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Capital flows into impact funds down 10% in ‘challenging’ year

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Published: 1 February 2022

Capital commitments to impact funds dropped last year due to Covid, but the sector has shown “remarkable resilience” throughout an unprecedented two-year crisis, Phenix Capital said in its annual report on the industry

Climate and renewable energy-related SDGs for projects including wind power generated the most capital commitments last year. Credit: iStock

Capital flows also declined due to remote due diligence processes and a preference for “re-ups” from asset owners directed allocations into financial-only investment funds. This “affected flows into impact investing solutions”, Phenix Capital Group wrote in its 2022 Impact Fund Universe Report

The number of impact funds that raised capital dropped by one-fifth to 196 last year compared to the year before, the Amsterdam-based impact investment consultant said.

Phenix said 2021 had been a “cathartic year on many levels for the world and the impact investing industry”. But it stressed the sector had shown “remarkable resilience” throughout an unprecedented two-year crisis.

“The impact investment market has always been a strong contributor to investments in healthcare,” said Dirk Meuleman, chief executive officer of Phenix. “But especially in the first year of Covid, impact investing really stepped up here and healthcare, care homes, healthy plant-based foods and healthy lifestyle companies have all attracted significant money from impact investors.”

Phenix has been tracking the allocation to impact investing since 2015. To date, some €477 billion has flowed to more than 2,000 funds, with an average of €97 million per fund, it said.

Private equity still leads the way

Thirty-five percent of all capital flows into impact funds in 2021 came from private equity, followed by public equity (18%), private debt (17%), and infrastructure (10%). That’s a reversal from the past, Phenix said, with private equity historically representing half of all capital commitments, with public equity typically attracting less than one-tenth. 

Although Climate (SDG 13) and Renewable Energy (SDG 7) related SDGs kept “driving the flows”, SDG 12 (focused on responsible production and consumption) rose in prominence “with a notable increase relative to historical commitments”, Phenix said. It further noted a “remarkable increase in 2021 in commitments to CleanTech funds”.

The Dutch consultant further said it was “encouraging to see the impact investment community catalysing and shifting capital towards innovations and solutions to tackle the disruptions caused by the pandemic crisis, especially in emerging and frontier markets”.

It also observed “a steady flow of solutions in the market across asset classes, instruments and geographies that are attractive to asset owners and allocators, and aim to deliver market-rate financial returns while tackling some of humanity’s most significant challenges”.

2022 trends?

Phenix asked two industry experts about this year’s trends.

Rebecca Rehn, ESG analyst at Alecta Investment Management, said the sector may see more blended finance initiatives this year. Alecta, Sweden’s biggest pension fund, is regarded as a pioneer in impact investing.

“As institutional investors, we struggle to find investable opportunities in emerging markets due to numerous transactional risks emanating from market volatility, political instability, and illiquid markets,” said Rehn. 

“At the same time, we are aware that this is where the financing transition is needed the most. Therefore, I anticipate an increased focus on blended finance vehicles, which is an important prerequisite for institutional investors to de-risk our investments,” Rehn added.

Vincent Triesschijn, global head ESG & sustainable investing at Dutch lender ABN Amro, expected much of the focus to be on “regulatory implementation and compliance”, especially in Europe.

“I would be happy to see this resulting in a shift in strategic agendas towards more outcomes-oriented investment strategies (classified as SFDR article 9),” Triesschijn said. 

‘General lack of standardisation’

Both Rehn and Triesschijn called for more harmonisation in the way the sector measures impact.

“We see more alignment of portfolios with the UN SDGs as a common ‘language’ within the industry,” Triesschijn said. “This is a great help to identify opportunities and build a portfolio that suits client preferences.” He added ABN Amro had seen “serious demand” for biodiversity and climate-related investment strategies, “naturally with the desire to report on the outcomes of such strategies.”

“The challenge, from our perspective, is how to combine different theories, methodologies and frameworks to support aggregated impact reporting, progress measurement and regulatory expectations (like SFDR, EU Taxonomy, Mifid),” Triesschijn said.

Rehn said a ”general lack of standardisation” has made it “fundamentally difficult for us to aggregate the metrics in an adequate way”. But she did point to “new and promising initiatives to close this gap”, including the Nasdaq Sustainable Bond Network, which has created a platform where issuers can upload their impact data.

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