Toward salvation – the growth of impact investing

April 2021 | FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

April 2021 Issue

Impact investing – an industry which provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance and affordable and accessible basic services, including housing, healthcare and education – is thriving.

According to the Global Impact Investing Network’s (GIIN’s) ‘2020 Impact Investor Survey’, assets under management grew by 17 percent, from $52bn to $98bn, among repeat respondents to the GIIN's 2016 Annual Impact Investor Survey (2015 year-end data) and this year’s survey, signifying growth among investors looking to generate positive, measurable social and environmental impacts alongside a solid financial return.

And while the emergence of coronavirus (COVID-19) threatened to derail growth in this space, the pandemic has, in fact, given impact investing a boost rather than applying the brakes.

“While the pandemic has been devastating for many, it has also been an extraordinary opportunity to accelerate the trend toward a more sustainable economy,” contends Sarah Gordon, chief executive of the Impact Investing Institute. “The events of 2020 have laid bare the urgent need for the global economy to respond to the interlinked challenges of climate change and increasing inequalities in a coordinated way.”

Likewise, Amit Bouri, chief executive and co-founder of the GIIN, feels the focus is on unleashing the power of capital for good. “The pandemic highlights the need for a sustainable and inclusive world,” he says. “To streamline these efforts, since May 2020, we have managed the ‘Response, Recovery, and Resilience Investment Coalition (R3 Coalition)’, an industry initiative accelerating impact investments to respond, recover and build resilience in the face of COVID-19.”

The pandemic is but one of a number of crises facing the world, including climate change, biotechnology risk and overpopulation. Together, they expose all too clearly the fragile interlinkages between human health, the natural world and our economic system.

“As the impact investing industry continues to scale and mature, the expectation is that ever-increasing numbers of investors will turn to it in the years to come as a way of directing funds toward companies that are making positive social or environmental impacts in the world.”

“Far from reducing impact investing, these crises have reinforced the need for the industry,” affirms Amy Clarke, chief impact officer at Tribe Impact Capital LLP. “We have seen significant increases in capital flowing into sustainable and impact investing and this has been aided by increasing evidence of positive financial performance of companies that understand these crises and are moving to address them.”

Investors and instruments

Underpinning the rapid growth of the impact investing industry and its broadening in terms of sectors and jurisdictions is the means by which this growth is being generated – in particular, the types of investors and the instruments they are utilising to finance businesses with a strong commitment to sustainability.

“The type of investor varies from endowments and foundations to private families, with lowest exposure among pension funds,” explains Lydia Guett, investment director at Cambridge Associates. “Specifically, private investors and endowments and foundations increasingly do not want to have exposure to environmental, social and governance (ESG) controversies or invest in areas misaligned with their values. We also see a trend toward strong alignment, where clients set out their own value framework and then look to build aligned investment portfolios across asset classes.”

In the experience of Fred Kooij, chief investment officer at Tribe Impact Capital LLP, equities are largely seen as the main market for impact investors in public markets. “Healthcare and technology are understandably becoming more visible in many portfolios,” he contends. “In the UK, we have witnessed more innovation in non-correlated assets with a handful of highly thematised investment trusts, for example housing for the homeless.

“Private clients, in particular family offices, are still very much at the forefront of impact investing, but we are also witnessing more of the mainstream asset management houses launch new products, and an increasing number of charities actively investigating their options,” he adds. “Investors, generally, are increasingly appreciating that impact investing is just good investing – well-placed to benefit from the global direction of travel at consumer, corporate and government level.”

Acceleration

As the impact investing industry continues to scale and mature, the expectation is that ever-increasing numbers of investors will turn to it in the years to come as a way of directing funds toward companies that are making positive social or environmental impacts in the world.

“A new US administration, the pace of sustainable finance change in the EU, China’s new Five Year Plan and the UK’s commitment to green investment all suggest a dramatic acceleration in impact investing,” believes Mr Kooij. “We anticipate a K-shaped recovery, with businesses fully vested in becoming future fit increasingly attractive to investors, while those not committed coming under scrutiny from government, consumers and investors alike.”

Ultimately, the vision is a world where impact becomes part of all investing. “One of the things emerging out of the crisis will be around how we build back and how we invest in a way that results in a better system,” concludes Mr Bouri. “Impact investing has a central role to play in that future.”

Fraser Tennant