By Neil Gregory, Chief Thought Leadership Officer, IFC
Looking to invest for impact? Better put on a good pair of glasses, because at first glance so much of it looks rather fuzzy. Is it a USD 500 billion market or a USD 1.3 trillion market, as reports by the GIIN and UNPRI state? Is it only a private equity and debt play or do green bonds and public equity funds count? Many investment products say “impact” on the label, but what is really inside the wrapper?
This fuzziness reflects the rapid growth in interest from retail investors and asset owners to put their money to work in ways that generate impact alongside financial returns. The impact investing industry has scrambled to keep up with this growth in interest, rapidly outscaling the size of the small specialist impact funds that once dominated the market. As mainstream asset managers and investment banks move in, it is understandable that investors find it hard to get a clear view on which investments will truly deliver impact and which ones are just exercises in branding.
In the IFC’s new report on impact investing, we take a clear-eyed view of the market. Starting from the widely accepted definition of impact investments as having the intent to contribute to measurable positive social and environmental impact, we find two market segments that clearly deliver on the promise to invest with intent to contribute to measured impact. The first segment is privately managed debt and equity funds, which manage about USD 71 billion. The second segment is development finance institutions (DFIs), like IFC, which have a mandate to invest in commercial returns to achieve development impact. The group of 25 DFIs that share common impact metrics manage about USD 742 billion. Beyond these two segments, two intriguing asset classes have the potential to contribute to measured impact. First, green and social bonds, which may contribute additional financing to firms generating positive environmental and social impacts, have grown rapidly to a USD 456 billion market. Second, shareholder engagement strategies in public equities, which are a USD 8.4 trillion market, can be deployed to influence firms towards greater impact. We think investor appetite for impact investments could grow to be a USD 26 trillion market, but only if the industry can offer credible investment vehicles that meet investors’ demands for commercial returns and disciplined management for impact.
Specialist impact funds, DFIs and mainstream investors are to a large extent different tribes that have pursued their objectives separately. But what brings them together is a shared interest in investing for impact. They have much to learn from each other. In particular, DFIs have up to 60 years of experience managing an investment portfolio for financial returns and impact. Drawing on this experience, IFC has convened a cross-section of these three groups to converge on a common set of Operating Principles that describe the key elements in managing investments for impact. Through an end-to-end process that covers the lifecycle of investments — from strategy to origination and structuring, portfolio management, exit, and independent verification — these principles are the building blocks of a robust impact management system. Sixty funds, institutions and banks became the first adopters of the principles on April 12, and they collectively manage for impact more than USD 350 billion. By adopting the principles, they have committed both to an annual disclosure on how they go about implementing them and to independent verification on how they follow-through on the principles in their operations.
In this way — and for the first time — the market will have clear standards to distinguish impact investments from other forms of sustainable and responsible investing. This will give asset owners the clarity they seek to identify opportunities to achieve impact with their investments in a disciplined way. With this clarity, we see enormous scope for the market to grow and contribute more to financing the Sustainable Development Goals. And we see this without glasses.