Wealth management firms need to re-think their business models to stay relevant, with last year's slide in equities serving as a timely reminder of how tough competition for business can be, the report said.
There has been much debate about the size of the impact investment market but The Global Impact Investing Network (GIIN), for 10 years advocating its potential, put the figure at $502 billion at the end of last year.
In GIIN's annual survey of the market released last week, the message from investors was that the market is growing - from 13,000 deals in 2018 to 15,000 allocated for 2019 - and that financial returns are overwhelmingly (91 per cent) meeting or exceeding investors' expectations. Those in the space, largely made up of alternative fund managers, foundations, private equity, pensions, and family officers, registered some of the strongest returns in private equity investments, with about two-thirds (66 per cent) citing market-rate returns as their primary concern, and 15 per cent citing cash preservation. The report found that investors are allocating the greatest share to energy at 15 per cent, microfinance at 13 per cent, and other financial services at 11 per cent, with half of the total allocations going to emerging markets.
This year the survey, conducted annually by the New York based non-profit, gathered data from 266 impact investors globally, whose combined assets of $239 billion make up around half of the total impact investment market. Looking ahead, recipients said that they planned to invest over $37 billion into impact investment in 2019, up by 13 per cent on capital invested the previous year.
An issue that has hampered the growth of the market has been measuring impact and how rigorously companies stack up in a self-reported universe, where virtue signalling and hard facts can be difficult to separate.
Respondents to GIIN this year almost universally said that they measure and manage their own portfolio impact, typically using a mix of qualitative information, proprietary systems, and metrics aligned to GIIN’s IRIS platform or other disclosure indexes. This publication wrote about the launch of the IRIS platform and how the organisaton was tightening and unifying performance measures last month.
The advocacy group said that more data from a maturing market is making a difference, showing that impact investing isn’t a drag on performance and can hold its own against conventional markets.
A stronger track record on this front has fired up some parts of the sector to allocate more, especially as climate risk has pushed up the news cycle and younger generations are genuinely feeling its existential threat. Around 50 per cent in this survey said that all their portfolios were aligned to the UN's Sustainable Development Goals.
But solving some of the big challenges of moving to low carbon economies and tackling global inequality, and the expectation that financial markets will meet such challenges, is a big ask, and in less certain economic times could stop momentum for impact investing in its tracks.
The report said that the specific challenges for impact growth are a lack of “appropriate capital across the risk-return spectrum,” and a lack of viable exit options, and often limited tools to measure and manage impact to draw in more capital. But GIIN's managing director, Sapna Shah, said this year’s survey showed that the industry is getting more sophisticated.
“We are starting to overcome challenges that used to stop conversations before they started, such as the misperception that financial trade-offs are necessary across all impact investment strategies. Fully one-third of survey respondents are motivated to make impact investments because of – not in spite of – their financial return potential.” Investors are now seeing “the alignment between business objectives and transformative impact,” she said.
The Financial Times’ Investing for Global Impact 2019 report, another market perspective released this week, showed that the individuals and family offices consulted for that study were allocating 30 per cent of their total assets to impact investing, almost double the original percentage in the first report in 2014. Those polled for the FT report, holding a cumulative wealth of $124.7 billion, said that the top two investment segments for the year were in clean energy and green tech, and education and skills. Combining social impact with financial returns remained a top priority for individuals (73 per cent), SFOs (53 per cent) and MFOs (77 per cent) in their impact investments.
Echoing what GIIN confirmed as holding back the market, the FT cohort said the top three reasons for staying out of the space were performance concerns (14 per cent), lack of awareness of opportunities (14 per cent) and lack of appropriate products (10 per cent).