The Dual Benefit of Impact Investing: Social Good and Competitive Returns

We aren't here to fix the market; we are here to fix the planet. Once the planet is fixed, the market will fix itself." - Satya Tripathi, Secretary-General of the Global Alliance for a Sustainable Planet 

Impact investing is kind of like looking beyond just making money.

Instead of only focusing on financial returns, it also considers things like the environment, social issues, and good governance (ESG) when deciding where to invest. It’s about balancing profits with doing some good.

As an approach, it has gained quite a bit traction in the past decade, demonstrating that profitability and purpose don’t have to be mutually exclusive.

According to Impact Investor and IPE (Investment & Pensions Europe), impact investing has been growing at an impressive 20% compound annual growth rate (CAGR) both in Europe and globally.

But is it a passing fad or are its roots truly embedded now in the landscape of investment?

Let’s take a closer look at what impact investing involves and the numbers that back up its growing importance.

Understanding Impact Investing

Impact investing is a strategy that aims to allocate capital with the goal of combining financial returns with societal and environmental benefits.

The focus tends to be on investments in companies, social enterprises and entrepreneurs that prioritize corporate responsibility and address a range of social issues such as sustainable agriculture, equitable healthcare access, affordable housing, renewable energy, and education.

Take AENU, a Vestlane client, as an example of impact investing in action.

AENU is an impact venture capital firm focused on early-stage climate tech investments in Northern Europe.

With Vestlane's tools, they have been able to streamline their daily operations, everything from managing investor communications to staying on top of regulatory compliance.

You can find out more about Vestlane’s work with impact investors in this success story. 

Key Features of Impact Investing

• Dual Benefits: Delivers financial returns and positive social impact.
  
  
• CSR Focus: Promotes corporate accountability and sustainable business practices.
  
  
• Environmental, Social, and Governance (ESG) investing: Focuses on asset classes that yield financial gains with minimal harm.
  
  
• Socially Responsible Investing (SRI): Emphasizes ethical business practices and partnerships.

Unlike traditional investment strategies that focus solely on financial performance, impact investing integrates ESG criteria into the risk-adjusted, investment decision-making process.

The Global Impact Investing Network (GIIN) defines impact investing as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

This approach spans various asset classes, including private equity, venture capital, and fixed income. 

That all sounds great in theory, but are people putting their money where their mouth is in terms of allocating capital?

Growth Trajectory of Impact Investing

The impact investing market has gone from strength to strength and experienced remarkable growth in recent years.

We’re seeing more than ever a shift towards more responsible and sustainable investment practices among the investor class as a whole.

According to the GIIN's "Sizing the Impact Investing Market 2024" report, the global impact investing market is estimated at $US1.571 trillion in assets under management (AUM), representing a 21% compound annual growth rate (CAGR) since 2019. 

This upward trend is not confined to global markets alone.

In the United Kingdom, for instance, the impact investing market has grown to £76.8 billion (US$93.73bn) in AUM as of the end of 2023, marking a £19.3 billion (US$23.55bn) increase from previous reports. 

These data points alone appear to show an ever-increasing appetite for investments that align with ethical values and contribute to sustainable development goals (SDGs).

Research suggests growth rates in the global impact investing market of as high as 9.5% annually, rising to a potential $5.17 trillion by 2029.

For comparison, the global private equity market grew from US$492.82 billion in 2023 to US$540.72 billion in 2024 and is projected to reach US$1,246.08 billion by 2033, with a CAGR of 9.72% (2024–2033), driven by the rising startup and AI culture.

Similarly, the venture capital market is estimated to expand from US$173.5 billion in 2021 to about US$1,068.5 billion by 2031, reflecting a CAGR of approximately 20.1%. 

In other words, impact investing can hardly be considered a gimmick or a passing fad, but more likely a key area of growth in the broader financial and investment space in the coming decade, at the very least. 

But is it too good to be true? Why are so many institutions and investors alike jumping on board?

Financial Returns in Impact Investing

“The overwhelming perception still is that impact investing is by nature concessionary” - Sarah Gordon, visiting professor in practice at the London School of Economics’ Grantham Research Institute.

A common misconception is that impact investing necessarily implies a trade-off between positive impact and financial returns.

However, numerous studies and real-world examples have debunked this myth.

The GIIN's "State of the Market 2024" report highlights that the impact investing market has expanded at a 14% CAGR over the past five years, in spite of post-COVID economic headwinds. 

Furthermore, several studies published by the European Securities and Markets Authority found that ESG and impact funds generally improved returns and cut client costs over time.

Analysis over a five-year period showed stock funds weighted towards ESG scores generally performed higher: an increase in annual average return of 1.59% in European markets, 1.02% in Asia-Pacific markets, and 0.13-0.17% in North American and global markets. 

These findings suggest that not only can investors and impact funds achieve market-rate, but potentially market-beating, returns while contributing to positive societal outcomes, at scale.

Diverse Asset Classes and Investment Opportunities

Impact investing encompasses a broad spectrum of asset classes, both in the public and private sector, providing investors with various avenues to align their portfolios with their values:

• Private Equity and Venture Capital: Investing in startups and private companies that are developing novel and innovative solutions to social and environmental challenges. For example, Galvanize Climate Solutions has raised over $1 billion for its Innovation + Expansion Fund, focusing on decarbonization solutions.
  
  
• Public Equities: Selecting stocks of companies with strong ESG performance, thereby supporting businesses that prioritize sustainability and ethical practices. Examples of top performers in terms of ESG include Schneider Electric, Microsoft, and The Ordinary. 
  
