Breaking down the latest GIINsight

The GIIN’s latest GIINsight is out, this time documenting a five-year qualitative and quantitative survey of impact investor trends and insights. The world of investment has changed drastically since 2017 when the first survey was conducted but despite global pandemics, inflation woes, and breakdowns in supply chains, impact investing has maintained steadfast growth. 

All in all, assets allocated to impact investing have increased, impact strategies in public markets have expanded, capital funding from institutional investors has grown, and impact investments have demonstrated strong financial performance that meet or exceed expectations.

Delving into the geographies, allocations show that the US & Canada and sub-Saharan Africa are the most common geographies of investment, gathering 45% and 42% respectively. The US & Canada was the fastest-growing region, growing at a CAGR of 53%, followed by Western, Northern & Southern Europe (33%) and then East Asia (21%) with investments in Asia overall growing at a CAGR of 15%. Despite the plethora of allocations in sub-Saharan Africa, market-rate investors allocated just 6% to the region – it has been below-market-rate investors allocating a third of their AUM to the region making up the numbers. 

In terms of future plans, just a third of investors planned to increase allocations to sub-Saharan Africa and only 25% planned to increase allocations to Latin America & the Caribbean, reflecting some investor interest in these emerging market regions. With the tough market conditions of 2022, it is clear private capital flows to emerging markets are decreasing as risks get tougher to manage – and so with the timing of the report, it is interesting more investors did not express a desire to increase allocations to emerging markets.

About 55% of investors in the sample direct their capital towards energy, followed by just over half (51%) who allocate it to healthcare, reflecting the continuous focus of impact investments on financing basic needs, especially in emerging markets. Indeed, a significant majority of emerging market-focused investors (86%) included at least some allocation to financial services and microfinance in their portfolios and, collectively, 49% of their AUM are directed to this impact theme, compared to just 6% of AUM from developed market investors who focus on financial inclusion. Investors also disclosed their planned impact allocations with over half (55%) seeking to increase allocations to energy over the next five years, followed by food and agriculture (48%).

Of the vast majority of investors who targeted at least one UN SDG (96%), the most common were decent work and economic growth (SDG 8; 80% of investors), climate action (SDG 13; 74%) and gender equality (SDG 5; 71%). As these SDGs are commonly cross-cutting lenses for viewing impact, it makes sense they made up the most popular targets. 

However, despite global recognition that life below water (SDG 14) is critical to tackling the climate crisis and a growing interest in the blue economy, less than a third of investors (32%) are aiming to positively impact ocean health. Another contentious issue has been the rise of anti-ESG sentiment in the US, although this has not yet shown up in the data. During the GIINsight press conference, members of the investment board revealed that though the polarisation of the ESG label in the US raises worries, there continues to be broad bipartisan support for the issues covered by ESG, such as climate change and low-income support.  Investors from Europe revealed they are closely monitoring the issue as they market many products to the US, but those from APAC commented that the region was aware of the issue but unfazed. 

Moving onto returns, the report revealed that, despite perceptions of risk in emerging markets and ESG, a vast majority of impact investors target risk-adjusted market-rate returns (74%), while the remaining target below-market-rate returns either closer to market-rate (14%) or closer to capital preservation (12%). One APAC-focused investor emphasised how important it is for the impact investment market to communicate the success of investments, stating that their portfolio was 7 or 8 benchmarks higher than NASDAQ. Another agreed, arguing there was a need for better financial benchmarks on auditings which display that impact investors are achieving competitive risk-adjusted market returns, and can communicate this in a clear way.

Due to the anonymous nature of the survey, investors were seemingly honest about their underperformances. Only 11% of developed market investors indicated underperforming relative to financial performance targets compared to 22% of emerging market investors. Just 30% of below-market-rate investors reported underperforming relative to expectations on financial performance compared to 11% of market-rate investors. 

One member commented that the survey began in an incredibly low interest rate period (2017) before Covid, before 2022, and since then the very nature of investments has changed. They argued we were seeing more and more impact investors wanting to invest impact in the public market, in listed equities to help establish some norms and boundaries for what counts as impact. Another investor agreed, stating that public debt is showing up as one of the fastest growing industries, as yields in public debt are attractive and can stand as a great diversifier in portfolios. They continued that private debt remained a downside defence when equities become more volatile.

Two more GIINsights are coming in the next few months to contextualise the impact investor story even further. The Impact Measurement and Management Practices GIINsight will be released in July, and the Emerging Trends in Impact Investing GIINsight will follow shortly after in August.