A new report from the UK’s Impact Investing Institute highlights the country’s leading position in impact investing. However, industry experts warn that addressing existing barriers is crucial for scaling up growth.
Impact investing in the UK’s is expanding fast and attracting a wider pool of investors than ever before, but more institutional investment needs to be mobilised, according to speakers at an event to launch a new report from the Impact Investing Institute (III) on the state of the sector.
The report found that the UK impact investing market has grown to £76.8bn (€91bn) of assets under management by end-2023. That represents £19.3bn rise compared to the figure at the end of 2020 – a 10.1% compound annual growth rate.
This performance comfortably outstripped that of the wider UK asset management sector, which had an annual growth rate between -2% and 0% over the same period, the III said.
The report also found that a higher share of impact assets in the UK are being managed by investment managers and development finance institutions (88%) – rather than asset owners such as foundations and pension funds managing their own impact investments – than was the case globally (68%).
The report’s findings were produced via a market survey and interviews covering more than 100 key market actors, thought leaders, and policymakers. III collaborated with the Global Impact Investing Network (GIIN) on data collection.
Most UK impact investment stems from the private sector – around 85% of the total, according to the survey. But David Krivanek, the III’s senior programme manager, who led work on the report, said others were helping to bolster the market.
“What’s been really notable since we last did this research is really the expansion to other asset classes, and particularly public markets, so public equities, public debt, etc. We’ve seen a lot of launches of new strategies in this space over the last few years, and that has obviously been a key factor in the growth,” he said during the launch event at London’s Guildhall.
The top sectors for impact investing identified in the report are financial services, including microfinance and community finance, healthcare, housing, energy, and information and communications technology.
But other sectors are now seeing increased investment, including place-based and nature-based investing, as the III’s chief CEO Kieron Boyle highlights in a viewpoint article on the report’s findings for Impact Investor.
Institutional investors
The UK impact investment market may account for around 8% of the global impact market, but it still accounts for just 1% of the overall UK investment market, so there is plenty of room for growth into the mainstream.
However, for the impact market to expand rapidly, institutional investors will need to be play a significant role and they said they still faced a number of perceived barriers. These include a lack of suitable investment opportunities, inadequate transparency on sustainability and impact of potential investments, worries over compatibility with fiduciary duty, and concerns over financial and impact performance, according to those interviewed for the report.
III and other UK organisations such as Pensions for Purpose have produced research over recent months in which they aim to show that impact investments by institutions can be fully aligned with fiduciary duty and yield market-rate returns.
Minal Patel, a partner at renewable infrastructure manager Schroders Greencoat, told the event a shortage of capital meant more needed to be done to allow big investors like insurers, as well as local government pension pools, to invest in large-scale infrastructure projects if the recently elected UK government’s energy transition targets were to be met.
“There’s a shortage of capital. So if the government has an ambition to reach our net-zero goals by 2030 instead of 2035, and we need roughly £100bn of capital to flow into the market in the next six years, it’s a huge change,” she said. “It needs local government pension schemes to roll in, but it also needs directional change to allow insurers to come in. At the moment, insurers invest in infrastructure debt, and they are penalized for investing in infrastructure equity. So there needs to be a step change there.”
Michele Giddens, CEO of impact investor Bridges Fund Management, said insurers were among new investors in its funds, joining the pension funds that have traditionally comprised most of its client base. The pension fund mix is also changing.
“As pensions move from direct benefit to direct contribution, we’re seeing a real interest from the DC pension funds in moving straight into impactful, sustainable and impact investments as they start, in particular, to think about private markets,” she said.
But, while the impact investment pot may be growing, it is not necessarily going to where it is needed most, the event heard.
Henry Kippin, CEO of North East Combined Authority, said more effort was required to ensure impact investment flows to the UK’s less well-resourced regions such as north-east England, which includes the cities of Newcastle and Sunderland.
He told the event the north-east region had long been a “cold spot” for public and private investment, but that it remained difficult to access “the wall of money willing to do social good” that he was constantly being told existed.
“We actually need to have a more constructive conversation about how we work with the private sector and with the impact investing community, more specifically, to build proper investment pipelines for regions that get beyond lowest-common denominator cherry picking,” Kippin said.
