Blended finance vehicles seen as key to attracting private investors.
Investment flows from asset owners have contributed to the growth of the impact investment sector, but current levels of capital still fall short of driving real-world environmental and social progress in emerging markets and developing economies (EMDEs).
This is according to members of the Global Impact Investing Network’s (GIIN) Investors’ Council responding to GIIN’s new research, which has taken stock of the latest trends in the global impact investment market via a survey of over 300 impact investors.
Between 2017-22, surveyed investment managers increased their sources of capital across all investor types, most prominently pension funds and insurance firms, the GIIN research said. Pension funds and insurance firms grew impact-focused managers’ funding by a compound annual growth rate (CAGR) of 32%, followed by sovereign wealth funds (22%).
GIIN said this is indicative of the growing trend of asset owners pursuing impact, “moving from portfolio carve-outs to applying an impact lens and seeking positive outcomes across their portfolios”.
“Institutional investors are becoming receptive to investing in impact, and that is perhaps largely due to its maturation as an asset class,” noted Andrea Kaufman, Head of Sustainable Investing at PGIM Real Estate, the private markets investment manager for Prudential, speaking at a media briefing on 27 June.
“Managers have also started to establish track records [in impact investing], which is a critical component of an institutional investor’s due diligence and receptivity to impact investing,” Kaufman added.
However, other members of GIIN’s Investors’ Council said they were concerned that most impact capital is targeting developed markets over EMDEs.
“Most of the growth we’re seeing is in developed markets; less is going to the countries that need it most,” said Steven Evers, CEO at private equity fund manager Triple Jump.
“This needs to change.”
Overall, 29% of impact investors’ capital was allocated to the US and Canada, 23% to Europe, and just 10% to Sub-Saharan Africa, the research said.
Investment managers focused on EMDEs raised 19% of their assets under management (AuM) from pension funds, compared to 29% of capital for developed market-focused managers.
Agustín Vitórica, co-Founder and co-CEO at European impact investment management firm GAWA Capital, said the firm has typically attracted large insurance firms and pension funds through blended finance opportunities.
Blended finance refers to catalytic investment from public or philanthropic sources to attract private sector investment, largely in EMDEs.
“For those of us investing in EMDEs, without blended finance it is really tough to attract private investors at scale,” he said, noting that this is largely due to private investors feeling more confident that blended finance vehicles have less risk and are more likely to deliver strong financial returns.
Last year, global network Convergence warned that climate-oriented blended finance transactions are in decline, from U$36.5 billion between 2016-18 to US$14 billion between 2019-21.
The network has previously noted that development finance institutions (DFIs) are not being transparent enough about the extent to which, and how, they are mobilising private finance for blended vehicles.
Overall, impact investing AuM has grown by a CAGR of 18% between 2017-22, reaching US$213 billion, GIIN research said.
Seventy-nine percent of impact investors reported that their financial performance had met or exceeded their risk-adjusted market rate return targets, with 88% claiming that the impact performance of their investments also met or exceeded their impact targets.
Only 16% reported underperforming relative to financial expectations; 3% indicated the same for impact performance.
Priority sectors targeted by surveyed investors include food and agriculture (61%), energy (55%), and healthcare (51%).
“This is an incredibly exciting, important and challenging time for impact investing,” sad Amit Bouri, CEO and co-Founder at GIIN.