Increasing numbers of large asset managers and other institutions are finding their way to the impact investment space, which means more capital and perhaps a boost to the market’s professionalism and credibility. But some of the sector's traditional, mission-based investors also worry that this trend could dilute the “impact” half of the equation, reducing the market’s effectiveness as a force for social and environmental good.
A core group of just over 200 experienced impact investors expressed their views on the topic as part of the Global Impact Investing Network’s 2017 investor survey, released this week. The GIIN defines impact investments as those “made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return.” This is as opposed to the broader category of responsible investment, which encompasses a variety of strategies, such as excluding certain sectors (guns or tobacco, for example), or investing in companies that are improving their environmental, social and governance (ESG) standards or doing better than their peers—say, choosing the French energy company Total, which has added renewables to its bailiwick, over ExxonMobil.
“The entry of bigger names is bringing attention that could help to increase interest in impact investing; however, it could also result in disillusionment if the commitment to impact isn’t clear or if it takes a backseat to return,” one fund manager responding to the survey wrote. “Another risk is that after testing the water, these bigger players decide to decrease resources allocated to this area, ultimately making it seem faddish instead of a sustainable strategy.”
Just over 70 percent of survey participants, who reported a total of $114 billion in impact assets under management, believe that there is a risk of mission drift associated with the entry of large-scale financial firms. But the majority also felt that this trend will bring in expertise that will help professionalize the market (67 percent), inject much-needed capital (66 percent), and enhance impact investing’s credibility (59 percent).
Most of the respondents represent organizations headquartered in North America or Europe. Fund managers (both for-profit and not-for-profit) made up the largest group at 67 percent, with foundations comprising 11 percent, banks at 4 percent, and development finance institutions, family offices and pension funds/insurance companies each making up 3 percent. These impact investors allocate funds largely to private equity and private debt, with 66 percent targeting risk-adjusted, market rates of financial return, while 18 percent seek close to market-rate returns and 16 percent seek capital preservation.
Interest in values-based investment has grown to the extent that it has largely because the idea that an investor must sacrifice return for impact has been dispelled, according to the report. Survey respondents reported that returns met or exceeded their expectations in both impact (98 percent) and financial performance (91 percent). And fund managers, who manage money for all of the other categories of investors, saw strong interest in impact investing across the board. Virtually all of their foundation and family office clients either already allocate capital, are developing a strategies or are starting to consider impact investing. Most of the banks, sovereign wealth funds, pensions and insurance companies they serve also fall into one of those three categories, with only about 20 percent of each of these investor types showing no interest in investing for impact.
“What that says to me is, one, there is much stronger interest out there than people may realize, and two, there is a remarkable amount of potential,” says Amit Bouri, the GIIN’s CEO and cofounder. “When you think about the capital that might be unlocked from those categories of investors that control large sums of capital around the world, it could have a tremendous effect on the market.”
Bouri added that one of the network’s members, a multifamily office platform, told him that four out of five potential new clients want to talk about impact investing—and that he recently spoke with a private bank scrambling to create an impact strategy because of demand from clients.
“Asset managers and intermediaries are trying to develop product to support the demand,” Bouri says. “I think there’s a real fear that they’ll lose clients to players who can establish a leadership role in impact investing.”
This year’s sample size and reported assets under management is the largest in the survey’s seven-year history. In 2016, participants committed a total of $22.1 billion to 7,951 deals, and they plan to increase capital committed by 17 percent to $25.9 billion via 9,557 deals in 2017. Since the survey’s inception, the GIIN has seen the capital commitment grow steadily, by between 10 percent and 20 percent each year, Bouri says.
North America, Europe, Sub-Saharan Africa and Latin America saw the largest amount of capital invested. Favorite sectors continue to be housing, energy, microfinance, financial services, and food and agriculture.
