Most impact investors recently surveyed by the Global Impact Investing Network (GIIN) expect to maintain or boost their commitment to impact investments this year in response to the coronavirus pandemic, and most plan to stick to strategies focused on addressing the U.N.’s sustainable development goals.
The responses were an addendum to the GIIN’s 10th annual survey of impact investors, which was released Thursday morning. The survey was conducted in February and March with 294 respondents, before most sheltering-in-place orders took hold, and the extent of the pandemic’s impact on global economies was not yet known. To better understand how the Covid-19 crisis would affect attitudes, the GIIN reached out later in the spring, receiving responses from 122 investors.
“One of the things that’s really clear about this crisis is that it underscores the need for investment capital to play a role in driving positive impact,” says Amit Bouri the GIIN’s CEO and co-founder. “As the dust settles on the shock of the crisis, and people have more energy to think about how to build back and recover, impact investing as an approach and the thinking behind it, will have a much greater interest among investors.”
Among several details surfaced in the 125-page report, the GIIN estimated the total size of the impact investing market at US$715 billion, drawing from a database of nearly 2,000 impact investors. These are investors who are focused on creating “positive, measurable social and environmental impact alongside a financial return,” through investments in a mix of asset classes, according to the GIIN.
The investor survey takes a narrower slice of this universe, gleaning answers from 294 investors with a total of US$404 million in assets. Each respondent has at least $10 million in impact investments or has invested in at least five deals.
Last year, the GIIN estimated the market size at about US$500 billion, but the figures aren’t directly comparable, as this year’s total reflects not only growth in assets but also a shift “in our ability to capture a stronger and richer data set,” Bouri says.
Of the investors who responded to the questions related to the pandemic, 57% said they were likely or very likely to maintain the level of capital they have committed to impact investments this year, while 15% said they were likely to increase their investments. This crisis, which has put a “spotlight on inequities in society,” and has “hit the most vulnerable the hardest,” he says, “does highlight the need for us to invest differently.”
The fact so many are expecting to stay the course shows that impact investors are playing the long game, Bouri says.
“If you are trying to address climate change, if you are trying to have a positive impact on low-income communities—whether in urban centers of the U.S. or places like India—you have to be in it for the long haul,” he says.
The response to the pandemic-related questions also found 63% of investors are unlikely or very unlikely to change their investing themes, which are aligned with the U.N. goals, over the next five years. “Many noted that the impact themes they already target are only exacerbated by the current pandemic, reinforcing the need for the solutions they already support,” the report said.
Another 20% of respondents did say they were likely or very likely to decrease their investments in light of the Covid-19 crisis, however. One asset manager quoted in the report said cash pressures affecting existing investments may mean “available capital might be prioritized to support existing clients rather than new investments,” while several others cited practical issues, such as not being able to visit prospective companies.
A Sector in Growth Mode
Overall, survey paints a strong picture of the market as assets within existing impact investing portfolios continue to grow and as more investors, big and small, enter the sector. This 10th annual survey reflects the largest group of respondents so far. They represent a mix of investors, from large for-profit asset managers, to development financial institutions, to family offices and foundations.
Overall, 88% of those who responded reported meeting or exceeding their financial expectations with their impact investments, and 67% report seeking risk-adjusted market-rate returns. The remaining 33% deliberately seek below-market returns, often as a way to catalyze investments from those who do seek to earn a return.
The strong results, and tilt toward market-rate return investors, may “imply a shift from the increasingly outdated perception of an inherent tradeoff between impact and financial performance,” the survey stated.
The GIIN took a closer look at a segment of the respondents who had participated in the 2016 survey, and found on average that their impact portfolios had achieved a compound annual growth rate of 17%.
While Bouri says the GIIN “can’t project forward,” all of these factors are “indicative of a strong growth trajectory.”
In pre-pandemic travels in the past year to Singapore, Tokyo, Brazil, Argentina, the Netherlands, and beyond, Bouri says he clearly found many investors looking to enter the market, “which is a very positive leading indicator of growth.” At a conference in Brazil just before travel was suspended, he spoke at a family office conference where multiple generations of families are exploring how they can get involved. “That market is ready to expand dramatically,” he says.
Overall, the bulk of the market potential, in terms of investors who are not yet engaged in impact investing, are those who are seeking market-rates of return, including pension funds, insurers, endowments, and many individuals who are focused on that level of performance, he says.
A factor in the market’s growth has been the rise of large private equity funds from major institutions such as TPG and KKR. The participation of these name-brand funds “builds credibility and legitimacy among many investors,” both individuals and institutions, Bouri says.
“The shadow to that light is it raises the concerns about impact washing,” he adds.
Of those surveyed, 66% are concerned about impact washing—investments that achieve impact in name only—while 35% have concerns about the market’s inability to demonstrate impact results. Also, 34% are concerned about the inability to compare impact results with peers, Bouri notes.
For these reasons, “one of the big areas of development in the market going forward is on driving a bigger emphasis on impact performance,” he says. The systems in place today for measuring impact are increasingly sophisticated, and more investors are using them, as the survey found (88% of respondents believe they have increased the rigor of their impact measurement and management practices), although “there are opportunities for continued refinement,” Bouri says.
“For [impact investing] to grow, it will be important that we really maintain strong credibility on impact performance,” he says. “That is essential not only to mitigating risk of impact washing, but really to rise to this moment in the world that we need to make sure we drive a race to the top when it comes to impact performance.”
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June 11, 2020 at 08:42PM
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Covid-19 Crisis Unlikely to Affect Impact Investing - Barron's
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