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With the urgency of climate change and growing education around impact investing, Aotearoa has seen increased interest in investments that aim to deliver social or environmental outcomes alongside financial returns. These opportunities can include direct investments in purpose-led companies, specific projects, lending opportunities and funds in sectors as diverse as renewable energy, housing, community infrastructure, climate technology, health and other impact-aligned assets.
This momentum is encouraging. But as with any investment, impact-aligned opportunities can vary widely in structure, risks, returns, liquidity, time horizon and expected outcomes. Before backing an opportunity based on the claims of amazing impact, investors should take the time to understand both the investment case and the impact case.
1. Have you read the offer document?
Every investment opportunity should be assessed on the information provided by the issuer. On Catalist, this is commonly set out in an information memorandum or pitch deck, alongside supporting key documents made available through our Marketplace.
The offer document is where investors should expect to find key information about the opportunity, including the investment structure, the risks, the fees, conflicts of interest, investor rights and the intended use of capital. It should also help investors understand what assumptions sit behind the projected return and the things that could affect any impact outcomes.
2. Do you understand the financial product you are buying?
Not all impact investments are the same. An impact investment could mean buying shares in a purpose-led company, investing in a specific project, lending to a business, or participating through a fund or other managed structure. Each product carries different rights, risks, and obligations.
Some opportunities on Catalist are available only to wholesale investors, while others may be open to all investors. Investors should first check whether they are eligible to participate in an opportunity, and whether the minimum investment amount suits their circumstances. There's no point assessing whether the product aligns with your risk tolerance and portfolio needs if you aren't able to invest.
After checking that you can invest, the next thing to understand are the risks and potential outcomes. Impact-aligned investments can have outcomes that sit across a wide spectrum of financial and non-financial measures. A direct equity offer, a lending opportunity and a fund structure may all be impact-aligned, but each may have a different return profile, impact profile, timeframe and source of risk. As part of this, investors should consider both the risks and returns associated with the specific financial product, just as you would for any non-impact investment.
Expected risks of these investments
All investments carry risk, and impact-aligned opportunities are no exception. The level and type of risk will depend on the structure of the investment and the underlying assets.
Lending or credit-based funds tend to be at the lower end of the risk-return spectrum. These are funds that lend money to impact businesses or ventures. The returns tend to be more predictable, because there will usually be fixed interest rates payable by the borrowers, so the Fund can expect to continue making consistent returns as long as those borrowers can continue to afford to pay. For example, Funds such as Te Puna Hapori Limited Partnership from BrightLight lend money to community housing providers who are in turn partly or wholly funded by the government, which reduces the risk of non-payment. Other social housing funds, such as The New Zealand Housing Fund (Te Piringa) might be structured to own the properties, with a significant proportion secred by long-term (up to 25 year) government backed revenue streams and managed by Community housing providers. For any lending or credit-based investments, investors should consider the quality of the underlying borrowers or revenue streams, whether obligations are secured - i.e. is there something that can be sold to recover the funds if the borrower is unable to pay from cashflow – and what is repayment the structure and default risk.
Equity investments carry a different profile. Returns depend on the company's performance, growth and future valuation, which can involve greater uncertainty, longer time horizons and less predictable cash flow, but potentially greater upside. This is particularly the case for early-stage growth businesses.
Expected returns of these investments
Impact investing is not a single return category. Expected returns include both the financial and non-financial returns and vary depending on the asset, structure, and market conditions.
Credit or lending investments generally aim to generate returns through interest payments and repayment of principal. While the impact may come from what the capital enables, the financial return is driven by the performance of the underlying loans.
Equity investments, by contrast, are based on ownership and growth. Returns may depend on company performance and future exit opportunities, offering higher potential upside, but with greater variability.
Think of two different funds investing in the same business. One fund buys shares in the company (an equity fund), while the other lends it money (a credit fund). If the business struggles to grow, it might still be able to keep up with its loan repayments. That would help the credit fund continue performing well. However, the company's overall value could fall, which would reduce the returns for the equity fund. On the other hand, if the company grows strongly, the credit fund still only receives its agreed interest and repayments. But the equity fund could benefit much more, because the value of the shares it owns may rise significantly. So, it's worth thinking about which type of investment better supports the company's impact goals, and which one matches your own preferences for risk and return.
Across all structures, investors should look beyond the 'impact' label and understand how financial returns are expected to be generated, alongside the impact outcomes the investment is intended to support.
3. Do you understand the liquidity profile?
Many impact-aligned offers can be illiquid by design, which may make it difficult to convert your investment back to cash quickly. Even where secondary trading is available, as may be the case for investments listed on Catalist, investors should not assume they will be able to sell quickly, at their preferred price, or at all. Liquidity depends on market demand (the number of potential buyers), the trading mechanism, and the specific terms of the investment.
Catalist's marketplace is designed to support optional secondary trading through periodic trading events, helping to concentrate price discovery and potential liquidity. However, periodic trading means that there will be periods when investors can't sell. Investors should understand when and what types of trading events will occur for any investment, and what that means for their opportunities to exit the investment.
For impact investments in areas such as housing, climate or community infrastructure, the underlying companies or projects may require patient capital to deliver both financial and impact outcomes.
4. Third-party assurance
A final factor that investors may wish to consider is whether the impact investment has any form of third-party assurance or independent review. While this is not a requirement, its presence can provide additional confidence that both financial and impact-related claims have been subject to external scrutiny.
For impact-focused funds in particular, third-party assurance can be especially helpful. Due to the nature of funds investing across a portfolio of underlying companies or projects, it can be more complex for investors to assess how impact is being measured and delivered across all holdings. Independent reporting and external verification, or at least clear reporting from the fund manager, can help investors better understand how impact is defined, measured and reported over time.
That being said, the absence of third-party assurance is not necessarily a negative. Investors may still be able to assess the strength and impact of an opportunity by carefully reviewing available key documents and track record. Third-party assurance simply offers an additional layer of transparency and accountability.
Conclusion
Impact investing gives investors the opportunity to put capital to work in ways that may contribute to meaningful environmental and social outcomes. The fundamentals remain just as important: take the time to read the offer document, understand the financial product, return and impact, assess liquidity and look out for any third-party assurance.
By asking the right questions upfront, investors can make more informed decisions and support opportunities that align with their values and their financial goals.
By Anika Batra
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