Impact investing, which aims to generate positive social and environmental impact alongside financial returns, has been steadily gaining prominence over the past decade. With major players like BlackRock entering the space, impact investing is poised to continue growing and shaping capital flows worldwide. The rise of millennial investors, who care deeply about ESG issues, combined with pension funds and sovereign wealth funds increasingly adopting impact strategies, are fueling this growth. However, impact measurement and management remain thorny issues, requiring standardized metrics and transparent methodologies. Additionally, concerns persist around impact washing and limited exits. Overall though, the field holds tremendous potential for channeling private capital to fund the UN Sustainable Development Goals while delivering competitive returns.
BlackRock, the World’s Largest Asset Manager, has Made Impact Investing a Strategic Priority
With over $10 trillion in assets under management, BlackRock is the world’s largest asset manager. In 2020, BlackRock made impact investing an official third pillar of its sustainable investment approach, alongside ESG integration and screening. It aims to scale its impact investments from $500 billion to over $1 trillion by 2030. BlackRock is seeding a dedicated impact fund, recruiting talent, and integrating impact across its investment processes. Its CEO Larry Fink stated impact investing offers “strong risk-adjusted returns” and criticized pure ESG screened funds as involving too many undesirable tradeoffs. With BlackRock embracing impact across both public and private markets, it legitimizes and mainstreamizes the practice. The move signals impact investing has entered the financial mainstream and will continue growing exponentially.
Millennial Investors are Driving Demand for Impact Investments
Millennials care deeply about social and environmental issues and are twice as likely as other generations to invest in companies targeting specific social or environmental impacts. As millennials inherit wealth and move into their prime earning years, their preferences are shaping investment trends. According to Morgan Stanley, millennials will represent 1/3 of global income by 2025. Their demand is fueling the rise of impact-focused robo-advisors, donor-advised funds, community investment platforms, and other impact investment vehicles. Additionally, women control an increasing share of wealth and are more likely to consider impact. In summary, shifting demographics are providing a major boost to the field of impact investing.
Large Institutional Investors like Pension Funds are Embracing Impact Investing
Large institutional asset owners like pension funds, endowments, foundations, and sovereign wealth funds increasingly view impact investing as an important part of their strategy. A recent survey found 77% of asset owners incorporate impact objectives. Their shift reflects growing evidence that impact strategies can deliver market-rate returns. For example, the $500 billion Dutch pension fund APG targets 7 billion euros for impact private equity investments by 2025, estimating market-beating returns. The $1.2 trillion pension fund Teachers Retirement System of Texas commits over $1 billion to impact. Asset owners’ growing allocations provide impact startups and funds access to abundant, patient capital enabling them to grow. If top institutional investors direct even small portions of their vast assets to impact, it would unleash massive new flows of impact capital.
Impact Measurement and Management Remain Challenging
While the impact investing field has grown dramatically, major challenges around impact measurement and management persist. Unlike financial returns, quantifying social and environmental impact is nebulous and complex. Standardized metrics are nascent and impact data is limited. Transparency around impact methodologies also varies. These issues increase opportunities for impact washing. Additionally, impact startups often lack supportive ecosystems and clear exit pathways. Nonetheless, encouraging progress is being made. B Lab’s B Analytics provides impact monitoring services and GIIRS ratings enable impact fund benchmarking. The GIIN’s IRIS catalog compiles widely accepted impact metrics. The field still requires significant standardization and transparency but momentum is building.
Impact Investing Holds Exciting Potential to Channel Capital to Pressing Global Issues
Despite persisting concerns, impact investing’s growth demonstrates private capital can address social and environmental challenges while generating solid returns. Tremendous investment is required to achieve the UN Sustainable Development Goals from clean energy to financial inclusion. Impact investing aligns private incentives with public goods. Its ability to deliver competitive risk-adjusted returns debunks the notion social mindedness must mean financial sacrifice. Furthermore, innovations like pay-for-success contracts and impact security issuances are unlocking new deal structures. Impact startups are tackling pressing needs from clean water to microfinance previously overlooked by markets. While the field remains nascent, impact investing holds exciting potential to channel capital to fund solutions for the world’s most pressing issues.
Impact investing has gained significant momentum, with major players like BlackRock embracing the approach. Expect the field to continue growing dramatically as millennials control more wealth and institutional investors increase allocations. However, difficulties measuring and managing impact continue and prevent more exponential growth. Overall, impact investing shows promise in directing private capital to public good and debunking notions of inherently lower impact returns.