Institutions embrace impact investing
Impact investing can be defined as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’, according to the Global Impact Investing Network (GIIN), an international thinktank1.
The GIIN adds that impact investing can target a range of returns, from below-market to market rate, depending on investors’ strategic goals. It also challenges the long-held view that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.
A wide range of entities, including family offices, hedge funds, asset managers and wealth managers, as well as government departments, pension funds, individual investors and charities, are embracing the concept. Impact investing allows them to target particular social or environmental causes, while also generating financial returns.
The GIIN estimates that 3349 organisations managed $1.164 trillion in impact-investing assets worldwide at the end of 2021, up 63% on 20192. Impact investment therefore accounts for a sizeable proportion of the $18.4 trillion of ESG-related assets under management in 20213.
Below, we look at how key sectors are embracing impact investing.
Family offices
Just 4% of the impact-investing universe is currently accounted for by family offices. Yet as the professional services business PwC argues, investing for a positive impact ‘goes to the heart of many family offices’ culture and mission’4. The firm adds that some of the ‘most successful pioneers’ of impact investing are family offices, ‘often reflecting the deeply held values and purpose that set them apart’.
Certainly, interest in impact investing among family offices is growing strongly. That’s according to a study by Campden Wealth for Global Impact Solutions Today (GIST) and Barclays Private Bank, published in 2023, which surveyed 149 of the world’s wealthiest individuals and family offices5. Its key findings included:
- More than half (53%) of global wealth holders believe impact investing forges a bridge between the older and younger generations
- 80% of those surveyed believe the appeal lies in doing well and doing good, as investors report they do not have to give up returns to invest sustainably
Hedge funds
The hedge-fund sector was slow to adapt to ESG investing in general, but hedge funds are increasingly incorporating sustainable and impact considerations into their decision-making process for new ventures. That partly reflects increased pressure on hedge funds from clients who want exposure to ESG and impact investing, as well as regulatory trends and awareness of the opportunities available in the sector.
Many hedge funds are increasing their allocation to ESG strategies, and hedge funds focusing entirely on the concept have also been launched. In 2019, for example, Trium Capital launched an ESG Emissions Impact Fund, which uses a market-neutral long/short investment strategy to target high-emitting companies in hard-to-abate sectors such as energy, mining and chemicals – where successful transformations in the form of decarbonisation and lower CO2 emissions can offer attractive long-term returns6.
Asset managers
The asset-management sector has long been a key driver of ESG investing, and it embraced impact investing early. In the US alone, impact-investment specialists now manage more than $122 billion in total assets, according to the 12th annual rankings from ImpactAssets, which gathered data from 163 asset managers specialising in impact investing. This sum was invested across a range of asset classes and impact themes. Moreover, the size of the impact-investing universe is much greater if mainstream firms that have a commitment to impact investing within their overall investment strategy, such as T Rowe Price, are included.
Greenwashing the biggest threat
The ability to target specific goals suggests impact investing will continue to grow in popularity as wealthy families and individuals become increasingly socially aware. The main threat to the future of impact investing lies in the lack of a consistent definition or approach in terms of measuring impact outcomes, either quantitatively or qualitatively. In addition, it can be difficult to measure outcomes. Investors have to be clear about the goals they are targeting and how outcomes can be measured.
1 https://thegiin.org/impact-investing/need-to-know/
2 https://thegiin.org/assets/2022-Market%20Sizing%20Report-Final.pdf
3 https://www.pwc.com/gx/en/news-room/press-releases/2022/awm-revolution-2022-report.html
4 https://www.pwc.com/gx/en/services/family-business/family-office/impact-investing.html
5 https://www.campdenfb.com/article/next-gen-involvement-impact-investing-prepares-them-future-family-responsibility
6 https://www.hedgeweek.com/2021/11/09/308953/emissions-focused-hedge-fund-reaps-rewards-trium-battle-against-climate-change
