Respondents show optimism over impact investment opportunities, an improved landscape for specialist recruitment and progress towards impact measurement harmonisation, but are less happy about regulatory developments.
Impact investors plan to increase capital allocation to emerging markets and the energy sector over the next five years, undeterred by heightened risk caused by Russia’s invasion of Ukraine, supply chain problems and rising interest rates, according to research from the Global Impact Investing Network (GIIN).
The report, entitled Emerging Trends in Impact Investing is based on data from 308 impact investing organisations around the world regarding their business in 2022 and their plans. It is the last of four reports from the GIIN, the New York-based non-profit, examining various facets of impact investment. Impact Investor covered previous reports in the series in June and August.
Top of the list of global challenges affecting investor strategies were the climate crisis (45% of respondents), the COVID-19 pandemic (42%) and rising interest rates (28%).
However, most investors told GIIN researchers that they were pleased with their performance against this difficult backdrop. Of those polled, 79% indicated they had outperformed or met their financial performance expectations, while 88% said the same for impact performance.
Emerging markets were viewed positively as future destinations for impact investment, with 56% of investors intending to increase their allocation of impact assets in sub-Saharan Africa, 48% planning an increase in Latin America and the Caribbean, and 42% seeking to boost their allocation in Southeast Asia. The GIIN said the fact that 18% of investors planned to reduce their allocations to Eastern Europe, Russia & Central Asia, may be due to the impact of the Ukraine invasion.
Sectors
Sectors where impact investors plan to increase their allocations include energy (69%), food and agriculture (60%) and infrastructure (59%). Unsurprisingly, most investors polled targeted positive impact for climate change mitigation and/or climate adaptation and resilience (82%). Leading categories for these investors were energy (79%), agriculture and land use (70%) and waste management (57%).
However, the GIIN cautioned that 36% of investors do not consider forecast potential for future avoided emissions when assessing whether climate investments or funds fit into their climate solutions portfolio, and 60% do not assess based on past and present GHG emissions.
“Use of impact data to select and manage investments toward intended impact results is critical. This lack of GHG emissions assessment may reflect challenges in the industry tools available to assess the impact of climate solutions,” the report’s authors said.
The availability of personnel with requisite skills required by the impact investing sector is also improving, according to survey respondents. Progress here was reported by 86% of investors. That finding professionals with relevant skillsets seemed no longer to be a major challenge shows industry progress in developing specialisations related to IMM, deal structuring, sectoral knowledge and other relevant impact investing skillsets, the GIIN said.
Another area giving grounds for optimism was in standardisation of impact measurement (IM). Of those surveyed, 84% said progress was being made on harmonization of IM frameworks. The GIIN said this highlighted an increased focus on a narrower group of impact measurement frameworks over the past five years. Around three-quarters of impact investors use the United Nations Sustainable Development Goals to guide their impact strategy and a similar proportion use the GIIN-managed IRIS+ system for measurement and management.
Adaptability to macro challenges
Dean Hand, chief research officer at the GIIN, said the results showed that impact investors had proved adaptable, allowing them to find opportunities in adverse investing conditions.
“Impact investors are navigating the effects of global macro challenges – such as the COVID-19 pandemic, Russia’s invasion of Ukraine, inflationary pressures and supply chain issues, among others – while still ensuring overall financial and impact performance remained strong in 2022,” he said.
However, the survey shows that a number of challenges remain. The inability to compare impact results against those of peers was identified as a continuing problem to some extent for 91% of investors, with 37% saying it was a significant challenge.
The effects of uncertainty over regulatory requirements for the impact sector – an issue still creating waves – are also reflected in survey responses. Notably, 9% of investors said the situation regarding clear guidance from government regulatory bodies on what was required for an impact investing strategy had worsened, while 28% said there had been no progress on regulatory guidance.
