Impact investments, defined as those that intentionally generate positive measurable social and environmental impact alongside financial return, have roughly doubled since 2019, from $502 billion1 to $1.164 trillion2 as of December 2021. According to a GIIN report3, impact investments are concentrated among 3,349 organizations, with the bulk of investments attributable to very few large entities with extensive impact investment portfolios. Fund managers were found to account for the bulk of the market (61%)3 while development finance institutions hold the second-highest lump of impact investments (27%)3.
Two areas of impact investing that have received the greatest interest in recent years are green bonds and corporate impact investing. Green bonds are pursued because they generate revenue for environmental efforts, diversify portfolios, and meet stakeholder demands for better accountability. Green bond issuance has grown 43%3 since their entrance to the market in 2008, but not all green bonds are impact bonds; they must have measurable outcomes and impact intention. Corporate impact investing is also being increasingly pursued through the creation of corporate foundations, fund of funds, and through balance sheet vehicles that allow them to invest cash reserves for productive impacts.
The rise of impact investing4 is in large part due to the increasing interest of mainstream investors and an expansion of the climate finance sector. Innovations in fintech4 are also making it easier for people to create their own impact portfolios. After the Paris Agreement in 2015 and COP26 in late 2021, this growth has taken shape as a result of intentional shifts in global diplomacy and pressure from stakeholders to address climate change and social inequity while integrating more transparent reporting. Although climate change is the primary driver of impact investing, broader economic and social impacts are being pursued as well. In response to the protests for racial equality in 2020, the top 50 companies in the US committed a total of $45.2 billion3 toward causes that support racial equality.
Ultimately, investors are finding that impact investments can offer risk-adjusted returns with positive real-world outcomes, though barriers to continued growth remain. A lack of measurement and reporting tools are the greatest causes for concern among weary investors. Due to insufficient reporting tools, concerns of greenwashing4 linger alongside discomfort with unclear definitions and deficient regulation from governing bodies. Another issue to be addressed in impact investing is with compensation schemes5. Like their traditional counterparts, most impact investments still have compensation schemes tied to fund performance. For example, if an impact fund achieves 30% of its impact goal, the fund manager might receive 30% of the carried interest. With the understanding that $700 billion4 in additional funding will be needed each year to address the climate crisis, these hesitations must be addressed.
The G7 Impact Taskforce4 has emphasized the need to bring impact investing to the mainstream. To do so, the Impact Management Project6 was created in 2016 as a means for building global consensus on measurement, assessment, and reporting. GIIN’s IRIS+7 has been broadly accepted as the system of measurement for impact investments. Entities with impact products or services will likely start to use these tools and frameworks to build future projections5 into their methods of measurement to entice new investment. Forward-looking metrics will also allow companies to align with the globally-recognized SDG framework as well as being useful for tracking progress over time. Overall, impact investing has and will continue to grow as products and services enter the market and new opportunities for real impact present themselves to investors interested in making a difference with their money.
Sources:
1 – https://knowledge.wharton.upenn.edu/article/growth-impact-investing-depends-data/
2 – https://thegiin.org/impact-investing/need-to-know/
3 – https://thegiin.org/assets/2022-Market%20Sizing%20Report-Final.pdf
4 – https://www.sganalytics.com/blog/sustainable-finance-impact-investment-trends/
5 – https://www.imd.org/ibyimd/leadership/three-trends-to-track-as-impact-investing-eyes-the-mainstream/
6 – https://impactmanagementproject.com/
7 – https://iris.thegiin.org/
