Editor’s Note: The following is an excerpt from The ImpactAssets Handbook for Investors: Generating Social and Environmental Value through Capital Investing; Edited by Jed Emerson (Anthem Press)
One of the first questions many ask about impact investing is just how big is the impact investing arena today? People want to know this to help them understand how many other investors are making use of this approach and, of course, the more people engaging in impact investing, the easier it is for you to buy and sell your investment positions, the more options for investment products you will have to help manage your risk and, overall, the easier it will be for you to find the types of opportunities that best reflect your interests and strategy.
You should not be surprised to learn that one’s definition of the size of the impact investing market depends on the type of investing you consider “impact,” the type of capital you are interested in deploying and the type of problem you’re wanting to go after. With all that in mind, here are a few figures that should get your attention.
The Report on U.S. Sustainable, Responsible and Impact Investing Trends 2016 stated:
• Overall, the field experienced 135 percent growth from 2012 to 2016.
• $8.10 trillion in U.S. domiciled assets at the outset of 2016 held by 477 institutional investors, 300 money managers and 1,043 community investing financial institutions to which various ESG criteria are applied in investment analysis and portfolio selection, and
• $2.56 trillion in U.S. domiciled assets at the start of 2016 held by 225 institutional investors or money managers that filed or co-filed shareholder resolutions on ESG issues from 2014 through 2016.
• These two segments of assets, after eliminating double counting for assets involved in both strategies and for assets managed by money managers on behalf of institutional investors, yield the overall total of $8.72 trillion, a 33 percent increase over the $6.57 trillion that the US SIF Foundation identified in sustainable investing strategies at the outset of 2014.
Or consider Dennis Price, writing for ImpactAlpha, who states that:
• “The latest tally of socially responsible investment shows growth in fixed-income and retail investing. The Global Sustainable Investment Alliance, which rolls up regional and national surveys from a half-dozen partners, casts a wide net, including negatively and positively screened public equities, green bonds and impact and community investments.
• Screened investments that exclude sectors like tobacco and firearms, still makes up the largest segment, with $15 trillion in assets.
• Bonds, including climate-aligned bonds, made up 64 percent of Socially Responsible Assets, up from 40 percent in 2014, partly driven by the growth of green bonds.
• European investors account for more than half of global SRI assets, compared with 38 percent for the United States. The portion of SRI assets owned by retail investors doubled to 26 percent.
• From a small base, impact and community investing grew by 146 percent to $258 billion.”
How does all that compare to the size of traditional capital markets? Interestingly enough, that sector also suffers from an inability to agree upon the right metrics and definitions of just what all should be considered a part of mainstream capital markets (which must be what we mean when we say that impact investing is really just investing…) in that estimates of the size of traditional capital markets vary from between $118 trillion, to $294 trillion depending upon the time frame and constellation of assets taken into account.
Adoption of impact and sustainable investment practices by traditional, mainstream asset managers is also an indication of the degree to which these ideas have migrated from the fringe to the mainstream. Morgan Stanley and Bloomberg News conducted a survey in 2016 that found that 64 percent of asset managers state they apply some form of sustainable investing within their practice.
Of perhaps greater importance than discussions regarding the size of impact investing markets relative to traditionally managed capital markets is the financial performance of current impact investors. After all, a key part of this conversation is the notion that we may do well and good; namely, that we may attain financial returns competitive with traditional investing, but that also generate various types and levels of “impact” (however we may each define that impact). Again, if one’s understanding of impact is moving X number of people from a dollar a day to two dollars a day income, investing in global public equities may be a long road to impact. If, however, you seek to invest in a diverse portfolio of conforming investment products and strategies that offer market rate returns (meaning, financial returns competitive with those of other investors like you…), but with various levels of social and environmental value creation then you need to understand this is not only possible, but a completely realistic expectation.
Our experience is consistent with the larger market as reflected by the following:
A 2015 study from the Institute for Sustainable Investing examined performance data from 10,228 open-end mutual funds and 2,874 separately managed accounts (SMAs) over seven years and found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments, both on an absolute and a risk-adjusted basis, across asset classes and over time. The study also showed lower median volatility for the funds and SMAs studied since companies that score well on ESG also tend to be less vulnerable to negative headline risks, large-scale lawsuits or environmental risks.
And years of academic research also validate the notion that while one cannot guarantee out-performance relative to traditional investing strategies and, of course, one may still find and invest in “bad” managers regardless of whether or not they are “impact” investment managers, the general consensus and actual, demonstrated experience has been that impact and sustainable investing strategies do not financially underperform the market relative to traditional impact investing strategies.
