Krisztina Tora, Chief Market Development Officer at the Global Steering Group for Impact Investment, outlines three key areas that show great potential to improve outcomes at scale for people and the planet.
2022 was a landmark year for impact investing. For the first time, impact assets under management crossed the US$1 trillion threshold, according to data from the Global Impact Investing Network. There was recognition and support at a global level for impact investment to address inequality. And there was growing momentum behind global initiatives that could reshape businesses’ approach to impact – notably the IFRS Foundation’s International Sustainability Standards Board recommendations for sustainability and climate-related disclosure standards.
It was also a year of intense suffering and hardship for many. The outbreak of war in Ukraine sparked a global energy crisis, which contributed to soaring inflation, a cost-of-living crisis and pressure on the poorest and most vulnerable in society.
The new year will be challenging and will bring even more geopolitical and economic uncertainty. Yet impact investing is proving its worth in creating value and addressing some of society’s most intractable problems. We have identified three areas of focus for 2023 and beyond that can be transformative for people and the planet, not to mention rewarding for investors.
Emerging markets – where opportunities and sustainability meet
Spiralling prices have a disproportionate effect on those who are most vulnerable in any society, but particularly in emerging markets where food and energy can account for 50% of consumer budgets. Worsening economic conditions bring additional risks that can negatively impact people and communities. Last summer, Sri Lanka’s mass protests, spurred by inflation spiking at 50% and shortages of essential goods including fuel, food, and medicines, was a warning sign. A Verisk Maplecroft study shows that 101 countries (out of 198 tracked) are at increased risk of civil unrest, including Algeria, the Philippines, and even Switzerland.
A fairer, more stable world requires much more investment focus on emerging markets. In times of crisis, capital is often pulled out of developing economies but that is where some of the greatest opportunities exist. Mainstream asset managers, such as Morgan Stanley and Lazard, are advising clients to invest more in emerging markets as valuations are attractive and the economic growth premium over developed markets is expected to widen. Investors can also find an ever-increasing range of impact investing products. Around half of impact funds focus on emerging markets, with over 672 funds and the cumulative size of this market at US$83.6 billion overall in 2022, according to Tameo. Nor are investors making the stand alone – development finance institutions are – and are pushed to – playing an increasingly catalytic role in de-risking investments and mobilising private capital into emerging markets, helping focus investment where it needs to go.
Sustainability bonds and loans achieve scale
One of the greatest challenges for the impact ecosystem has been the creation of scalable instruments that can attract institutional investors into projects that create financial returns alongside environmental and societal benefits. Green, social, sustainability and sustainability-linked (GSSS) bonds have reached a tipping point. Issuance has grown by some 80% per year on average in the last decade, hitting almost €700 billion (US$740.5 billion) in 2021, making the segment well and truly institutional.
GSSS bonds are becoming ever-more sophisticated in their ability to track how impact is created and measured, enabling their focus to shift further towards results from inputs. According to the Global Steering Group for Impact Investment’s (GSG) own research, issuance of the relatively new sustainability-linked bonds and loans almost equalled green bonds at the end of 2022, and are likely to exceed them in 2023. These products are typically not linked to funding for a specific purpose or project, but rather can be used for general corporate purposes, while still committing companies to measurable targets, such as a reduction in carbon emissions. As a result, sustainability-linked bonds and loans could mark the paradigm shift needed to accelerate corporate actions that really address climate change and other sustainable development goals.
The rewards of bringing diversity and inclusion to life
Not all themes are developing at the same pace, but that does not mean they do not warrant investor attention now. It is clear that diversity and inclusion are moving up the agenda as businesses look to increase the participation of women and minorities, particularly at the most senior levels. In its Diversity Wins report, McKinsey showed that the relationship between executive team diversity and potential financial outperformance had strengthened over time. While this is encouraging, in many cases, diversity and inclusion remain something of a tick-box exercise. Moreover, diversity does not automatically mean inclusion. It doesn’t matter how many varied voices there are in senior roles or at board level if they do not feel empowered to speak.
Getting to true inclusion requires more of us to understand the term “intersectionality” – the notion that a person’s gender, race, sexual orientation, among other factors, impact how they experience the world, and can create different levels of advantage and disadvantage. Without an intersectional lens, our efforts to tackle inequality and injustice will likely perpetuate inequality. Gender-lens investing, as one of the solutions, has progressed, representing around US$13 billion in 2021. But with all voices better understood and heard, there will be endless opportunities, not to mention rewards for companies that develop products and services better suited to the people that need them most.
Support the transformation
Like any other year, 2023 will have its highs and lows. Throughout these, our role will be to ensure that no one gets left behind, and no voice goes unheard. The GSG and its partners will continue to shine a light on the issues and demonstrate how impact investing can make a difference.
By focusing on these three themes, we can help people cope with the food and energy price hikes, make real progress on addressing climate change, and create improved outcomes for people around the world.