Impact investments, in a nutshell, are investments that aim to have a beneficial, verifiable social and environmental impact as well as a financial return.
So, what’s a bird’s eye view of the market for impact investments in present times?
The market for impact investing worldwide, according to GIIN, reached approximately USD 715 billion in 2020 under assets under management. While these are somewhat conservative estimates, the estimate from the International Finance Corporation (IFC) is much higher: $2.1 trillion. It is the period from 2020-2030 that seems exciting for impact investment as it could go far in the course of a decade.
For now, it is clear that impact investing has become mainstream. There is cognizance that climate change, economic inequality, gender inequity, racial injustice, and other crises—all of which are excellent targets for impact investment solutions—are already posing serious difficulties to governments throughout the world. Today, there is a widespread realization that these are areas that must be focussed on globally to ensure sustainable development. Based on insights from SSIR, let’s take a look at how impact investments are shaping up in the ensuing decade.
Focus on Inclusion, diversity, and equity
What would a more free and equitable society look like?
Historically, the private sector has been expected or prepared to do little to address inequality, particularly under Milton Friedman’s free market capitalism of the past decades. Today, as Friedman’s philosophy fades and firms increasingly realise their duties to stakeholders rather than simply shareholders, investors have a better chance of improving everyone’s access to inexpensive, high-quality capital, commodities, or services. Here are a few ways investors have seized this moment that show a way forward:
Social movements such as Black Lives Matter and #MeToo have reverberated well beyond the 2020 street protests, especially in the west. They have prompted investors and companies to take action to address structural racial and gender disparities, notably in terms of capital access and economic opportunity. The impact of these movements has been felt in India as well. Recent pledges continue a pattern that has been emerging in recent years. In 2019, private equity, venture capital, and private debt made $4.8 billion in investments focused on benefitting women, up from $1.1 billion in 2017. The business case is another element fuelling this tendency. According to McKinsey, firms in the top quartile for gender diversity were 25% more likely to achieve above-average profitability than those in the fourth quartile.
Since more firms are adopting a hybrid work environment, the added flexibility creates more opportunities for greater diversity and inclusion as geographical restrictions become blurred owing to technology.
Resilience and adaptation
More companies are developing goods and services to support smart cities and circular economies, which address climate change via adaptation and resilience. For example, Roserve, an Indian wastewater management company, provides technology and finance for sustainable water usage in sectors ranging from tannery to paper to steel. The firm is growing from India to Africa, where wastewater treatment and recycling services are almost non-existent. These developments indicate that there is a significant disparity between the amount of money needed to respond to climate change and the amount of money available. According to UN estimates, the annual demand is $300 billion, but only $30 billion is available. We expect this investable universe to grow significantly over the next ten years as calls for climate action intensify.
A study conducted by the Global Impact Investment Network discovered that 72 percent of investors expected to retain or grow the amount of cash allocated to impact investing, despite the pandemic.
Institutional investors are increasingly aiming for net-zero greenhouse gas emissions by 2050 in their investments. Opportunities for carbon sequestration will become more appealing if organisations like the Net-Zero Asset Owner Alliance’s aim gets more broadly accepted. In this sense, the forestry industry stands out. It can help a portfolio decrease rather than merely avoid rising carbon outputs, but it must work in tandem with, not in instead of, emission reductions. It also supports the livelihoods of 1.3 billion people around the globe.
In Kenya, for example, Komaza is using “micro-forestry” to address the problem of deforestation. Using this strategy, the firm assists tens of thousands of smallholder farmers in growing trees on previously unproductive land for sale as timber in commercial markets, creating long-term revenue while also benefiting the environment. The oceans can also store carbon on a large scale, with coastal ecosystems capable of sequestering up to 20 times more carbon than forests.
It is the steady consonance of these trends that shall help us re-imagine the future for business and consequentially society. The crisis has helped us weave a powerful mandate for change and reimagine how business is approached. It helped us not only pause and reflect but create the momentum for sustainable change.
– Lionel Alva