“Vast allocations of capital and an intentional focus towards generating positive impact are required right now if we are to achieve the UN Sustainable Development Goals [UN SDGs] by 2030 and to reach net zero emissions by 2050.” GIIN CEO Amit Bouri1:
In recent years sustainability related funds have seen a rapid growth in popularity and attention. According to work carried out by the Better World initiative2, most people say they want their investments to do good for people and the planet, with 3 out of 5 people surveyed believing “financial institutions should avoid investing in companies that harm people or the planet”. On the surface it appears the financial sector is responding to this demand. At the current rate of growth ESG-mandated assets will represent half of all professionally managed assets by 20243. But the integration of ESG does not necessarily translate to generating positive impact for people and the planet.
Figure 1: More than 50% of professionally managed assets are forecast to be ESG mandated by 2024. Deloitte Insights: “Ingraining sustainability in the next era of ESG investing” and the PRI
If we want to understand whether the financial system is positively contributing to solutions for global systemic issues such as poverty, inequality and the climate emergency, then we need to look at the state of the impact investing market.
Impact investments are those that are made with the intention to generate positive, measurable social and environmental impact alongside a financial return (GIIN). They can target a range of risk/return profiles, investment structures and costs, all united by the dual aim of achieving both a financial return and an impact return.
The varying approaches to and definitions of impact investments makes accurately sizing the market difficult. Nevertheless the GIIN has estimated the size of the worldwide impact investing market to be USD 1.16trillion (Dec 2021)4. But this estimate puts impact assets at only 1%5 of total global assets. By contrast, the funding gap required to reach the UN SDGs by 2030 currently sits at USD 4.2trillion. Of course,
In the UK we have also seen growth in the impact investment space, reaching an estimated £58billion in 20206. But again this accounts for less than 1% of total AUM. A lack of allocation to impact can be seen most starkly with UK pension funds. Making up the largest portion of assets in the UK at 43%, pension funds only make up 1% of assets allocated to impact.
But as our understanding of impact investing grows, regulatory and political pressure increases, and investor demand increases we forecast that more institutional capital will flow to impact investments. Organisations like Make My Money Matter, Pensions for Purpose and the Impact Investing Institute and regulatory changes such as the requirement to report in line with the recommendations of the TCFD, have all contributed significantly to raising the profile of impact investments within the UK. Global and political challenges are also yielding investable opportunities; growing urbanisation will require more social housing, and the pressing need for a just transition will require a green tech revolution.
As practitioners within the impact space it can become all too easy to forget to take a look at the wider market. Its encouraging to see a buzz around impact solutions, especially at the close of events like COP 27, but we also need to see this matched with increased flows of capital. The financial industry, if directed correctly, has an unrivalled potential to redress societal and environmental imbalances whilst still earning a financial return. We are at the precipice of this redirection and need the whole investment industry to seize the opportunity impact strategies offer both as a long-term investment solution and as a solution to the most significant challenges facing the world today.
Author: Elizabeth Conway, Head of Sustainability
