Funds that invest in private real assets, such as timber, real estate, and infrastructure, can offer similar objectives and returns as environmental, social, and governance (ESG) investments, according to a report from nonprofit organization Global Impact Investing Network (GIIN).
The “Financial Performance of Real Assets Impact Investments” report analyzed the financial performance of private real assets impact investment funds in three sectors: timber, real estate, and infrastructure.
“Real assets play a number of roles in institutional portfolios, providing diversification, current income, the potential for strong, long-term returns, and an inflation hedge,” said the report. “In addition to these benefits, real assets impact investment funds present opportunities for alignment with a number of important impact objectives.”
For example, the study found that timber-focused impact funds often pursue sustainable timber production or land conservation, and real estate-focused impact funds are typically focused on green real estate and affordable housing. It also found that most infrastructure-focused impact funds targeted renewable energy generation.
The report coincided with the launch of three benchmarks developed and compiled by investment firm Cambridge Associates in partnership with GIIN. Cambridge Associates will provide updated performance data on the three benchmarks on a quarterly basis.
“Focusing this benchmark on real assets was important because a large impact investment opportunity set lies in that sector,” said Jessica Matthews, head of the Mission-Related Investing Practice at Cambridge Associates. “Many impact investors—especially those with an environmental focus—are looking to invest in areas such as low-carbon infrastructure and green real estate.”
Matthews added that “each fund included in the benchmark has a clear and established commitment to impact. What we set out to analyze was how their financial returns compare to a larger universe of private real assets funds.”
The report also compared the performance of real assets impact funds with private real assets funds with a similar sector focus, but with no social impact objectives. It found that timber-focused private impact funds outperformed non-impact timber funds. The top-quartile funds in the timber-focused impact benchmark returned at least 8.6%, compared with 4.2% for the top quartile of non-impact timber funds.
It also found that top-quartile returns for private real estate-focused impact funds returned at least 15.9%, compared with 13.8% for the comparative set of top-quartile funds. However, the median return for real estate impact investing funds was lower than that of non-impact real estate funds. Meanwhile, returns for private infrastructure-focused impact funds were also mixed, with returns lower than those of non-impact private infrastructure funds, but higher than those of private equity energy funds.
“There is a misperception that impact investments always come at a price: lower returns,” said Matthews. “But this research shows that institutions can align this important part of their portfolios – real assets – with their social and environmental missions, without necessarily sacrificing financial returns.”