Giving Compass' Take:
- Yasemin Saltuk Lamy et al. discuss how the impact investing movement has grown since 2010, and make predictions for its trajectory over the next ten years.
- What relationship do impact investing and philanthropy have? How can you engage in both activities?
- Learn about getting involved with impact investment.
What is Giving Compass?
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Just over 10 years ago, JPMorgan and the Rockefeller Foundation, together with the Global Impact Investing Network (GIIN), published a report claiming that impact investment was an emerging asset class that would reach between $400 billion and $1 trillion in assets under management by 2020. At the time, this prediction seemed like a very ambitious forecast to us as authors of the paper and to the people who read it.
Our doubts were misplaced. In 2020, the market reached roughly $715 billion in assets under management, according to GIIN. The International Finance Corporation (IFC) put the estimate even higher: $2.1 trillion. With such remarkable growth over the last 10 years, we wondered how far impact investment might advance from 2020 to 2030.
To answer this question, we need to step back to note a few important trends. For one, we know that the climate crisis, economic inequality, gender disparity, racial injustice, and other crises—prime targets of solutions supported by impact investments—were already posing deep challenges to governments around the world at the start of this decade. We know there is a $2.5 trillion annual gap in the funds needed to deliver the Sustainable Development Goals (SDGs) by 2030. And we all know that the COVID-19 pandemic has devastated and disrupted the lives of people around the world; it has also made it even harder to achieve the SDGs as governments shift resources and take on new levels of debt to survive the threats of the disease, including the exacerbation of inequalities.
Not only will private impact investment capital be key to funding the SDGs, but it will also play an important role in finding solutions to problems conventionally seen as the domain of the public sector as it struggles with new and unprecedented crises. Given those pressures, what opportunities and innovations in impact investing might we see over the next 10 years? To get an idea of where things might be headed, we take a look at where they've been in three areas we believe play an outsized role in the goals and practices of impact investing: equity and inclusion, climate, and financial and analytical tools.
1. Diversity, Equity, and Inclusion (DEI)
Historically, there was little the private sector was expected or willing to do about inequality, especially in the free market Milton Friedman capitalism of the past decades. Today, as Friedman’s doctrine abates and businesses increasingly recognize their responsibilities to stakeholders instead of just shareholders, investors have a greater opportunity to improve the equality of access to affordable, high-quality capital, goods, or services for all people.
Much impact investment over the last decade was focused on minimizing the increase in global temperatures, or climate change “mitigation.” In 2017 and 2018, mitigation projects made up 93 percent of total climate finance. Renewable energy opportunities have often been the focus of such funding—the same two years, they made up 58 percent of climate finance. Today, investors can find a growing set of options to support communities struggling with climate change and to achieve global “net-zero” carbon emissions.
Improved standards of impact measurement and management have helped elevate the role of impact investing over the last decade, demonstrated by more and more mainstream asset managers incorporating the practice into their products. The increased attention has also brought a healthy dose of skepticism about “impact washing,” or attributing impact to investments when it isn't warranted. To grow impact investing over the next 10 years, we need more publicly listed investment vehicles and more improvements in measurement and standards to assuage investors' fears about the integrity of the field.
Read the full article about impact investing by Yasemin Saltuk Lamy, Christina Leijonhufvud, and Nick O’Donohoe at Stanford Social Innovation Review.