The impact investment market has seen significant growth over recent years. GIIN estimates that the market rose to $1,164 billion in 2021, surpassing $1 trillion for the first time in history. This represents huge growth from $9.5 billion in 2011, rising at a compound annual growth rate of +62% per year over the decade. Below, I consider whether this rapid pace of growth can continue into 2023 and beyond.
Short-Term – Headwinds
In the short term, the challenging macroeconomic backdrop provides a headwind for the impact investment industry. Global markets fell hard in 2022, so the size of existing impact investments likely fell as well. However, even assuming an average valuation drop of -20% and assuming capital inflows equivalent to the lowest historic growth rate (+28%), the impact investment industry would still have grown by circa +8% in 2022.
Looking to 2023, market challenges abound, with a probable global recession, unstable geopolitics, including Ukraine, and the prospect of further economic and other shocks. Whilst such factors may limit the size of existing impact investments, I believes that growth is still likely, based on the long-term trends he discusses below.
Regulatory trends are also impacting the impact investment industry. Obstructive actions by US politicians towards ESG, of which impact investing can be defined as a related subset, are causing some industry participants to reconsider, which could limit the supply of impact investment offerings, especially from the US – the world’s largest investment market.
In Europe, Sustainable Finance Disclosure Regulation (“SFDR”) implementation is progressing. 2023 sees the introduction of the EU Taxonomy’s four remaining environmental objectives and Article 8 & 9 disclosure requirements, requiring minimum disclosures from sustainable finance firms. This is causing major headaches amongst market participants. For example, certain industry data providers are decategorizing impact investment funds based upon Article 9 compliance, despite them having an impact-driven approach. However, once this round of regulatory changes is digested, the market should be better placed for further growth.
Long-Term – Growth
My conjecture is that the long-term growth prospects for the impact investment market remain very strong, driven by underlying demand from customers, employees, and investors, and fuelled by global support for the UN Sustainable Development Goals (“SDGs”). A 2021 survey conducted by the UN Development Programme found that over 90% of people in 40 countries support the SDGs. These same people are the customers, employees, and investors driving corporate and investment change. The UN estimates that $5 to $7 trillion in annual investment is required to meet these SDG targets by 2030.
Likewise, the Paris Agreement emission targets were ratified by almost every country on the planet, feeding global demand for investment in renewables and related impact industries. IPCC estimates $1 to $2 trillion in annual investment is needed in the energy sector by 2030.
The investment capital required to support these global targets is many times the current $1.2 trillion impact investment market and is expected to multiply in size by 2030 as a result.
On a relative basis, impact investment is dwarfed by the ESG market, which GSIA estimates at $35 trillion in 2020 or 36% of global AUM. This also bodes well for impact investment, as I believe that over the course of the 2020s, this relative proportion will swing towards impact investment. This is supported by an onslaught of regulation directed at ESG resulting from greenwashing scandals. ESG investment providers are being forced to prove their ESG credentials or drop the ESG label. This will drive further ESG integration, forcing many ESG strategies towards genuine impact investment.
End Game – Ubiquity
I expect that over the decades to come, it will become increasingly difficult to delineate social and environmental considerations from corporate and investment decisions. They will be intrinsically interlinked because of factors such as carbon taxes, regulatory action, fines, data provision requirements, customer demand, employee preferences, and many more. Given the huge potential financial implications of getting ESG factors, right or wrong, their consideration will become a minimum requirement for prudent business leaders and investors.
A resounding 71% of global business leaders believe that “Eventually, no investment decisions will be made without considering ESG.” For those who integrate E and S impact factors into their decision-making and can prove they are positively impactful, the rewards will be huge, driven by the financial benefits of meeting the tsunami of demand. By putting people and the planet first, companies will not only make the world a better place – they will make more money in so doing. Perhaps that means a future where all investment is impact investment? That would be nice!
