A turning point is coming for Impact Investment, a market analysis

In a financial world navigating recessionary fears and increased attention on what comes next , the growing intersection between where financial prudence meets social and environmental impact deserves analysis.

As a fund manager Dragonfly Enviro Capital thrives on this intersection — where the transition toward a more sustainable society presents a historic investment opportunity.

Capital has a critical role to play and forward-thinking investors stand to make huge gains and deep impact.

Defining Impact

Impact, at its core, serves as a blend of financial and climate related imperatives. For us, an impact investment is one that inherently addresses at least one of the UN's Sustainable Development Goals (SDGs) while fuelling expansion for companies with proven products, profitability, or a clear path thereto. What’s encouraging is this paradigm is expanding; according to Responsible Investment Association Australasia (RIAA), the sustainable investment market increased 20% to a record $1.5trillion. Its 2022 benchmark report also found sustainable investments represent 43% of total professionally managed funds.

The Market Conditions and Policy Catalysts

Australia has established the Australian Sustainable Finance Institute, ratified the Paris Agreement, embraced the Sustainable Development Goals, and maintained commitments to UN human rights obligations.

Australian sustainable fund inflows during Q1 2023 were significantly lower than previous quarters. They amounted to US$0.1bn, compared with US$1.53bn in Q4 2022. Assets, on the other hand, increased by 7.8% during Q1 2023, reaching a record high of US$30.8bn, mainly driven by higher valuations (Morningstar, 2023).

The unfolding policy landscape, combined with the increase of sustainable assets offers an unprecedented opportunity for growth funds like ours to lead the way, leveraging finance as a transformative force for good.

The Role of Super Funds: A Unique Asset in Australia

According to Thinking Ahead Institute’s latest study, Australia has one of the world’s largest super scheme’s, with an estimated $3.5 trillion worth of assets. This gives our country an unparalleled ability to mobilise private capital for positive impact, particularly as several super funds are exploring impact investment mandates across a wide spectrum of asset classes. Global Impact Investing Network (GIIN) notes that nearly 90% of impact investors are meeting or exceeding their impact and financial expectations. GIIN also notes that according to its 2020 Impact Investor study, portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.

What We Consider for Portfolio Inclusion

We search for businesses that not only disrupt markets but also produce positive, proven, and profitable outcomes. We take a holistic approach to due diligence, emphasising both financial metrics and ongoing positive environmental impact. This isn’t merely a “feel-good” exercise but a prudent risk management strategy. Our ongoing monitoring of these metrics aids us in making real-time, informed investment decisions.

Spotlight on Portfolio Companies

Australia is rich with companies that offer promising solutions to pressing environmental challenges. Take, for instance, local enterprises like The Water and Carbon Group, focusing on PFAS extraction from water, and Red Earth Energy Storage, a rapidly growing manufacturer of energy storage systems. These companies offer both substantial economic returns and meaningful environmental impact.

The Road Ahead

Impact investing is not a transient trend; it’s a pivotal shift in our understanding of capital’s role in societal betterment. Through comprehensive due diligence, ongoing monitoring, and a commitment to social and environmental impact, we can leverage capital in a way that is beneficial for both profit and the world. With Australia’s unique resources, both financial and regulatory, we’re not just poised to adapt to this change — we have the opportunity to lead it and be beneficiaries for generations to come.