The 2023 Investment Challenge: Hedging Against Inflation and Achieving Mission-Driven Impact

In today's increasingly complex economic and investment landscape, investors are seeking innovative strategies to navigate inflationary pressures while aligning their portfolios with mission-driven goals.

Andrew Sneddon, Chief of Client Portfolio Solutions at Brightlight, sheds light on this new paradigm. With extensive experience crafting tailored portfolio solutions, Andrew works directly with Brightlight's clients to achieve their impact investment objectives.

In the following discussion, Andrew offers insights into the challenges and opportunities investors face in 2023, highlighting the growing importance of Real Assets, Impact Investments and authenticity in a world where positive real returns have become increasingly elusive.

How does Brightlight assess the economic and investment landscape for 2023?

As the turbulent disruptions of the COVID-19 era subside, many investors in 2023 anticipated a return to a more stable economic and investment climate. However, over a decade of zero interest rates, lingering COVID-19 supply chain disruptions, and unprecedented government spending have rekindled inflation as a dominant investment concern. While some COVID-related supply chain issues have eased, the devastating conflict in Ukraine has generated new disruptions, particularly in European energy supplies.

In response to these challenges, the Reserve Bank and other major central banks have implemented a series of interest rate hikes (ten in Australia as of Q1 2023). Recent weaknesses revealed in the banking sector in both the US (e.g., SVB) and Europe (e.g., Credit Suisse) will make controlling inflation even more difficult for central banks.

Under normal circumstances, investors might seek refuge in cash deposits offering low single-digit percentage interest rates. However, with stubbornly high inflation, real returns (adjusted for inflation) remain negative.

Generating positive real returns is the most significant challenge for investors in 2023 and beyond, as the era of effortless double-digit investment returns amid sub-2% inflation is over.

How should investors navigate this landscape?

In 2023, Brightlight observes that investors are reallocating their investment fee budgets toward strategies that both hedge against inflation and align with their mission-driven objectives. Real Assets, such as unlisted property and infrastructure, typically offer the best opportunity for achieving positive real returns in an inflationary environment and lend themselves well to Impact Investment solutions that align with investors' missions.

Are there risks involved in this approach?

In previous years, the focus has been on ESG investments, which some suggest have had limited success in driving substantial positive SDG outcomes. Concerns have been raised about the transparency and oversight of ESG products and reporting. High-profile instances of ESG 'greenwashing' or impact washing have been met with severe reputational consequences for the parties involved, both in Australia and internationally.

In this climate of increased scrutiny, authenticity becomes a crucial reputational asset and risk mitigator for investors.

How can investors minimise this risk?

A well-structured impact portfolio that aligns financial outcomes with a clear impact framework prioritising measurable social and environmental results is an excellent starting point. Investors should first understand the targeted consumer or environmental issues and their developmental needs and then assess potential deals based on stable and predictable cash flows (e.g., government-backed cash flows). A rigorous impact management and measurement process should be incorporated to monitor impact. Enhanced investment measurement and reporting frameworks that account for return, risk, and impact are becoming increasingly prevalent.

Real Asset unlisted Impact Investments, particularly those with a well-designed theory of change and impact framework, are among the most potent drivers of success in these three dimensions. Investors must carefully evaluate and distinguish between genuine "Impact" Real Assets and those at risk of green or impact washing. In some cases, investors are shifting their fee budgets from traditional active management in listed assets to private real impact investments.

Funding disability housing through a private credit solution is an example of an impact investment solution where we can align investment returns underpinned by government-backed cash flows with social impact. This way, we address the critical need for accessible, affordable, and inclusive housing for individuals with disabilities. By financing the construction, renovation, or expansion of such housing options, we can enhance the quality of life for these individuals, promote their independence, and foster a more inclusive society. Furthermore, this investment strategy can generate stable and attractive returns for investors. As the demand for specialised disability housing grows, a win-win scenario is created for both financial performance and social impact.

What impact themes are investors prioritising in 2023?

While traditional investment portfolios often balance global and domestic investments, impact investments are more mission-aligned with the investing entity, its stakeholders, and its geographic location.

For instance, there is a robust demand for state or regionally-based disability and social housing, as these investments offer stable real returns and high mission-aligned impact. Authenticity versus 'impact washing' will likely determine the difference between repeatable success and reputation-damaging failure.

In a competitive environment for donors and members, clear communication and differentiation from rivals are essential, with authenticity playing a crucial role.

What next?

If you're an investor seeking to navigate the complex economic landscape of 2023 while aligning your portfolio with mission-driven goals, consider partnering with Brightlight. With a team of experienced professionals, Brightlight can help you create tailored impact investment solutions that balance return, risk, and impact. Reach out to Brightlight today and discover how their expertise can enhance your investment strategy for a more resilient and impactful future.