Seeing Success

What’s Driving Growth in Impact Investing?

With just over $228 billion now invested in impact projects, the growth in impact investing in recent years—along with increased shareholder focus on environment, social, and corporate governance (ESG) issues—has reached a new high.

For its 2018 Annual Impact Investor Survey, the Global Impact Investing Network (GIIN), a nonprofit organization that monitors financial activity in the ESG space, asked 229 institutional investors about their impact performance and reasons for investing. Providing insight into changes over time, 82 of the respondents also completed the survey five years ago. These asset managers reported a compound annual growth rate of 13% for their impact assets under management, increasing from $30.8 billion in 2013 to $50.8 billion in 2017.

In all, the $228 billion invested in 2017 doubles the $114 billion reported by the 208 respondents to last year’s GIIN survey.

What’s driving this growth? While GIIN research director Abhilash Mudaliar might be right in speculating that the “fundamental norms governing the role and purpose of capital in society are changing,” there are other, more specific factors involved, too. Here’s a look at some of the highlights not only from the 2018 GIIN report but from several other recent impact investing surveys as well.

New Players and Stakeholders

The GIIN report noted that new names—some of them quite big—have begun entering the space, with over one-third of organizations that manage “conventional” investments starting to make impact investments. This trend both “brings in new investors and more capital” and at the same time “works to enhance the broader credibility and professionalism of impact investing practice.”

One example of the shift among major institutional investors is BlackRock, the world’s largest asset manager with $6.28 trillion in assets under management. In January 2018, BlackRock head Larry Fink wrote a letter to corporate CEOs urging them to meaningfully consider ESG issues and risks. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink wrote.

At the same time, GIIN pointed out that several foundations announced significant impact investments in 2017, from the Ford Foundation’s $1 billion commitment to mission-related investments over the next 10 years to the Michael & Susan Dell Foundation’s plans to put new endowment dollars toward investments aimed at alleviating child poverty.

Finally, more clients are stepping up to ask for impact investments, too. While some 98% of respondents agreed that pursuing impact through investments was either very or somewhat important to their mission, 86% said that client demand played an equal role in their decision to grow their ESG investments.

The Rise of Individual Investors—and Millennials

Perhaps surprisingly, a 2017 survey by investment firm Callan said that while the number of institutional investors including ESG factors in their investments had grown from 22% in 2013 to 37% today, that percentage has at present leveled off. Callan noted that this reflected the fact that its 2017 survey respondents comprised more small and corporate funds than in previous years and that “multiple years of investor education around ESG [are] coming to fruition.”

With institutional investors leveling off, individual and retail investors may be playing a greater role in driving growth in impact investing. According to a 2017 study by Morgan Stanley, 75% of the “total population” of individual investors is either “very interested” or “interested” in sustainable investing goals. But among millennials—those born between the early 1980s and the mid-1990s—that interest level rises to 86%. Now coming into its own as a cohort of investors, this generation is twice as likely to make a sustainable investment than the investor population as a whole.

And with millennials now predominating the workforce—giving them sway not only as consumers but also as 401(k) investors—it’s perhaps logical that this “demographic is a key factor in the rise of responsible investing,” as consulting firm Aon’s 2018 Global perspectives on responsible investing report asserts.

Better Strategy and Data

One issue relevant to the impact investing industry’s ability to scale is the availability of data about how ESG investors are managing their assets and what results they’re seeing, both financially and in terms of impact. The Case Foundation’s recent #ShareYourData initiative both calls attention to this issue and helps to solve it by gathering the information needed to move impact investing even further into the mainstream.

The GIIN survey notes that impact investors increasingly “demonstrate a strong commitment to measuring and managing impact,” with 76% of respondents setting impact targets to measure against. The expanding availability of frameworks like the GIIN’s own IRIS performance metrics and the United Nations’ Sustainable Development Goals, established in 2016, has helped investors keep their projects on track.

Likewise, in explaining the development of the impact investing market, 90% of respondents pointed to the growing presence of skilled professionals in the space, while 88% pointed to the “sophistication of impact measurement practice” and 85% pointed to progress in “research and data.”

That said, 40% called “common understanding of definition and segmentation of [the] impact investing market” a “significant challenge.” And Aon’s survey found that roughly half of ESG investors want more consistent data, better research on impact and returns, and increased standardization of industry terms and definitions.

Still, a majority of GIIN respondents said their ESG investments had met their expectations for impact (82%) or financial (76%) performance, with another 15% saying their investments had exceeded expectations for both. As results like these bear out the premise of impact investing and investors share their success stories, it’s not surprising to see momentum continuing to build.

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