Impact investment

Many investments can have a positive impact, be it through supporting job creation, or making better and cheaper products and services available. What sets impact investments apart, however, is that they are carried out with a specific and intentional outcome in mind. The impact is not a side-effect; it becomes part of the investment objective. ‘Intentionality’ can be established through allocations to impact investments as part of a dedicated mandate or by reflecting impact criteria in the process to select investments for an existing portfolio. Intentionality can also stem from a specific project setup that, by design, targets a positive outcome, such as infrastructure focused solely on renewable energy generation, or social enterprises set up to solve a specific issue. Zurich defines the appropriate approach in the context of a specific asset class and investment structure.

Our main impact objectives are mitigating environmental risks and increasing community resilience.

Learn more about them in the Zurich Responsible Investment Whitepaper.

When impact is part of the investment objective, it should be measured just like other objectives. Impact is not easy to measure. Data may not be readily available or the quality may be poor, and randomized control groups may be required to establish outcomes with scientific rigor. In most cases, the cost to get proper measurement of the outcomes will be prohibitive. As a result, we take a pragmatic approach with respect to impact measurement, assessing approaches on a case-by-case basis. We will, however, always insist that reasonable attempts are made to measure impact quantitatively. Measurement may be limited to specific indicators that do not cover the full breadth of impact objectives; it may be supplemented by case studies; it may evolve; or it may not even be in place to begin with if there is a solid commitment to establish it over time. We do not, however, regard any investment as an impact investment if no attempt is made to measure impact in a reasonable time frame.

Standards around impact measurement are starting to emerge, such as the Global Impact Investing Network’s (GIIN) Impact Reporting and Investment Standards (IRIS), or the Green Bond Principles’ (GBP) harmonized framework for impact reporting. These complement approaches established and applied by development finance institutions. We encourage the use of these standards. As data quality improves over time and impact measurement gets more widely adopted, we expect capital can be allocated more efficiently to where impact is generated most effectively. Our own lessons learnt from multiple years of measuring impact in an aggregated format have led to an upgrade in our strategy, that now prioritizes impact targets.

Impact investing is distinct from grant-giving philanthropy. While grant-giving accepts financial ‘losses’, in impact investing, capital is paid back to the investor. As institutional investors with a fiduciary responsibility to optimize returns for beneficiaries, we must be comfortable that the return of an impact investment does, in fact, adequately compensate for the underlying market risks.

We acknowledge that many pressing social and environmental issues cannot be solved through purely commercial means, and that the role of grant funding and other sources of ‘concessionary’ capital is hugely important. However, given the massive scale of the solutions required to solve issues such as climate change, resource scarcity, global education, global health and many other challenges, we feel that it is equally crucial to develop an impact investment market; one that can attract institutional investors with a responsibility to achieve economic returns, even if public or philanthropic capital is required to de-risk investments. Institutional investors have access to capital in sufficient amounts to tackle many of the issues at hand, and we want to be part of that effort.

We target a range of impact investments: those whose ‘impact’ is aligned with our stated impact objectives, and those that have a ‘deep impact’. In the first category, we focus on actively increasing our investments in asset types we would conventionally hold in our portfolio, for example, green bonds. On the other hand, deep impact investments, such as private market investments in emerging and frontier economies, require further effort in terms of investment processes.

Every investment, regardless of asset class, has an impact on communities, people’s lives and the environment. Companies or assets such as buildings and infrastructure are built and operated, and in the process, jobs are created or lost; products are introduced, sold and consumed, or services delivered; natural resources harvested and processed; energy produced and consumed; waste and emissions created or mitigated. Accordingly, every investment has a footprint, both positive and negative, that affects the real economy, our environment and our communities. Tools have become increasingly available to measure such impacts. Examples are carbon emissions, or the share of ‘green’ and ‘brown’ revenues generated by portfolio companies. To better understand how Zurich’s investments affect the environment, we strive to apply new data and tools, starting with measuring our carbon ‘footprint.’