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UN SDGs • CLIMATE ACTION • IMPACT INVESTING
One of the challenges of measuring the size of the impact investing market is the lack of a clear and consistent definition of what constitutes an impact investment. Different investors can have different criteria and expectations for their impact investments, and there is no universally agreed-upon standard or framework for reporting and verifying the impact outcomes. However, some organizations have attempted to estimate the size of the market based on surveys, reports, and databases of impact investors and intermediaries.
One such organization is the Global Impact Investing Network (GIIN), a nonprofit that aims to increase the scale and effectiveness of impact investing around the world. According to its 2022 Annual Impact Investor Survey, which collected data from 1,289 impact investors managing $623 billion in impact assets, the total size of the impact investing market was estimated at $1.164 trillion as of the end of 2022 . This represents a significant growth from previous years, as the same survey estimated the market size at $715 billion in 2020 and $239 billion in 2019.
Another source of data is the International Finance Corporation (IFC), a member of the World Bank Group that provides financing and advisory services to private sector projects in developing countries. The IFC has developed its own definition and principles for impact investing, which require investors to manage their impact throughout the investment lifecycle and report on their progress. Based on its analysis of funds that align with its principles, the IFC estimated that the potential market size for impact investing in emerging markets alone was $2.3 trillion as of 2020. This suggests that there is a huge untapped opportunity for impact investors to support sustainable development in low and middle-income countries.
Another challenge of assessing the opportunity for impact investments is the trade-off between financial returns and social or environmental impacts. Some investors may be willing to accept lower returns or higher risks in exchange for higher impacts, while others may seek market-rate returns or better while still achieving positive impacts. The optimal balance between returns and impacts may vary depending on the investor’s objectives, preferences, constraints, and risk appetite.
However, some studies have shown that impact investing can offer competitive or even superior returns compared to conventional investing, while also delivering significant impacts. For example, a 2015 study by Cambridge Associates and GIIN found that the median impact fund realized a comparable return when compared to non-impact funds. However, when looking at specific segments of the market, such as emerging markets or smaller funds, the impact funds outperformed their non-impact peers. Moreover, the study found that there was no correlation between financial performance and social or environmental performance, meaning that higher impacts did not necessarily imply lower returns.
The opportunity for impact investments is not only large but also growing. As the world faces unprecedented challenges such as climate change, poverty, inequality, health crises, and social unrest, there is an urgent need for more capital to address these issues and achieve the United Nations Sustainable Development Goals (SDGs) by 2030. The SDGs are a set of 17 global goals that cover various aspects of economic, social, and environmental development, such as ending hunger, ensuring quality education, promoting gender equality, and combating climate change. According to the UN, achieving the SDGs will require an annual investment gap of $2.5 trillion in developing countries alone. The value of opportunities that align with the UN Sustainable Development Goals (UN SDGs) was estimated as a $12 trillion dollar opportunity from 2017 to 2030.
Source: Better Business World; The Report of the Business and Sustainable Development Commission; 2017
Impact investing can play a vital role in bridging this gap and mobilizing more capital for sustainable development. Additionally, the world is expected to have increased demand on strained resources as a result of the continued growth of the middle class globally. This is expected to increase global water demand by 40% by 2030 and global energy demand by 50% by 2050.
1. World Bank Group, 2030 Water World Resources Group (WRG) 2. US Energy Information Administration (EIA) 2019.
Impact investing is also attracting more attention and support from various stakeholders, such as governments, regulators, corporations, foundations, and consumers. For example, in 2020, the European Union launched the EU Taxonomy for Sustainable Activities, a classification system that defines what constitutes an environmentally sustainable economic activity and sets performance thresholds for different sectors and activities . This initiative aims to provide clarity and transparency for investors and businesses that want to align their activities with the EU’s climate and environmental objectives. Similarly, in 2021, the US Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force, which will focus on identifying and pursuing misconduct related to environmental, social, and governance issues . This reflects the growing demand and scrutiny from investors and regulators for more disclosure and accountability on ESG matters.
3. Business and Sustainable Development Commission (BSCD) 2017 4. World Health Organization (WHO)
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