According to the most recent annual Global Impact Investing Network survey (GIIN), in 2018 private debt received more capital than any other impact investment type (34%), with public debt, private equity, and public equity trailing by over a dozen percentage points. But not far behind those asset classes was one perhaps less often thought of as a vehicle for driving impact: real assets.
What Are Real Assets?
Unlike financial securities, real assets are physical things purchased by an investor in the hopes that each asset’s value will appreciate over time. Examples include real estate or land, precious metals, and artwork. Pensions & Investments reports that investments in real assets grew 92% between 2009 and 2018.
Investors often use these investments as a way to diversify their portfolios, as their value does not typically correlate to what is happening in the stock or bond markets. In addition, they may provide a hedge against inflation, since real estate and commodity prices can rise faster than the rate of inflation. In some cases, these investments come with tax incentives, from conservation easements for protecting land use or capital gains benefits for investing in Opportunity Zones.
Real Assets and Impact Investing
Some investors have other, nonfinancial reasons for investing in real assets. The GIIN survey found that real assets were the asset class with the largest average deal size ($20.1 million). While only 1% of all impact investments made was in real assets, those investments accounted for 10% of all capital invested. Among respondents who put money into real assets, 56% invested in residential real estate, 45% invested in commercial real estate, and 33% invested in utilities.
Where does the positive impact come in? Investments in physical assets like land or timber can help guard those natural resources against the effects of climate change, drive sustainable replenishment, protect ecosystems, and even create jobs in underserved rural areas. For example, EFM is an asset manager that primarily invests in forests and other habitats in western United States. The firm focuses on sustainable forestry methods in order to efficiently produce timber while benefiting from easements, tax credits, and carbon contracts.
Others might choose to invest in real estate with an eye toward buildings with low carbon footprints or affordable housing that can help close the wealth gap. Vital Capital, for example, invested more than $95 million to help Kora Housing construct the first of 14 affordable urban communities in Angola that provide residents access to healthcare, education, clean water, and electricity.
As interest in sustainable investing continues to grow, the full role real assets can play in an impact portfolio will continue to emerge.