  
• Fixed Income: Allocating funds to green bonds and other debt instruments that finance projects with positive environmental or social impacts. These might include the European Investment Bank’s (EIB) Climate Awareness Bonds, the World Bank’s Green Bonds, and Apple Inc’s green bonds, to name but a few.
  
  
• Real Estate: Investing in properties that meet high environmental standards, such as energy-efficient buildings, to promote sustainable urban development. Galvanize Climate Solutions plans to invest nearly $2 billion over three years to promote energy efficiency in U.S. commercial real estate, aiming to help establish a new asset class for environmentally-friendly buildings.

Impact Measurement and Management

A critical component of impact investing is the ability to measure and manage the social and environmental outcomes of investments.

The GIIN has developed tools such as IRIS+ to provide standardized metrics for assessing impact investment performance.

Additionally, frameworks like the Impact Measurement and Management (IMM) tools enable investors to track and optimize the impact of their portfolios. 

Effective impact measurement is key to ensuring both accountability and transparency, enabling investors to make informed decisions and continually tweak their impact strategies.

Case Studies: Real-World Applications of Impact Investing

To illustrate the practical application and benefits of impact investing, consider the following examples:

• Galvanize Climate Solutions: Founded by Tom Steyer and Katie Hall, Galvanize focuses on investing across asset classes, including venture capital and growth equity, public equities, and real estate.
  
  The aim is to address climate change while yielding returns for investors and stakeholders.

• Affordable Housing Initiatives in the UK: Institutional investors have increasingly recognized the potential of social and affordable housing to deliver both social impact and financial returns.
  
  For instance, the Teesside Pension Fund committed £5 million to the Ethical Housing Company, providing affordable homes to families in need in the Tees Valley.
  
  Similarly, the Greater Manchester Pension Fund invested £10 million in the National Homelessness Property Fund, managed by Resonance, to address homelessness.
  
  
• Savills Investment Management’s Simply Affordable Homes Fund: This fund achieved a £123 million first close, backed by institutional investors including Samsung Life Insurance and Big Society Capital.
  
  It seeks to address the UK's affordable housing shortage by providing secure and affordable homes.
  
  
• Urban Land Conservancy (ULC) in Denver, USA: ULC has been instrumental in preserving and developing real estate for community benefit, including affordable housing, schools, and nonprofit office spaces.
  
  Through initiatives like the Denver Transit-Oriented Development Fund, ULC has facilitated the creation of affordable homes along transit corridors, enhancing accessibility and community development.

Challenges in Impact Investing

While the growth of impact investing is promising, it’s important not to overlook the challenges that come with it:

• Impact Measurement and Reporting: Quantifying social and environmental impact remains complex, with a lack of standardized metrics leading to inconsistencies and difficulties in comparing performance across investments.
  
  Efforts are underway to develop more robust impact measurement frameworks, but achieving consensus remains a work in progress.
  
  
• Perceived Risk and Return Trade-off: Some investors remain skeptical about the ability of impact investments to deliver market-rate returns, perceiving them as higher risk or requiring concessionary returns.
  
  However, as previously discussed, studies have shown that impact investments can achieve competitive financial performance.
  
  
• Market Maturity and Scale: The impact investing market, while growing, is still a small fraction of the global investment landscape.
  
  Scaling impact investments to address global challenges requires increased participation from a broader range of investors, including institutional asset owners and managers.

Future Trends in Impact Investing

Looking ahead, several trends are poised to shape the future of impact investing:

• Integration with Mainstream Finance: As more people become aware and demand grows, impact investing could start blending into mainstream investment strategies.
  
  This shift might channel more money into projects that create meaningful social and environmental benefit.
  
  
• Advancements in Impact Measurement: The development of more sophisticated and standardized impact measurement tools is likely to enhance transparency and accountability, allowing  investors to make more informed decisions and track the effectiveness of their investments.
  
  
• Focus Areas: If growth continues, Investors are also likely to concentrate on specific themes such as climate change, affordable housing, and healthcare, aligning their portfolios with pressing global challenges and SDGs.
  
  
• Policy and Regulatory Support: Government policies and regulations promoting sustainable finance are expected to play a significant role in facilitating the growth of impact investing. For example, in May 2021, Germany introduced its first Sustainable Finance Strategy to drive investments in climate action and sustainability while tackling financial risks linked to climate change.

A Step Toward a Profitable and Sustainable Future

The rise of Impact investing demonstrates that positive social and environmental outcomes alongside market-rate financial returns don’t have to be a pipe dream.

Recently, I was struck by an interview with Satya Tripathi, former assistant general secretary of the UN Environment Management Group.

In an interview with Reuters, he discussed his green economy accelerator, which focuses on permaculture and turning organic waste into energy, stating: “We’re not here to fix the market. We’re here to fix the planet,” he explained. “Once the planet is fixed, the market will fix itself.”

It’s pretty refreshing when you see a focus on real-world solutions instead of market imperfections.

Anyway, the message seems to be that if we prioritize investing in things like sustainable agriculture and renewable energy, the financial systems will adapt to support that progress. 

Of course, there are hurdles. Such as figuring out how to measure the actual impact of these investments, convincing skeptics that impact investing is worthwhile, and scaling these efforts to make a real dent.

But the good news is, there are resources like the Global Impact Investing Network (GIIN) that can help investors navigate this space.

If you’re curious about making investments that are as impactful as they are profitable, it’s a great place to start.

Who wouldn’t want to put their money into something that not only grows but makes the world a better place?

Anyway, if you liked this post and want to hear how Vestlane can help with impact investment onboarding, contact our team here.