Creating positive social and environmental impact through investment is growing. In this article, we take you through some of the most important trends in impact investing.
“Impact investing,” making investments for both financial and social gain, is trending noticeably upward around the globe. Currently, there are no approximate figures on how big the market is, but assets under management grew by 18% compounded annually between 2013 and 2015.
The Global Impact Investing Network (GIIN) estimates in their 2017 Annual Impact Investor Survey that the market is worth around USD 114 billion. Michael Baldinger, head of sustainable and impact investing at UBS, marks it at USD 250 billion, noting that “it’s growing fast” and “might really be a game-changer for the finance industry.”
Where is all this money going? GIIN marks housing (circa USD 25 billion), energy (USD 19 billion), and microfinance (USD 14 billion) as the top three sectors in terms of total assets under management. Additionally, the report notes that the highest concentration of investments are in the US and Canada (USD 46 billion), followed by western and southern Europe (USD 16 billion), and then sub-Sharan Africa (USD 11 billion).
All about the money: financial returns
Impact investments deliver favorable financial returns. Across the three most popular asset classes—private equity, private debt, and real assets—market rate returns for impact investments are similar to those of corresponding conventional investments.
Impact investment funds are often smaller than comparable venture capital (VC) or private equity (PE) funds, with Pitchbook reporting data from its sample of 270 impact funds that some 86% of VC and 59% of PE funds are under USD 100 million. Within VC and PE funds, the majority of the investments go to emerging markets.
In 2017, over USD 3.4 billion was committed to VC and PE funds, much of this coming from TPG Growth’s USD 2 billion Rise Fund.
Investors in impact investing also have wide ranging expectations on returns, from below market rate returns to better-than-market returns, with many, according to a GIIN survey, pursuing market-rate returns that are competitive. In terms of portfolio performance, investors overwhelmingly indicated their expectations were either met or exceeded, regarding financial returns as well as social and economic impact. Interestingly, while impact investing funds are generally smaller than average, they do not underperform when co mpared to larger entities.
Social drivers of impact investing
Another reason for an upswing in impact investments is increased availability of products. According to money managers, the primary reason they say they offer impact investments is due to client demand. Due to the fact that clients are becoming better informed, they can exert shareholder influence over how companies make decisions about appropriating capital in the long-term regarding environmental and social issues. This gives companies incentive to provide impact investment products.
Not surprisingly, millennials are on the forefront of making environmentally and socially conscious investments that have positive financial returns, and are set to possess some USD 59 trillion from wealth transfers. Deval Patrick, managing Director of Bain Capital’s Double Impact business, comments on the power of millennials, saying:
“[w]hile the idea that the only job of a company is to maximize financial returns to shareholders is still fairly entrenched, I think we have the wind at our backs in the form of our younger generations, who have higher expectations.”
The younger generations translate these expectations into their investment decisions, furthering pushing growth in impact investment.
Additional drivers of demand include fiduciary duty, a nd appealing return and risk profiles.
What’s next for impact investing?
Impact investing may be on the rise, but it has not yet become a fully-realised market. Amit Bouri, CEO and co-founder of the Global Impact Investment Network (GIIN), sums up the state of impact investing in his Letter From the CEO in GIIN’s study of trends in impact investing:
“We have come a long way in building this market, but we have further to go, as the amount of available impact investment capital does not yet come close to matching the scope of the pressing social and environmental problems we face today.”
There is much room to grow before impact investing can meet the financial requirements of the world’s social and environmental issues.
Moreover, since there is no consensus on standards for measuring the social and environmental impact of these investments, this area will be key to further growth in the sector. Common standards will make it easier for investors to compare different investments and more accurately assess investment performance. Amongst the most prominent standards in this space are the UN’s Sustainable Development Goals, which could very well be adopted by more investors in the near future.
For impact investing to become an even bigger force in the investment landscape, it will need to gain more credibility. This can occur, as Pitchbook notes, through more mainstream investment firms entering the space; however, the presence of these large entities “has raised concerns about the prospect of firms offering ‘impact’ products that may not be well-measured or deeply impactful.”
The environment, which is presently a significant theme in impact investment, will remain important. Hugh Lawson, head of ESG and Impact Investing at Goldman Sachs Asset Management, says that the environment will remain important to impact investing because “people see there’s a clear opportunity to make money and have a beneficial effect,” further indicating an upward trend in the sector.
Besides the environment, other areas of focus will be health care, energy, food security, and education.
By Elliot Lyons, Research Analysts at Holland FinTech
This article is part of a series on sustainable and social finance. Read up on the essentials in our previous article, and keep an eye out for more in the series.