Impact investing is a type of investments made to generate a positive social and environmental impact alongside a financial return. They can be made in both developed and emerging markets, and it provides capital to address challenges in sectors such as agriculture, water, alternative energy or healthcare.
We have chatted with Arnau Gil, who works in impact investing at Phenix Capital as well as with two pioneers in the impact investing sector, Tim Radjy from AlphaMundi and Jacco Minnaar from Triodos, to understand how the sector is evolving and the real impact of this trend in the financial sector.
Arnau Gil, Senior Associate, Impact Investing at Phenix Capital Group
We have seen a strong first half of 2021 when it comes to capital inflows to impact funds and observe institutional asset owners and managers being fully back in the market after a tough 2020, where fundraising dynamics changed amid a pandemic and investment teams adapted to manager selection due diligence processes in a remote environment.
At Phenix Capital Group, we have been tracking the impact fund market for almost a decade and for this year, the ranking of dominant asset classes in the impact investing space driving the inflows to fund managers raising capital in 2021 include private growth equity, infrastructure (focused on renewable energy, waste and circularity assets), real estate (affordable housing and green buildings), private debt, venture and buyout solutions.
When it comes to geography of investments, Western Europe, North America and Global fund solutions are the top regions where managers are raising and deploying capital.
We observe renewable energy, climate, agriculture, and health services as the dominant sectors in fundraising.
It is important to note that while impact investing fund solutions are growing year after year, room for growth is still enormous as the overall market has a relatively short track record (Indeed, standardisation of the impact investing market began in 2008 when the term was coined, and that translates into a good amount of funds having short series, recent vintages and unrealized returns.
In parallel we see an increasing sophistication of fund selectors when it comes to impact investing, looking for solutions that integrate impact across the investment cycle in a robust and accountable way. This is driving allocations to quality solutions and will enable better return series and benchmark data, reinforcing the impact investing thesis as well as helping address concerns around greenwashing.
The standardisation of impact measurement is still in progress and some initiatives such as Impact Management Project, Joint Impact Model (led by Development Finance Institutions), IRIS+, The Operating Principles for Impact Management along with several institutional investors are making industry participants cooperate towards standardisation and consolidation, aiming to replicate the consensus that financial accounting principles reached. In that regard, we see Forestry and Timberland as a reference for the impact fund market in terms of accountability and consensus reached between allocators and managers when it comes to impact measurement and reporting, with multi-stakeholder initiatives such as the Forest Stewardship Council and the Sustainable Forestry Initiative.
On the standardisation path, we are welcoming the recent SFDR (Sustainable Finance Disclosure Regulation) regulatory requirements and monitoring how it affects the market but see it as a step in the right direction to add consistency and clarity to the market.
Finally, a trend in the market worth mentioning is the number of institutional asset owners committing to Net Zero portfolios and formalising changes in Investment Policy Statements that are and will continue to drive capital towards impact funds, especially those focused on delivering measurable environmental outcomes and scalable decarbonisation solutions.
As mentioned above, we also asked two of the most reputed Impact investment companies to take us through their investment strategies and how they see impact investing getting more traction in the coming years. We had Tim Radjy, Founder and Managing Partner of Alphamundi Group and Jacco Minnaar, Chair of the Management Board at Triodos Investment Management, give us their insights and how they see the investment industry evolving towards sustainability and social responsability, their strategies and
Tim Radjy, Founder and Managing Partner of AlphaMundi Group in Switzerland
According to the United Nations, achieving the Sustainable Development Goals (SDGs) would result in the creation of 380 million jobs, savings of USD 26 trillion on climate change, and market opportunities worth USD 12 trillion by 2030.
The international community adopted the SDGs in 2015 and the Paris Agreement in 2017, China issued its Green Financial System Guidelines in 2016 and a Climate Change Financing timeline in 2020, and the EU published its Sustainable Finance Action Plan in 2018 and Taxonomy Regulation in 2020, all of which set clear targets and a calendar for the global transition to a sustainable economy.
Voluntary mechanisms play a key role as well. European labels demonstrating ESG credentials are now used by some 1,500 funds managing EUR 827 billion, according to Novethic, and associations like the Net Zero Asset Owner Alliance are looking to align USD 6.6 trillion on the 1.5°C temperature increase scenario.
