In the ever-evolving financial landscape, the rise of impact investing has marked a transformative era where the investment community is no longer solely driven by the pursuit of financial returns but also by the desire to generate positive social and environmental impact. As an asset manager committed to democratizing access to investment opportunities and expanding our assets under management, it is imperative to understand the importance of diversification across asset classes in offering impact investing products to our investors.
Impact investing transcends traditional investment boundaries by integrating social and environmental considerations into financial analysis, thereby aligning investors’ portfolios with their values. However, this alignment does not absolve investors from the risks inherent in the market. It is, therefore, essential to provide a framework that not only seeks to achieve targeted impacts but also manages risk through diversification.
Diversification is a time-tested investment principle that mitigates risk by spreading investments across various asset classes, such as equities, bonds, real estate, and alternative investments. In the context of impact investing, diversification takes on an additional dimension; it allows for a broader spectrum of impact themes and sectors, enhancing the ability to address a range of global challenges while promoting portfolio resilience.
A well-diversified impact investment portfolio can accommodate varying levels of liquidity, risk tolerance, and time horizons, making impact investing accessible to a broader investor base. By offering products across different asset classes, we can cater to both the seasoned investor seeking to include impact investments in a well-established portfolio and the novice investor looking to make a positive difference without compromising on financial prudence.
Integrating asset classes
Diversified impact investment products are pivotal for stabilizing returns over time. While equity markets may be volatile, investing in fixed-income instruments offers a steady income stream, complemented by real assets like regenerating land, which provide long-term value appreciation and hedge against inflation. Despite higher risk, alternative assets such as venture capital funds promise higher returns. Our approach integrates these asset classes to help investors achieve their impact goals while mitigating market fluctuations. In recent years, we introduced a fixed income product with a minimum ticket of $20 and liquidity of less than a week, alongside a credit product for nature-based solutions.
Initially focused on venture capital, we now manage seven VC funds totaling around $200 million. In 2021, we launched a fixed-income fund investing in high-grade bonds of Brazilian public companies contributing to Sustainable Development Goals (SDGs), currently managing $10 million. This year, we established a Nature-Based Solutions area structuring a $10 million bond for sustainable livestock. Through these initiatives, we’re reshaping impact investing, driving meaningful change in finance and sustainability.
As VOX Capital, currently with $250 million in assets under management, strives to grow its reach, it is crucial to communicate the value proposition of impact investing to our clients. Diversification not only serves as a risk management tool but also exemplifies our commitment to providing a robust investment platform that addresses the multifaceted interests of our investors. By offering a variety of impact investment products, we are not just facilitating portfolio growth but are also empowering our investors to be part of a collective effort aimed at fostering sustainable economic development.
Specialists in impact
This may be a more established practice, with a more diversified product base, when it comes to the Global North. The latest data for impact Investments in Latin America on a report led by the Aspen Network of Development Entrepreneurs in 2023, still shows a concentration of investments in private equity instruments (>70%) while data from GIIN reports that less than 20% of investments are made through this structure and a more diversified base across asset class. This shows not only the need but also the opportunity of diversification in Brazil.
The path to diversification, however, presents many challenges. It requires confronting the prevailing market notion that investment management firms must be hyper-specialized to achieve results. Our premise in this regard is that we are specialists in positive impact, without compromising on professional and rigorous management. This investor perspective challenges the initial fundraising rounds for new vehicles, which often face standard questions about track records in the new classes we pursue.
Internally, the barriers to overcome relate to the reorganization of teams and the strengthening of a culture of innovation, moving the group from an environment where results are more predictable. A leadership that supports the vision regarding the importance of broadening asset classes to provide more impactful solutions for society is essential in this endeavor.
As we move into a multipolar World, with many distinct challenges and opportunities, it is crucial to align our values to investing. This can only be done if there are diversification options. Investing 1% of our portfolio into positive impact is not enough anymore. It is imperative to have a portfolio view of the impact we and our investors are generating and gear it into ever increasing beneficial contributions to the planet and the society as a whole. Our role as the leading and pioneer impact investing asset manager in Brazil is to open this path so many more can. Join us to forge a path toward a more inclusive and sustainable future.
Daniel Izzo is CEO of Vox Capital and Daniel Brandão is a partner and nature-based solutions director at Vox Capital.
