As we celebrate the 10th anniversary of the coining of the term impact investing, it is exciting to see the impressive growth this powerful practice is experiencing. While some organisations have been engaged in it for decades, the term itself was first used in October 2007, when a small band of pioneering investors came together in Italy to discuss the possibility of developing a coherent market.
Much has happened since then. Impact investing has moved from the margins toward the mainstream, with a growing number of major financial institutions, foundations and fund managers recognising the commercial and social/environmental opportunities it offers.
Impact investing takes place across all asset classes, with investors in private markets particularly active. Research shows that over 75 percent of impact investors now have at least some allocation via private equity and nearly one in three invests predominantly through this instrument. Family offices and high-net-worth individuals have been pioneers in impact investing, not least because of their orientation towards risk and innovation, and this has been a driver in impact investments flowing through private equity funds. As the industry has grown, a strong track record has been established, with sectors such as microfinance, clean energy, and timber/conservation demonstrating good commercial viability. Institutional investors – such as pension funds, endowments and insurance companies – are beginning to enter the market in greater numbers.
Of course, we still need a lot more capital to be deployed. Meeting the ambitious targets set by the UN’s Sustainable Development Goals requires trillions of dollars in capital per year to tackle crucial issues such as hunger, social injustice and climate degradation. Impact investing has the potential to make a major contribution, but we need it to scale rapidly.
One major challenge the industry faces is in being able to clearly communicate its impact, in simple, yet rigorous ways that are standardised. The Global Impact Investing Network has prioritised this challenge and we are excited to be working with key industry stakeholders towards a solution, which we believe will open up impact investing to many more investors. Another key challenge is the availability of capital across the risk-return spectrum. Currently there are significant shortfalls in the very early stage, high-risk segment, in options for retail investors, as well as in secondaries markets that provide liquidity and exit options for investors. We are seeing some promising early innovation here also, especially in the development of financial products designed to address the most critical social and environmental challenges of our time.
Private equity investors have an important role to play if we are to build a just and sustainable world where everyone has come to understand the full power of their investment capital to drive social and environmental change. This will be a world where investors aren’t just counting more money, but making more money count.
Imagine future generations who are able to live in an equitable society on a healthy and sustainable planet, thanks in no small part to the fact that investment capital has been transformed into a global force for good.
That is the potential of impact investing. Please join us in making this vision a reality.