Impact market players say more work needs to be done in terms of education and provision of attractive investment opportunities if a wider group of investors is to be tempted to the impact sphere.
Impact investing is realising its potential for a lot of specialist investors, but challenges lie ahead if the sector is going to be considered part of the mainstream by the wider investment community, according to an impact market survey by German-based impact specialist Blue Earth Capital.
The inaugural edition of Blue Earth’s Impact 360 survey polled 130 impact market participants, of which almost two-thirds were European-based and nearly a fifth were based in North America, with the remainder coming from Asia, Latin America, Africa and Australasia. Of the survey group, 39% were fund managers, 32% were advisors, 16% were limited partners (LPs) and asset owners.
Stephen Marquardt, Blue Earth Capital’s CEO said in the report that its findings indicated that more investors were seeking to generate positive outcomes alongside financial returns.
“The findings are both enlightening and encouraging as the survey highlights the growing confidence among investors in the potential of impact investing to drive meaningful change,” he said.
The need for climate action
Echoing other industry polls over recent years, climate action was identified as the most significant environmental and social focus for impact investors, followed by sustainable agriculture, infrastructure, financial inclusion and healthcare. Predictably, Africa and Asia are seen as providing the most investment opportunities for impact investors, followed by Europe – the latter perhaps partly reflecting the large number of European respondents to the survey.
Private equity is the most popular asset class for respondents making impact investments, used by 72%. Other popular asset classes include venture capital (used by 44%), private credit (36%) and infrastructure investments (31%). Just 8% use listed equities as an avenue to make impact investments.
Encouragingly for the sector, most of those surveyed said their impact investments had either met or surpassed their expectations in terms of financial returns (83%) and impact delivered (96%). There was also optimism on how incorporating impact will affect valuations. Around four-fifths of those surveyed said incorporating impact elements into businesses would have a positive effect on valuations over the next five years, compared to “non-impact” businesses.
Although only 16% of respondents believed impact strategies were already mainstream for institutional investors, 43% thought they would be in the next five years, and most of the remainder (30%) said they would be mainstream within ten years.
Challenges
But it is not all plain sailing. Blue Earth reports that, of the different types of investors, LPs are least convinced that impact investment will become a mainstream strategy for institutions, with nearly 30% of them saying it won’t happen in the foreseeable future or will not happen at all. That compares to 11% of all respondents.
The survey also reflects a feeling among impact investors that the sector is still not on the radar for other investors in the way it should be.
Only 14% of respondents thought the broader non-impact finance community had a good or very good understanding of how impact investment works. Around a third thought non-impact investors had a poor understanding of the main characteristics of impact investing, the investment opportunities, the impact agendas of businesses, and the skill sets needed to invest in the space.
Respondents identified diverse challenges in terms of attracting more capital to impact investment. They cited a lack of tailored impact investment products, the complexity of impact measurement and reporting, and the lack of transparency on impact being delivered as being among the top themes that need addressing.
Around 40% of respondents said industry regulation was not fit for purpose because more regulation was needed to reduce impact washing. But a further 14% said it was not fit for purpose because there was too much impact-focused regulation.
There were diverse views on the usefulness of impact-linked compensation, which links fund manager compensation to impact performance of their investments. While 20% of respondents thought it was an essential tool and 35% thought it was an important component of impact investing, 40% said it was only one possible component and was not always suitable. Meanwhile 5% classified impact-linked compensation as an unhelpful distraction.
A majority of those surveyed did think it was important for impact fund managers to take a more hands on role with the companies in which they invest. Three-quarters said it was either essential (40%) or important (35%) to demonstrate an ‘investor contribution’, either through improved access to capital or through direct engagement to enhance impact.
