Impact investing is an investment approach that has gained increasing popularity in recent years. It aims to generate measurable environmental and social impact alongside financial return. The concept was first coined by the Rockefeller Foundation in 2007, marking the beginning of the impact investing movement. Since then, impact investing has evolved from a niche investment approach into a mainstream practice adopted by major financial institutions and asset managers globally. The development of impact investing reflects investors’ growing awareness of their potential to address pressing social and environmental challenges while pursuing profit. This article will provide an overview of the history of impact investing, its current state, and future trends.
The origin and early development of impact investing
The notion of impact investing was first introduced by the Rockefeller Foundation in 2007, which described it as ‘investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return’. The Rockefeller Foundation is recognized for catalyzing the impact investing industry during its nascent stage. In 2009, it supported the establishment of the Global Impact Investing Network (GIIN), which has played an instrumental role in building the impact investing ecosystem through field-building, education, advocacy, and networking. The definition and framework of impact investing were further refined by leading experts and practitioners in subsequent years. For instance, the Bridgespan Group proposed the ‘impact investing spectrum’ in 2009, distinguishing impact-first investors and financial-first investors. During the early 2010s, several pioneering impact investing funds were launched, such as Acumen Fund (2001), Root Capital (1999), Leapfrog Investments (2007), and Omidyar Network (2004). These funds focused on sectors like financial inclusion, agriculture, education, and healthcare in emerging markets. Besides foundations and non-profits, mainstream financial institutions also started experimenting with impact investing in the 2010s. For example, JPMorgan Chase launched a $100 million program in 2007 to support affordable housing and community development. Although the impact investing market was still nascent, it signified the growing role of private capital in driving social progress.
The growth into the mainstream investment approach
Over the past decade, impact investing has gained significant momentum and emerged into the mainstream investment landscape. According to the Global Impact Investing Network (GIIN), the size of the global impact investing market reached $715 billion in 2020 and is projected to exceed $1 trillion this year. The market now consists of over 1,700 organizations. Mainstream asset managers, including BlackRock, Goldman Sachs, Nuveen, and Morgan Stanley, have all established dedicated impact investing products. Moreover, various types of investors have entered the market, ranging from pension funds, insurance companies, corporations, family offices to high-net-worth individuals. The motivations to adopt impact investing strategies are also multidimensional, including to better align investments with mission and values, respond to younger generations’ preferences, as well as to gain access to deal flows. Apart from the growth in aggregate capital, the scope of impact investing strategies has also expanded significantly. Initially concentrated in private equity and venture capital, impact investments now spread across all assets classes, including public equities, fixed income, real assets, and beyond. The locations of impact investments are no longer limited to emerging markets like India and Sub-Saharan Africa. Developed markets, especially the United States and Western Europe, have become key destinations for impact capital. The range of sectors has enlarged from microfinance, agriculture to cover education, healthcare, clean energy, sustainable consumer goods, and more. The proliferation of impact investing reflects the industry’s adaptability to investors’ different risk-return profiles and impact objectives.
Future trends and growth opportunities of impact investing
Looking ahead, impact investing is expected to sustain rapid growth and move towards the center stage of the financial system. According to McKinsey, global ESG-linked assets are on track to exceed $50 trillion by 2025, representing over a third of total assets under management. Impact investing will likely make up a significant portion as it gains moreRecognition from asset owners. More capital with specific impact mandates will become available as mainstream investors continue to embrace the concept. Meanwhile, the industry will keep developing innovative investment vehicles across the risk-return spectrum to accommodate diverse investor needs. Public equities and fixed income products will play a more prominent role compared to the private market dominance historically. Another promising area is community investing that channels capital to historically marginalized groups and places. Impact measurement and management will witness more standardization, providing the basis for accountability and credibility. With the maturing of the industry, issues like impact washing need to be proactively addressed. Overall, the future seems bright for impact investing. As stakeholders build on the progress made and strengthen collaboration, impact investing has the potential to truly catalyze capital markets in driving social and environmental progress.
Over the past 15 years, impact investing has evolved from a fringe concept to a mainstream practice adopted by leading financial institutions globally. The development of impact investing marks investors’ increasing awareness of their potential to address social and environmental issues while generating financial returns. Moving forward, impact investing is expected to continue experiencing exponential growth as more capital and innovative investment approaches become available. The industry will also make strides in building the underlying infrastructure and addressing pertinent issues. Impact investing has cemented its role as a powerful force that directs investment and business activities to create enduring impact.