IMPACT
Mind the (impact funding) gap
Climate change
Energy transition
Biodiversity
Circular economy
Sustainable Agriculture
Education
Public health
Other
Addressing global, systemic challenges requires a holistic and concerted effort from all market participants. Financial institutions are uniquely positioned to catalyse positive change through capital allocation, and we believe there are opportunities to generate attractive risk-adjusted returns through positive impact.
Since our previous survey, we have observed increased attention on impact investing – with 41% of managers in our universe currently managing at least one impact fund (up from 39% in 2022). This represents over £859 billion of capital invested in impact solutions (compared to an overall universe of £38.5 trillion AUM).
Interestingly, 88% of asset managers who will launch an impact fund in the next 12 months already have an existing impact strategy in place.
This makes sense as impact funds will typically require increased resourcing upfront to support with screening, due diligence, and reporting. The initial heightened financial and human capital cost may be a barrier to entry into the impact investing world for some firms, which may explain why only a minority of managers without existing impact allocations will be launching an impact fund within the next year (2%).
It is evident that larger firms in our survey – by AUM and number of employees – are more likely to run an impact fund than their smaller peers. Specifically, 59% of firms with overall assets greater than £100 billion and 56% of managers with over 250 employees manage at least one impact fund. With increasing scrutiny on impact, sustainability solutions and associated regulatory and greenwashing risk, larger firms are more likely to have the infrastructure and resourcing in place to credibly manage impact funds.
In fact, firms with impact funds tend to have larger sustainability or ESG teams, with a median of 15 team members, compared with firms without an impact fund (median of six ESG personnel).
Firms managing impact funds are typically headquartered in developed markets, with notably larger proportions in the US and UK. Of course, our respondent universe is skewed towards where our clients are invested or interested in investing, but it is nonetheless notable to see a lack of manager firms focused on impact outside of Europe and North America.
Firms managing impact funds are typically headquartered in developed markets, with notably larger proportions in the US and UK."
From a climate perspective, surveyed firms with impact assets under management tend to have stronger climate commitments relative to their non-impact counterparts. 71% of managers with an impact fund have a firm-level net zero commitment (compared to 48% for managers without an impact fund). Anecdotally, we encounter many managers with net zero targets not only to decarbonise their existing portfolios, but also to identify climate-positive impact opportunities, which may provide a rationale for this trend.
When we begin to analyse how firms are approaching impact, it is evident that approaches vary.
From an asset class perspective, many self-described impact funds being launched are either public equity or real assets strategies, with 50% of managers with impact capital focusing on either of these asset classes. This focuses attention on definitions of impact and in particular the perennial question – ‘Can you achieve real-world, positive impact by investing in public markets?’.
It is easier to measure impact and demonstrate its additionality in real asset investments – such as infrastructure and real estate –while impact in listed equities is harder to show, given difficulties in proving additionality.
While we generally have higher conviction in impact in private markets, and therefore rate more impact options in the private space, we do understand the value in approaching sustainability and impact in public markets (e.g. lowering the cost of capital for impactful companies).
From an asset class perspective, many self-described impact funds being launched are either public equity or real assets strategies, with 50% of managers with impact capital focusing on either of these asset classes."
In terms of regional preference, managers tend to have a focus on investing in developed-market or global portfolios. We recognise a large funding gap in emerging markets – with only one manager in our universe seeking to launch an emerging markets-centric impact fund in the next 12 months. We hope to see this trend change as we believe there are attractive opportunities in emerging markets impact (see more here), and it is a crucial region for investment to ensure sustainable and equitable development.
Thematically, surveyed managers have a particular emphasis on environmental topics – e.g. climate change, energy transition, biodiversity, circular economy, sustainable agriculture – which account for almost 70% of themes in focus for existing impact funds. Interestingly, first-time impact funds have a proportionally greater focus on climate change, energy transition, and circular economy (58% vs. 45% for existing funds).
This may be because these are areas which have proven themselves to be investible – and are therefore less risky relative to other themes – and which have gained heightened attention in recent years following shifts in regulation, science, and public sentiment. The focus on ‘other’ themes seems to increase for funds imminently launching and includes topics such as water, clean technology, and social housing.
Firms typically have a much shorter track record in impact investing than traditional investments. While the range spans from less than one year to 50 years, the median track record length is six years and mode is just two years. With most funds relatively early on in their impact journey today, we expect to see a continuous expansion of the ways in which managers invest in impact and what they focus on, especially as they garner further track records and sophistication over time.
