There hasn’t been a better time to adopt an impact investing strategy than now, according to UBS Chief Investment Office (CIO) Wealth Management Research.
In a report, UBS noted that impact investing, which was first coined as a term in 2007 by the Rockefeller Foundation, is emerging at a time when total global financial assets are at all-time highs. Three years ago, the aggregate global assets reached $225 trillion, three times the world gross domestic product levels. And global high net-worth wealth was a record $52.6 trillion in 2014, with 92 percent of high net-worth individuals saying social impact contribution is important to them.
Assets under management targeted at impact investments have been growing. Whereas impact funds raised $10.3 billion in 2013, they raised $77 billion last year. The strategy has been diversifying across sectors, with real assets pushing out microfinance out of its position as the most popular sector for impact. In terms of geography, Sub-Saharan Africa and Latin America immediately follow North America for target regions.
Although impact funds returned 6.9 percent between 1998 and 2010, compared with conventional private investment funds that returned 8.1 percent in the same period, UBS said this difference is not “statistically significant given the large performance variability across funds, fund types and time periods.” Rather, the important fact for impact investors to remember is that “thorough manager due diligence and selection” is more crucial to realising financial returns in impact than just seeking a manager with an impact strategy, it said.
The expectations and direction of capital flow are changing due to the increased focus on sustainability and impact by the Millennials, who are expected to inherit $30 trillion in the next few decades from their parents and grandparents in North America alone, UBS said.
It also doesn’t hurt that, aside from private debt and equity, two of the most popular strategies for impact investing, governments and international organisations are increasingly considering the strategy. For example, the G8 countries launched a dedicated taskforce for impact investing three years ago.