Investor Appetite for Impact Investment can Reach US$26 Trillion
Investors’ appetite for impact investing could total as much as $26 trillion, according to the report Creating Impact: The Promise of Impact Investing from the International Finance Cooperation (IFC). Impact investing is defined by the Global Impact Investing Network as:
Investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.
According to the report, the private market has US$ 71 billion AUM, while public markets include US$ 8.365 trillion in corporate engagement and shareholder action investment (mostly public equities), and US$ 456 billion in green and social bonds. The potential appetite for impact investment is ”as high as US$ 26 trillion – US$ 21 trillion in publicly traded stocks and bonds and US$ 5 trillion in private markets including private equity, non-sovereign private debt, and venture capital,” said Philippe Le Houerou, IFC CEO.
But before this can become a reality, the industry must overcome four key challenges which the report highlighted.
- Firstly, there remains continued uncertainty over whether impact investment can provide the financial returns achieved by non-impact related investments. This perception of impact investment providing smaller returns still deters many potential investors. That said, there is evidence that impact investment can provide commercial returns. See page 31-35 of the report.
- Second, there is a lack of clarity about how impact investments are managed which has given rise to concerns about “impact washing”, which affects the industry’s credibility. As such, standards should include investment strategies that link intent to asset selection, and an impact measurement system that ensures accountability by establishing targets, monitoring performance, and reporting impact results. Check out The Business Value of Impact Measurement. See page 36 of the report.
- Third, there is limited comparability of measured impact since common approaches, metrics and conventions are not widely accepted. Several promising initiatives are emerging with three measurement frameworks being presented in the report.
- Fourth, regulatory frameworks do not support investment managers who are seeking impact alongside financial returns. Fiduciary duty is often narrowly defined as only concerned with maximising financial returns, so asset managers are often discouraged from pursuing additional objectives in their investment strategies.
The report provides several solutions to tackle these challenges. The IFC has developed Operating Principles for Impact Management in association with other development finance institutions (DFIs), asset managers and asset allocators, in an effort to bring more clarity and discipline to managing impact investments. “Just as the Green Bond Principles helped avoid “greenwashing” – or deceptive environmental claims – the Operating Principles for Impact Management will help avoid “impact washing” and strengthen the development of this new market,” said Houerou. These are the first Adopters of the Operating Principles for Impact Management:
- Acumen Capital Partners
- AlphaMundi Group
- AXA Investment Managers
- Baiterek National Managing Holding JSC
- Belgian Investment Company for Developing Countries (BIO)
- Blue like an Orange Sustainable Capital
- BlueOrchard Finance Ltd.
- BNP Paribas Asset Management
- Calvert Impact Capital
- Capria Ventures
- Cardano Development B.V. (ILX fund and TCX)
- CDC Group plc.
- CDP – Cassa Depositi e Prestiti
- Community Investment Management (CIM)
- Cordiant Capital
- Credit Suisse
- DEG – Deutsche Entwicklungs- und Investitionsgesellschaft mbH
- Development Bank of Latin America (CAF)
- European Bank for Reconstruction and Development (EBRD)
- European Development Finance Institutions (EDFI)
- European Investment Bank (EIB)
- FinDev Canada
- Flat World Partners
- FMO – the Netherlands Development Finance Company
- IDB Invest (Member of the Inter-American Development Bank)
- IFC Asset Management Company (AMC)
- IFU – Investment Fund for Developing Countries
- Incofin Investment Management
- Investisseurs & Partenaires – I&P
- Islamic Corporation for the Development of the Private Sector, Member of IsDB Group
- Kohlberg Kravis Roberts & Co. L.P.
- LeapFrog Investments
- LGT Impact
- LGT Venture Philanthropy
- MicroVest Capital Management
- Multilateral Investment Guarantee Agency (MIGA)
- Oesterreichische Entwicklungsbank AG (OeEB)
- Overseas Private Investment Corporation (OPIC)
- Partners Group
- Prudential Financial Inc.
- STOA Infra & Energy
- Swiss Infestment Fund for Emerging Markets (SIFEM)
- The Rise Fund
- The Rock Creek Group
- Zurich Insurance Group Ltd.
Uniform standards for impact measurement frameworks would improve transparency and allow for better comparability of the effectiveness of impact investments. The IFC has identified three dominant frameworks such as impact rating, impact target and impact monetisation. Initiatives are also being undertaken by firms like the Global Reporting Initiative to strengthen reporting so that investors can be provided with more information.
As scaling impact investment in private markets means unlocking institutional capital such as funds from asset owners, the IFC also urges regulators to reduce barriers faced by institutional investors interested in impact investment. This involves making changes relating to investment policy and disclosure and reporting. Fiduciaries should be allowed to include impact considerations in their fiduciary, reporting, and disclosure mandates.
The report is one of the most detailed assessments of the current state of impact investment and provides a good blueprint on how the industry can develop.