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Impact Investing

What is Impact Investing?

The Global Impact Investing Network (GIIN) defines impact investing as:1

“investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

ISF Primer Video Series

How impact investing stands apart from ESG, with Basma Majerbi

“The tools are there, it will just take a little more education.” ISF Executive Director Sara Alvarado interviews Basma Majerbi, Associate Professor of Finance at the Gustavson School of Business, about defining impact investing, how it can achieve results to improve society, and how impact investing can be made mainstream.

The specific social and environmental objectives desired will vary from investor to investor, and from investment to investment, but the majority are aligned (to varying degrees) with one or more of the UN’s Sustainable Development Goals (SDGs).

GIIN identifies the following four key elements of impact investing:2

  1. Intentionality: intentionally contribute to social and environmental solutions, which differentiates it from other responsible investing strategies such as ESG integration, screening, etc.
  2. Financial Returns: seek a financial return on capital even though this return can range from well below market rate to market rate or above, which distinguishes impact investing from philanthropy.
  3. Range of Asset Classes: can be made across asset classes and markets.
  4. Impact Measurement: includes the commitment to measure and report the social and environmental performance of underlying investments, in addition to overall financial performance.

Impact investments may occur in public or private debt or equity markets around the globe. Given the elements noted above, one can visualize a spectrum of impact investing that includes grant support at one end, to focused investments with market rate return (or higher) expectations at the other end..

Market Characteristics

GIIN estimated the size of the global impact investing market at $715 billion-US during 2020, based on data provided by 1,720 investors.3 The study surveyed 294 of these firms, representing $404-billion US, with the surveyed firms being comprised of 65 per cent asset managers (51 per cent profit; 14 per cent not-for-profit), 14 per cent foundations, 5 per cent development financial institutions (DFIs), and another 16 per cent consisting of family offices, diversified financial institutions, pensions, insurance companies, and “other.”

RIA Canada estimated the size of the Canadian impact investing market at $20.3-billion Cdn. at the end of 2019, close to 50 per cent higher than the 2017 estimate of $14.8-billion and almost five times the 2013 estimate of $4.1-billion.4

While the GIIN definition of impact investing provided above is consistent with most commonly used definitions, there is no universal consensus as to what qualifies as impact investing, and what does not. For example, the UN Principles for Responsible Investment (PRI) note that while impact investing clearly extends beyond “ESG-related compliance and investing,” the concept has evolved through time, leading to an industry that “has expanded and become increasingly complex.”5

PRI notes that impact investing has become increasingly integrated into mainstream investing. For example, PRI estimated global impact investments of $228-billion US in 2016, based on similar estimates to those used by GIIN above, including grants, blended finance and traditional impact investing. However, when mainstream impact investing assets are also included, PRI estimated $1.3-trillion in AUM in impact related investments.

PRI notes that the current impact investing landscape is broad and fragmented, stating: “It is broad because organizations define impact differently…” and, it is “fragmented because there are no basic methodologies, certifications or standards to identify and assess impact investing funds, or to distinguish ESG investing from impact investing.”6

In order to provide some clarity to the market, PRI developed the Impact Investing Market Map to provide a common definition of thematic investment, some basic criteria to identify thematic investments, as well as some key performance indicators. The PRI Market Map was developed along the following 10 themes: energy efficiency; green buildings; renewable energy; sustainable agriculture; sustainable forestry; water; affordable housing; education; health; and inclusive finance.

Measurement and Impact

As discussed above, impact investors have objectives with respect to both impact objectives and financial returns, which may vary considerably from investor to investor. A 2020 GIIN study shows that about two-thirds of impact investors pursue risk-adjusted market rate returns, with 18 per cent pursuing below but close to market-rate returns, and 15 per cent pursuing capital preservation.7

Virtually all impact investors measure and evaluate their impact. GIIN’s survey indicated that over 70 per cent of the surveyed investors reference the SDGs in performance tracking, with the average number of SDGs pursued being eight. The most commonly referenced SDGs being: decent work and economic growth (71 per cent), no poverty (62 per cent), good health and well-being (59 per cent), and reduced inequalities (58 per cent). Measuring and assessing progress on achieving impact objectives requires identifying specific impact outcomes, determining thresholds in terms of scale and depth that indicate success, evaluating outcomes versus such thresholds, and identifying and addressing relevant risks to achieving these objectives. An important part of the impact measurement process requires reporting of progress to key stakeholders, along with identifying opportunities for improvement.

Trees with dollar sign

Current State of the Market

The impact investing market continues to grow at solid rates, and impact investing is making significant inroads into the mainstream responsible investing market. This growth has been driven by client demand, a desire to contribute to local and global communities, an interest in sustainable development, and a desire to align investments with personal values. These motivating factors will only strengthen as millennial investors place greater emphasis on these objectives and values.

As the market has grown there have been improvements in key areas such as relevant market research and common understanding of key market information, improvements in impact measurement and assessment, investment opportunity sets, and government support. However, all of these areas still require significant development, and impact investing remains small in comparison to the total market of investable assets. Remaining obstacles include a shortage of quality deals, a lack of capital, inadequate regulatory clarity, and a general lack of incentives for investment advisors to recommend impact investments.

This series explores the foundations of sustainable finance, one of the most important emerging fields of our time. Sustainable finance aligns financial systems and services to promote long-term environmental sustainability and economic prosperity.

Financed Emissions Transition Finance Scope 1, 2 and 3 GHG Emissions Natural Assets The GHG Protocol Sustainable Debt Climate Risk, Scenario Analysis and Stress Tests Indigenous Economic Reconciliation Carbon Markets Sustainable Investing Stewardship and Corporate Engagement Impact Investing Taxonomies Fiduciary Duty, Climate Change and ESG Considerations ESG Factors in Investing Divestment Climate-Related Financial Disclosures Transition Bonds Green Bonds What Is Sustainable Finance? The Canadian Expert Panel Report