According to Bloomberg, global ESG assets will have grown from USD 22.8 trillion in 2016 to a forecast USD 37.8 trillion by the end of 2021, with Europe investing 42% of its assets sustainably and accounting for half of the world’s ESG assets currently. In Europe, ESG mutual funds and ETFs passed the trillion-dollar milestone in 2020, with more than 100 ESG funds launched each quarter last year.
The Global Sustainable Alliance (GSA) further notes 35.9% of all professionally managed assets worth USD 98.4 trillion were invested sustainably by 2020, with the leading ESG approaches remaining ESG integration and exclusionary screening, now bolstered by the EU SDFR requirements. In Switzerland, sustainable funds now account for 52% of the funds market, and 32% are certified by a third party, according to the 2021 survey by Swiss Sustainable Finance (SSF).
A key caveat: ESG is no longer sufficient to address the global challenges the world faces, mostly because it cannot measure its impact accurately. SSF predicts the emergence of a third era for sustainable finance, with products increasingly combining multiple ESG methods and with a greater emphasis on impact and third-party validation.
As for impact investing, the US is in the lead, with an asset allocation twice that of Europe for this investment approach, according to the GSA.
SSF notes that impact investing mobilized CHF 85.6 billion in 2020 in Switzerland, a small fraction of the CHF 1.5 trillion invested sustainably, the latter amounting to 20% of the country’s financial market size of CHF 7.6 trillion.
Based on the Global Impact Investing Network (GIIN)’s 2020 survey, Swiss impact assets represent 12% of the global impact portfolio of USD 715 billion, though a Symbiotics survey established in 2020 that Swiss managers control 35% of all private sector impact funds investing in emerging markets.
Interestingly, the GIIN notes that nearly half of all impact assets are allocated to developed markets, underlining that impact investing begins at home as we are now directly exposed to sustainability threats.
The World Bank estimated global private financial assets were worth USD 200 trillion in 2018, so financing the USD 3 trillion SDG annual funding gap should not be an issue. The main concern is the steeply rising cost in both human lives and biodiversity loss that each of us must pay until the public policy leviathan has successfully marshalled the bulk of private capital to achieve the SDGs.
Jacco Minnaar, Chair of the Management Board at Triodos Investment Management
Sustainable investing has gained a lot of traction in recent years with global ESG assets well on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. With this growing popularity, it’s important to be able to distinguish genuinely sustainable products from not so green or even greenwashed offerings and to know the differences between the various shades of green.
While it’s great that the financial industry is quickly adopting ESG as the new mainstream for investing, it’s also clear that ESG criteria alone aren’t going to deliver the positive impact that the world urgently needs. In some cases, it can even be questioned if ESG labeled funds are as green as their label suggests. Across the industry, existing mutual funds are being rebranded as ‘green’ with no discernible change to the fund itself or its underlying strategy. In general, there are simply too many passive investments that lack an authentic sustainable purpose.
If you really want to take part in the transition towards a sustainable system that respects ecological boundaries and works for the benefit of all, you should have an active and credible vision plan to generate sustainable impact. As an investor, this means looking beyond ESG and going further than negative exclusion by focusing on positive environmental and social outcomes. Impact investing is a league of its own and considered the darkest of all greens because it explicitly targets positive environmental and social outcomes while at the same time aiming to achieve market rate financial returns. It takes a very targeted approach and requires investment teams to have a clear vision for what kind of changes they wish to effect in society by way of their investment activity.
The outcomes in terms of both impact and financial returns are not by chance or coincidence. Each investment must go through an extensive diligence process to evaluate the ability of the specific project or company to deliver on the defined impact and financial outcomes. A key element of impact investing is a formal process to measure and monitor the impact of an investment to assess whether it is on track to achieve its environmental and social objectives. This impact data gets fed back into the original goal setting to refine the portfolio.
Investors should realise that there is no such thing as a neutral investment. At the end of the day, it’s about investment choices. Not only what you choose to invest in, but also how and what you choose not to invest in. Every investment decision has its consequences and creates an impact, either positive or negative. While ESG investments and negative exclusions may cause less negative impact, impact investments have the potential to create a positive impact. Only if you have an active sustainability approach, you can really be a changemaker.
If you want to learn more about sustainable investment, check out our ESG section