Impact investing entails financial investment driven by philanthropic considerations. It is increasingly contributing to the development of social enterprises. Driven by values, this investment type deploys global financial resources to solve apparently intractable issues. Fifteen years ago, the Rockefeller Foundation coined the term impact investing, which has changed the investment industry landscape. Impact investing has developed a new paradigm in the current context, diverging from environmental, social and governance investment, which focuses on mitigating company and investor risks and/or analyzing non-financial performance.
The sustainable development sector has grown and becomes highly sophisticated thanks to impact investment. Increased policymakers’ attention and the establishment of industry standards have benefited the sector, while international institutions, such as the UN, have encouraged impact investment. Bodies, such as the Green Bond Principles Council, comprising investors and borrowers, have also contributed to establishing uniform standards.
Currently, the impact investing sector boasts US$ 1.16 trillion in assets under management (AuM), handled by 3,349 organizations – a significant psychological milestone for an industry still expanding and growing in complexity, reported as of December 2021. In a survey, across 1,289 organizations, the average investment portfolio had US$ 485.00 million in impact AUM, while the median investment portfolio held US$ 62.50 million.
Impact investing is gaining traction from a wider spectrum of investors, broadening the possible sources of impact finance outside its previous wheelhouse. The below table presents the historical involvement and risk tolerance by fund type.
Impact investment focuses on key issues such as climate change, inclusive capitalism, health and wellness, and sustainable markets. Some key examples are presented in the table below
The advancements made in the last decade are commendable, but the impact investing sector cannot afford to become complacent. The 2030 deadline for achieving the Sustainable Development Goals (SDGs) is fast approaching, and financial allocation to achieve these goals remains woefully inadequate to overcome the worst effects of climate change and ongoing inequalities. Nonetheless, financial markets have witnessed unprecedented commitment from asset owners and managers to plug the US$ 4.20 trillion financing gap required to accomplish these targets. It is estimated that only 1.10% of all assets owned by banks and institutional assets globally will be necessary to fill this gap. Impact investment is one of the most powerful weapons at the world’s disposal for achieving a more fair, inclusive, and sustainable future. The next years will provide a once-in-a-lifetime chance to scale the impact investing sector. By allocating more cash for impact solutions, the market can ensure that impact investing lives up to its promise.
