Impact investments can take the form of various asset classes.
No matter the asset classes you choose, one of the basic goals is to reduce the negative effects of business activities on the social environment. It’s for this reason that most investors who use this strategy consider a company’s corporate social responsibility (CSR) before involving themselves with the company.
Most impact investing is done by institutional investors such as private foundations, pension funds, banks, and hedge funds. This strategy has been praised for its potential to reconcile traditional financial markets’ key shortcomings.
Even so, the World Economic Forum revealed that, out of the tens of trillions in global capital, only a cumulative total of under US $40 billion was dedicated to impact investments in 2013. However, things have changed since then.
The Bill & Melinda Gates Foundation is one of the best examples of an impact investment fund. The foundation is mostly engaged in philanthropy, although it also has a strategic investment fund with $2.5 billion under management. This is invested in ventures aligned with the foundation’s philanthropic goals.
What is the impact investing market size?
As the following statistics show, the impact investing market size certainly has grown since 2013:
The Global Impact Investing Network (GIIN) found that, in 2022, the impact investment market size amounted to US $1.164 trillion in assets under management.
According to Research and Markets, the global impact investment market grew from $420.91 billion in 2022 to $495.82 billion in 2023, marking a 17.8% compound annual growth rate (CAGR) and indicating a robust expanding sector.
Why is impact investing changing?
The impressive CAGR of impact investing over the last few years is arguably one of the clearest signs that the sector is not only expanding but also evolving.
A closer look at the sector and its growth reveals a few interesting points worth considering if you’re looking for investment opportunities that go beyond traditional options.
In 2022, Bank of America found that 80% of young investors are interested in alternative investments such as commodities, private equity, real estate, and other tangible assets.
These investors allocated three times more of their investment portfolios to alternative strategies (16%) and half as much to stocks (25%) than older investors.
In comparison, older investors allocated 5% of their portfolios to alternative strategies and 55% to stocks.
75% of young investors said it was only possible to generate above-average returns with traditional stocks and bonds.
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These findings by the Bank of America show that the shift in influence and control over the largest share of US personal wealth (approximately $84 trillion) is expected to pass primarily from Baby Boomers to Gen X and Millennials through 2045.
A 2022 survey by the Stanford Graduate School of Business, the Rock Center for Corporate Governance, and the Hoover Institution found that two-thirds of Millennial and Gen Z investors were very concerned about environmental and social issues like carbon emissions and income inequality.
Conversely, two-thirds of investors 58 years old and older said they were only somewhat or not at all concerned about such issues.
Given Millennial investors’ socio-economic and environmental concerns, it’s not surprising that this demographic is playing a large role in growing and evolving social impact investing.
How do impact investments perform financially?
The impact investing approach focuses on more than just turning a profit.
Investors who adopt this strategy have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility.
A Royal Bank of Canada survey of international investment studies found that impact investing did not negatively impact investor returns.
GIIN’s 2019 Annual Impact Investor Survey found that 91% of impact investors were pleased with their performance.
The majority of investors surveyed in GIIN’s 2020 Annual Impact Investor Survey reported pursuing competitive, market-rate returns.
The table below, drawn from GIIN statistics, sheds more light on the target returns that investors seek principally:
| Percent of Respondents | Target Financial Returns Principally Sought |
|---|---|
| 67% | Risk-adjusted, market-rate returns |
| 18% | Below-market-rate returns: closer to market rate |
| 15% | Below-market-rate returns: closer to capital preservation |
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Increasingly popular among younger investors, impact investing is a strategy that offers investors the chance to grow their money while contributing to making a real, measurable difference in the world around them. As can be seen from the sector’s 17.8% CAGR as well as numerous surveys, the sector is not only growing but also evolving.
If you are thinking about making impact investments part of your portfolio, you need to find a registered financial advisor.
Unbiased matches you with an expert who can provide financial advice that ensures your impact investing yields the best results.
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