The Global Impact Investing Network (GIIN) has been reporting on the impact investing sector since 2010. In 2022, it estimated the size of the market reached at USD 1.164 trillion. ​

In late June, Volumes 1 and 2 of GIINsight, this year’s global survey of 308 impact investing organizations, were released. The briefs, one focusing on the demographics of impact investors, the other on the allocation of funds, offer both data and perspectives on where the sector sits, just a few years away from the 2030 UN Sustainable Development Goals (SDG) deadline. The next two installments will focus on impact measurement and management (IMM) and industry trends to watch out for, using the briefs’ sample which is mostly comprised of investment managers (71%) and foundations (11%) with a majority headquartered in developed markets.

Broadly speaking, the progression of impact investing in size, diversity of asset classes, and geographic focus in the past five years has been undeniable.

With the pandemic and the unusually high valuations of 2021 now behind us, recurring questions around retail investor access and education, misconceptions around risk and rates of return, impact measurement methodologies, and sector allocation remain relevant. The accelerating rate and increasing severity of climate-related crises as well as the widespread rise in political extremism inject added complexity in forecasting accurately both the urgent opportunities and the hindrances faced by impact investing.

First, the good news

2021 saw a pronounced rise in private valuations which led to caution from investors. 2022 marked a return to more manageable levels which in turn led to strong investor activity and notable interest in public debt (101% growth) and real assets (27%) in part as a protection measure against inflation.

Key insights over a three-year period indicate a continued trend toward impact investors achieving risk-adjusted market-rate returns and meeting or exceeding expectations with equity-like debt, private equity, private debt, and real assets as best performers. Participants reported financial expectations being met at 59% and 20% outperforming, with those values sitting at 70% and 18% respectively for impact performance expectations.

The progression of impact investing in size, diversity of asset classes, and geographic focus in the past five years has been undeniable.

Ambika Narayanan is VP at Lok Capital which has AUM of over $500M dedicated to investments in finance, healthcare, agriculture, climate, and sustainability echoes this sentiment. Even as the narrative of impact-focused investing offering concessionary returns still often persists in the mainstream, she observes:

“We have been successful at investing in innovative startups in India with proven business models in high-growth sectors, with proprietary access to great founders who have an intention to responsibly cater to their stakeholders. This approach has yielded outsized impact outcomes and superior realized net returns to our investors placing us in the top 5% of all VC / PEs in emerging markets and at least 800-1000 basis points higher than the best-performing listed equity baskets in the US and India (NASDAQ and Nifty Midcap 150), even after adjusting for all fees, expenses and carry, which we believe more than justifies the country and private market risk premiums. 90% of our exits have been profitable, with only one full write-off in our 20-year history across 40 investments from 3 funds.”

While there are geographic variations to be mindful of, the sector as a whole now benefits from myriad examples and benchmarks to fuel its growing dynamism.

A maturing field

Fifteen years after the coining of the term impact investing, the experience of fund managers, robust measurement frameworks such as IRIS+, as well as the compound effects of repeat investors and new players entering the space, are starting to bear fruit.

The space remains diverse and is increasingly betting on impact strategies as demonstrated by an 18% growth of AUM by CAGR from 2017 to 2022.

Pension funds and insurance companies feature more and more prominently as top sources of capital for investment managers by a CAGR of 32% from 2017 to 2022, with pension funds (20%) and family offices (15%) representing the greatest proportion of managers’ capital.

The diversity of asset classes represented is a positive evolution, providing more entry points to the space to match investors’ needs and expectations.

The politicization of impact

The politicization of ESG is top of mind in the U.S. and, nudged by rising interest rates, has resulted in a pullback of $US5.2bn from sustainable funds in the first quarter of 2023, according to Morningstar. Though this trend cannot be ignored, certainly until the 2024 U.S. elections, there is little evidence that other countries will follow suit.

In Europe specifically, it will be interesting to see the longer-term ramifications of the recently implemented MiFID II ESG amendments as the European Union seeks to put into action its Sustainable Finance Action Plan. The amendments include a requirement for manufacturers and distributors of MiFID-regulated (Markets in Financial Instruments Directive) products to consider “sustainability” dimensions with the term being defined as: “environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.”

Efforts at systematizing transparency mechanisms for demonstrating both financial and impact returns are an encouraging response to match growing demand with glaring needs.

Keeping pace with change

For instance, among the sample of repeat respondents, the fastest growth in investment allocation is in the housing sector (at a CAGR of 44%). Anna Smukowski, Senior Director of Capital Programs at Enterprise Community Loan Fund remarks that “to provide new avenues for purpose-aligned capital, community development financial institutions (CDFIs) are working on, amongst other efforts, increasing transparency.” 

Investment in climate change mitigation and/or climate adaptation and resilience issues is lagging in comparison to what’s needed.

Reducing information asymmetry helps investors make better, evidence-based decisions on where and how to put their capital to work. In parallel, introducing financial vehicles with varying risk-return profiles, and adjusting language can help match investors’ understanding and clarify performance expectations.

This type of tailored information approach, coupled with what Pete Murphy, Senior Director of Private Equity Impact Investing at Nuveen, describes as “a need for more data on how managers achieve their targets”, could supplement existing insights, bolster the case regarding performance, and, as a result, increase the desirability of, and ease of access to, the space.

Innovative tools and tactics to bridge any remaining barriers seem particularly timely as investment in climate change mitigation and/or climate adaptation and resilience issues (including the blue economy) is lagging in comparison to what’s needed and to the level of activity observed in the energy, financial services, and healthcare sectors.

Let’s hope the accelerating pace at which investment structures and instruments and impact measurement and management frameworks are being tested and refined will continue to up the stakes of the audacious — and urgent — bet that a blended value economy is not only desirable but, in fact, attainable. Not a moment too soon.