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Driving impact through investments
Sustainable investing is a collective descriptor for a range of investment approaches that enable investors to meet both sustainability and financial objectives. Sustainable investing harnesses capital and innovation in an attempt to contribute to solving some of the world’s most pressing environmental and social challenges ranging from climate change and biodiversity loss to social inequality.
Sustainable investing has grown rapidly over the past decades and reached over USD 30 trillion invested globally as of 2022.1 Impact investing is one of the fastest growing sustainable investing approaches given its economic potential alongside its intention to drive positive externalities.
What is impact investing
The term ‘impact investing’ was first coined by the Rockefeller Foundation in 2007.2 There are different definitions of impact investing, and its interpretation varies by context.
At Citi Wealth, we define impact investments as investments that seek to generate risk-adjusted financial returns alongside environmental and/or societal impact. This impact needs to be intentional, measurable and incremental.
This means the impact is specifically envisioned and targeted at the outset and it must be exhibited with measurable performance metrics. At the same time, the investment must drive positive change beyond what would have been achieved had the investment not been made.
An example would be investing in an impact-centered business that provides an affordable essential service such as healthcare, education, water or financial service to underserved communities, which would otherwise not have access to these services. The enterprise would have clear performance metrics to demonstrate their impact and track progress. Moreover, investors could contribute to impact through capital allocation and often other forms of non-financial support such as active engagement and stewardship.
It is the combination of intentionality, robustness of impact management and the focus on the theory of change that makes impact investing different from other sustainable investing approaches (Click here to learn more about other sustainable investing approaches).
Impact investing on the rise
Global impact investment assets under management (AUM) estimates range from over US$1 trillion to around US$2 trillion as of the early 2020s. This number is expected to grow at double-digit annual growth rates in the next decade.3 4 5
Impact investing has attracted a wide variety of investors, including institutional investors, foundations, family offices and High-Net-Worth-Individuals, with the latter two groups having the highest growth, as of 2020.6
Increasing numbers of investors are looking beyond risk management and aim to purposefully embed sustainable outcomes into their investments. Impact investments attract investors who seek to access competitive returns and portfolio diversification; gain exposure to innovations that drive sustainable development; invest in a way that complements their philanthropic efforts or a combination of all.
Just as venture capital was the response to the investment needs of tech entrepreneurs, impact investment is the response to the needs of impact entrepreneurs and businesses that want to improve lives and help the planet.
According to the 2020 GIIN annual impact investor survey, 88% of impact investor respondents report that portfolio performance of impact investments meets or exceeds their financial expectations and 99% says impact investments meet their social and environmental impact expectations. This is an indicator that helps to show that impact investments can meet both investors’ financial and impact objectives.8
How can investors participate in impact investing
There are now a variety of impact investments in both public and private markets that investors can seek to match with their risk-return-impact preferences across geographical focus, themes, sector and asset classes. These strategies incorporate impact in different ways and seek to offer various levels of financial outcomes depending on their investment objectives and asset classes. There are some investments which are impact-first or catalytic and some are financial-first.
Impact investments that meet Citi Wealth’s definition are mostly in the private markets, especially in private equity and private debt. Other asset classes that apply an impact lens include real estate and direct private investments (Click here to learn more about Impact Investing and Private Markets).
Investors may also make impact investments in the capital markets via green, social or blue bonds in the primary market. These types of bonds have specific guidelines on how the proceeds from the sale of the bonds are intentionally used for some environmental or social benefits.
Moreover, for suitable investors, there are vehicles that use a pay-for-success financial structure, in which investors’ returns are linked to the achievement of the pre-agreed project outcomes. These vehicles usually blend both public and private capital. It is one way to help diversifying the investor base that provides capital to underfunded non-profit organizations and projects and at the same time allow investors to seek competitive risk-adjusted returns. For example, we have seen outcome bonds used in numerous realms such as supporting children affected by the COVID-19 pandemic, conserving critically endangered umbrella species like the rhinos and reducing plastic pollution.
Continuing the momentum
Although impact investing still accounts for only a relatively small proportion of sustainable investments, we expect to see further innovation and acceleration in impact investing. By 2030, we envisage more impact strategies emerging which address a broader range of sustainability challenges, and to address the huge funding gap to reach the 17 United Nations Sustainable Development Goals (UN SDGs) and global climate goals. We believe enhancements in transparency and measurement of impact would also further strengthen the credibility and growth of impact investments.
KEY TAKEAWAYS:
At Citi Wealth, impact investments refer to investments that seek to generate competitive risk-adjusted financial returns alongside intentional, measurable and incremental environmental and/or social benefits.
There are now a variety of impact investments in both public and private markets that investors can seek to match with their risk-return-impact preferences across geographical focus, themes, sector, and asset classes.
Impact investing is a growing phenomenon, and it has already surpassed the trillion-dollar mark. The impact investing market is expected to continue to expand with more strategies, greater transparency, and standardization of impact metrics.