CSR: SRI assets hit $8.72 trillion
ESG criteria increasingly used by investors; impact investing still has growth challenges.
The amount of professionally managed assets invested in sustainable, responsible or impact investment products has risen 33% since 2014. According to data released at the end of last year from US SIF: The Forum for Sustainable and Responsible Investment, $8.72 trillion is invested in such products – that is more than one fifth of all assets professionally managed in the US.
Giselle Leung, GIIN
Of that, impact investing is the smallest sector. Estimates put the impact investment industry at just $77.4 billion in assets under management, but forecasts for its growth are positive. Monitor Institute and the Global Impact Investing Network (GIIN) forecast the market could reach $500 billion by 2020, putting impact investing at roughly 1% of all globally managed assets. The Calvert Foundation estimates it could be even bigger, at $650 billion.
Current impact investors certainly seem to be willing to increase their commitments. A survey of 62 investors by GIIN released in December shows that they had collectively increased their allocations to impact investing from $25.4 billion in 2013 to $35.5 billion in 2015. It is positive news for the industry. A lack of track records and success measurements due to its infancy have contributed to the slow growth rates. Some 98% of GIIN’s survey respondents indicated impact performance in line with or exceeding their expectations and 85% to 95% of respondents indicated financial performance in line with or better than their expectations.
Growth is expected to come predominantly from high net-worth individuals – particularly female and millennial private clients. More than 70% of women consider social or environmental impact as important to investment decisions, compared with just 49% of men. That is an indicator of where money will move, as 66% of US wealth is forecast to end up in the hands of women within the next decade.
According to US Trust, 85% of millennials also believe social and environmental impact is important to investment decisions – again a group expected to become wealthy, or benefit from wealth transfer.
As more products are introduced that meet the requirements of institutional investors, it could be a game-changer for scaling the industry - Giselle Leung, GIIN
Giselle Leung, director at GIIN, says supply of capital to impact investments is not going to be the main challenge when it comes to growing the industry. The majority of impact investors originate in Europe or the US and, she says, particularly in Europe, there is momentum from not just high net-worth clients but also institutional investors. It is institutional involvement that will move the needle on AuM, but Leung says what is needed for them “are products and vehicles that can meet their needs. Particularly those that are large enough to absorb the minimum ticket size.”
Another challenge Leung points out concerns market-based solutions. The regions where most of the impact investment money is flowing are sub-Saharan Africa, South Asia and Latin America, and there she says any product is dependent on the mechanisms in place to support it, as well as on local governments’ willingness to implement policies supportive of impact investment vehicles.
Julia Balandina Jaquier
Julia Balandina Jaquier is the author of the ‘Guide to Impact Investing’. She points out, for example, that difficulty in enforcing legal contacts and corruption can make investment challenging in some emerging markets countries and that more due diligence is often required, which can also lead to longer times to close deals.
When it comes to type of product, the majority of impact investments tend to be through private equity funds or private debt. The top three sectors receiving the highest proportions of assets under management among GIIN’s survey were microfinance, other financial services and energy, respectively. Collectively, these three sectors accounted for the majority of assets under management.
But Leung says that institutions are looking at how to create products that are familiar to institutional investors in terms of features and structure. Leung says some product developers are thinking about this through the lens of debt products.
"As more products are introduced that meet the requirements of institutional investors, it could be a game-changer for scaling the industry," says Leung.
That is partly the reason that money has flowed into SRI products at a faster pace than impact investments – it is simply easier to build products. The number of investment funds investing in public markets and now incorporating environmental, social and governance (ESG) factors in the US alone rose above 1,000 in 2016.
And the use of ESG screening shows no signs of slowing. Climate change is now the most important factor impacting investments.
This year $3.57 billion of investments in the US applied restrictions regarding fossil fuels – three times the amount of assets as in 2014.
And conflict risk analysis, including the exclusion of companies doing business in countries with repressive regimes or state sponsors of terrorism, was the largest ESG factor for both money managers and institutional investors.