Sustainable finance is experiencing very exciting developments as we speak. The impact investment market has grown from $77.4 billion in 2015 to $715 billion last year. This investment approach shows no signs of slowing down – despite of the unprecedented global crises.
The emerging impact investing sector has already shown tremendous growth and offers new solutions for the pressing global problems. It allows us to align investments with values – without sacrificing returns at the same time. According to the GIIN 2020 study, the market has grown ninefold since 2015. The market also attracts a range of investor types characterised by organisation type, headquarters location and investment power. Looking at the total pie, 55% of impact investment assets are directed to developed markets, while 40% are allocated to emerging markets. In another reflection of the diversity, respondents mandate impact investing capital across asset classes – private debt accounts for 21% of AUM, followed by public equity at 19%.
The demand for sustainable investments is particularly pronounced amongst the next-gen investor group, millennials and obviously charitable foundations. The amount of money that group invests into this space each year is growing in two digits. On the one hand, these investors are attracted by shares in listed companies with marketable solutions, i.e. companies that generate positive environmental and social impacts by providing products and services to the market.. On the other hand, some impact investors seek returns not on on stock markets but rather in private equity and private debt. They invest in companies or projects that solve specific environmental or social challenges against a stringent and measurable matrix of impact – driven by either specific goals or against a set of those.
Solving problems and achieving financial performance – a contradiction?
Aside of the obvious, the pandemic has raised awareness for social challenges and accelerated the boom in impact investments. The industry remains diverse and has developed a wide variaty and depth. As more and more investors are interested in investing in socially responsible companies, “impact washing”, also called greenwashing, is becoming increasingly popular. Banks and asset managers’ challenge is to develop products that solve real problems. And the impact on the environment is as measurable as their financial performance. Social Impact Incentives (SIINC) as a funding instrument that rewards high-impact enterprises with time-limited premium payments for achieving social impact could be a solution. This is where the industry’s excellent development potential lies, and it will also be the future of asset management.
It is popular to talk about impact investing, but do you have to sacrifice returns? There is a widespread misconception that profits and positive impact on our planet and society are not inclusive. However, a look at research in this area reveals that impact investing – investing in companies that balance social, environmental and financial goals equally – has performed as traditional investing, if not better.
Millennials as an essential target group
Impact investing may become the investment method of Millennials, reerring to those born between 1981 and 1998. In ten years, this generation will make up the largest share of the global workforce. It is estimated that this age group will inherit $30 trillion in wealth from their parents by 2025. While investors have rarely pursued social and environmental goals with their past investments, doing good and investing money is inextricably linked with future generations. According to a Coldwell Banker Global Luxury study, this target group will have five times as much wealth by 2030 as they do today, indicating the potential for exponential growth in the impact investing sector over the next decade.
The future of impact investment
Today, impact investing is no longer a visionary idea of a small group of innovators, but a differentiated billion-dollar market with excellent growth potential and dynamics. Experts agree that impact investing can lead to remarkable results for both investors and the companies they support. Fundamental impact investing trends for 2021 include:
- Climate solutions, including low-carbon investment opportunities, will become even more critical (specifically focusing on the transformation of our food chain, away from animal protein)
- Scepticism about ESG (environmental, social and corporate governance) in general will be replaced by a better understanding of how useful this concept can be. Better frameworks are in the making
- The biodiversity crisis will change investors’ impact on habitat destruction, over-harvesting, and invasive species
- Social inequalities will continue to test investors’ creativity
As a new year begins, the world remains to reel from a global pandemic, an urgent climate crisis and tightened regulatory requirements for the investment industry. To address these issues, impact investment becomes the option of main street investors.
Finally, perhaps the most critical role for impact investors is to lobby for better legal implementation and frameworks. Impact investors could be a strong voice calling on governments to internalise externalities and transform all investments into impact investments. New incentives greatly expand the horizon for linking social return to profitability – whether a price on carbon, reduction of subsidies on the animal and animal feed side or some other mechanisms. By doing so, opportunities are being raised heavily in the private-sector innovators.
With a more balanced view of how impact investing fits into our economic system, we will promote a way of creating a world where profit and impact go together – diverse, inclusive and sustainable.
Investments intended to generate a measurable, beneficial social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below-market to above-market rates, depending upon the circumstances.