns from their impact investing portfolios. The average returns are represented by the diamonds on the chart below. Private equity EM investments returned on average 18% while developed markets returns on average 16%. The bars represent the 10th and 90th percentile returns in each asset class. Impact investing does not come at the expense of strong returns.

Proof Point 5. Cambridge and Associates return indices. Growth equity returns.

Growth equity has outperformed all other asset classes on a 25-year horizon confirming both its return characteristic and its longevity as an asset class.

Proof Point 6. Australia is underrepresented in the global impact market.

Oceana represents less than 3% of impact investing respondents to the GIIN annual impact survey. 71% of respondents are from North America and Western Europe. There is opportunity.

Sustainable investing in the Asia Pacific region lags significantly behind Europe and the USA as Q4 2020 flows show. Source IBIS World

The Game is Over. It’s time to focus on sustainable returns.

Flows over recent years demonstrate the significant momentum in sustainable investing and surveys predict it will continue to grow.

Growth equity and impact investing produce positive returns.

Australia is underinvested in both impact and growth asset investments.

Beckon Capital Enterprise Fund invests in growing firms (growth equity) which are past the proof-of-concept stage. We look at late-stage VC style investments and SMEs that are cash flow positive. We invest in firms that are making or have the capability for a positive impact because these SMEs are more likely to have a sustainable future – profit because of impact.

SMEs in developed markets account for almost 60% of employment and over half of GDP, they create jobs four times more quickly than large firms and add to a country’s GDP six times as fast. The growth of successful SMEs is exactly what the economy – and investors need.

The global return profile is supportive of the view that growth equity outperforms and that impact related investment demand is growing rapidly.

Australia is underrepresented in these asset classes. Beckon Capital combines both categories representing a significant investment opportunity, Impact Growth Equity.

David (Bushy) Nolan

Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)