Impact investing, which aims to generate positive social and environmental impact alongside financial returns, has been gaining significant interest in recent years. As we enter 2023, several key trends are emerging that will shape the future of this rapidly evolving field of sustainable investing. With climate change accelerating and social issues becoming more pressing, impact investing is attracting greater attention from individual and institutional investors alike. At the same time, financial innovation and new policy incentives are creating more opportunities to deploy capital in projects that address pressing global challenges.
Strong growth trajectory will continue as investors shift towards impact
Impact investing has been one of the fastest growing investment strategies over the past decade, with assets estimated to have grown from $8 trillion in 2020 to $15 trillion in 2022 according to the Global Impact Investing Network (GIIN). This strong growth is expected to continue, driven by rising demand particularly from millennials and women investors who see impact investing as a way to align investments with values. According to Morgan Stanley, 85% of millennials are interested in sustainable investing. Asset managers are responding by making it easier for individuals to invest sustainably through mutual funds and ETFs focused on environmental, social and governance (ESG) factors.
More government incentives supporting impact investments
Governments are recognizing the potential for impact investing to help fund solutions to social and environmental challenges while driving economic growth. Policy incentives like tax credits, subsidies and dedicated funds are being introduced in many countries to catalyze impact investments in areas like renewable energy, affordable housing, health and education. For example, the US government’s New Markets Tax Credit has stimulated $60 billion in impact investments in underserved communities. India has set up a dedicated fund to provide credit enhancements that derisk impact bonds focused on WASH, education and health. Such incentives improve the risk-return profile of impact investments and are likely to unlock significantly more private capital flows.
Innovative deal structures facilitating impact projects
Financial innovation is creating new opportunities to fund impact investments in sectors that were previously considered too risky or unprofitable. Novel deal structures like social impact bonds, green bonds and blended finance are enabling private capital to be deployed alongside public and philanthropic funding. For instance, development impact bonds which tie financial returns to achievement of social outcomes have supported projects in education, health and employment in emerging economies. As impact measurement methodologies improve, more such pay-for-success models will likely emerge. Already, the market for green bonds which fund environmental projects has surpassed $1 trillion in cumulative issuance.
Technology expanding access and enhancing impact
Technology is making impact investing more accessible to a wider pool of investors while also improving impact measurement. Digital investment platforms are offering fractional investing in impact projects, thereby opening up the market for individuals with smaller amounts to invest. Big data, machine learning and blockchain are being used for impact reporting and verification, addressing concerns about impact washing. GPS mapping enables more targeted investment in underserved regions, as in the case of Root Capital’s lending to agricultural businesses in rural Africa and Latin America. Thus technological innovation is likely to continue improving the accessibility, transparency and real-world outcomes of impact investing.
Driven by surging investor demand, policy incentives and financial innovation, impact investing is entering a phase of significant growth and development. As this market rapidly evolves, investors have an opportunity to generate competitive financial returns while also meaningfully addressing pressing global challenges like climate change, inequality and healthcare access.