Impact investing fits well in a world of turmoil
10:46, 3 March 2022
During dark days, demand for investments that deliver positive outcomes for people and the planet are more important than ever.
Floods, storms, wildfires, pandemics and military conflict all affect production and supply of life’s essentials – be that energy, healthcare or food. How far does investment in new ideas make a real difference in alleviating pressure?
Consider the fact that Ukraine is one of the world’s biggest wheat producers – often referred to as the ‘breadbasket of Europe’. What happens if the production and supply of grain is affected due to Russian invasion?
As senior portfolio manager at KBI Global Investors (KBIGI) Andros Florides suggests, there is a huge incentive to not only broaden where food is produced, but also to improve storage so that billions of tonnes of food does not perish each year and can be accessed at crucial times.
Production and storage methods also look to be hugely energy efficient and flexible.
Comments Florides: “The war in Ukraine and extreme weather events stress the need for infrastructure to move crops from one area of the world to another. Better storage of food is essential. In the US, there is a large storage of crops – which are then brought into the market at the best time with little wastage.
“For instance, in the US, the age of an apple from tree to shop is about nine months (using controlled atmosphere storage). But in Latin America, there is a huge lack of storage on farms.”
Growing market for impact investor segment
The attraction of investments that deliver a positive, measurable social and environmental benefit alongside a financial return is growing significantly.
Research out this week from the Impact Investing Institute, delivered in collaboration with Ernst & Young (EY), estimates the UK’s impact investment market was worth £58bn (€70bn, $77.6bn) in 2020.
According to the institute, this demonstrates the growing importance of this segment of the capital markets, which is fast moving into the mainstream.
Penney Frohling, financial services strategy, EY-Parthenon Partner, says: “This report is an important first step in quantifying the scale and scope of the UK impact market.
“The convergence of factors such as the pandemic and recent severe weather events, and the increasing focus on ESG [environmental, social and governance], are intensifying the demand for investments that deliver positive outcomes for people and the planet.”
She adds: “The spotlight is firmly on the financial services industry and the critical role it can play in helping to resolve these societal and environmental challenges. We hope that the report will act as a catalyst for ongoing debate, and will help accelerate the impact market’s further development and growth.”
‘Further room for growth’
Sarah Gordon, the Chief Executive director of the Impact Investing Institute, largely echoes these findings in her comments: “The impact investing market has grown hugely over the last decade.
“This new report demonstrates how far it has come in responding to people’s growing desire for their money to deliver positive impact for both people and the planet, as well as a financial return – but it also shows how much further room there is for an impact investment approach to grow and develop.”
This “further room for growth” is illustrated in the report, which indicates that despite the rapid growth in the market, impact investing today still accounts for less than 1% of total assets under management in the UK.
The report, which surveyed both professional investment managers and industry bodies, shows that 97% of survey respondents held the view that over the past two years, asset allocation to impact had increased.
Of those surveyed, 64% predicted 10% annual growth in funds flowing to impact investments, with 36% forecasting above 20% a year.
Approximately 90% of the survey respondents reported that 2020 returns were either in line with or exceeded their targets, thereby reinforcing the argument that impact investing does not mean a trade-off on returns. (One of the criticisms in the past that has been aimed at ethical/ESG/impact investing.)
The survey estimated that funds allocated to impact would almost double to £100bn in five years.
Scalable businesses: AppHarvest and other agtechs
One of the issues regarding impact and ESG investing is that many innovative companies, while they maybe growing at a fast rate and offering something very different, are capital intensive and have no track record of profit-making.
A good example of this is the US agricultural technology (agtech) stock AppHarvest (APPH) AppHarvest, which grows fruit and vegetables all year round by using artificial lighting.
The Kentucky-based specialist in indoor mega-farms has seen its share price plummet this year – partly through getting caught up in the special-purpose acquisition company (SPAC) hype – from around $28 in March 2021 to its current price of $3.59.
In its full-year 2021 results, App Harvest delivered net sales of $9.1m, versus a previously announced outlook of $7m–$9m. But it also reported a net loss of $166.2m. This high-growth business is pumping capital into expansion; it plans to quadruple its number of farms this year and hopes to more than double its net sales as a result.
Other agtechs have been accused of burning cash without making any returns for investors. While the concept of the business may make sense, is it scalable?
In August 2021, GreenLight Biosciences, a crop-protection specialist, announced plans to become publicly listed through a business combination with Environmental Impact Acquisition Corp. It began to trade on the Nasdaq exchange at the beginning of February 2022 under the GRNA ticker.
Like AppHarvest, GreenLight has seen its stock price struggle recently – for example, in early February, it stood at around $8.23, but it is down to $5.35 in mid-day trading today.
As Florides points out, agtech is not short of companies where profit streams are not clearly evident yet, which can have the effect of discouraging investor interest. But that doesn’t mean that in future they couldn’t be highly profitable – right now, pardon the pun, would appear to be the period of growing pains.
Referring specifically to AppHarvest, Florides concludes: “If you ask me, if this is a scalable tech business I would definitely say ‘yes’ to.”