It has been three years since that bold prediction about impact investing was presented. The speculation was that impact investing would represent a potential profit opportunity of up to $660 billion, with up to $1 trillion invested in the market by 2020.
A new report released today by the World Economic Forum in collaboration with Deloitte Touche Tohmatsu adds a dose of reality. It found that the sector would have to “grow aggressively” to surpass $500 billion. Yet challenges remain. Less than $40 billion of capital is currently committed to impact investments, and they mainly come from development finance institutions, family offices, and high-net-worth individuals. These groups represent only a small share of the global capital pool. According to the report, while 80 percent of U.S.-based pension fund managers are familiar with impact investing, only 9 percent felt that it is a viable investment approach.
Moreover, the report revealed that 79 percent of impact investors are targeting market rates of return, despite impact investing experts calling for an adjustment of expectations and practical deductions about those returns.
“There is limited consensus among mainstream investors and specialized niche players on what impact investing is, what asset classes are most relevant, how the ecosystem is or should be structured, and what are the underlying constraints the sector faces,” said Abigail Noble, Head of Impact Investing Initiatives at the World Economic Forum.
“As a result, there is widespread confusion regarding what impact investing promises and ultimately delivers, and therefore how it can reach scale.”
In attempt to provide clarity on impact investing, the report defines it as an investment approach and not an asset class; it must carry an intention to create social or environmental good and not solely financial gain, even if it unintentionally creates social or environmental value; and the outcomes must be actively measured.
The report proposes several recommendations on how the sector can reach scale, or from the “margin to the mainstream”. These include concerted efforts such as:
“Impact investing has become increasingly important as asset management is in a state of flux and public funds face increasing constraints to address key societal needs. Trillions of dollars are expected to be inherited over the next 50 years by the next generation, a generation that believes business should play a crucial role in creating a better society,” said Chris Harvey, Managing Director of Global Financial Services at Deloitte.
The report is the product of a one-year research initiative by the World Economic Forum’s Investors Industries community, which engaged 150 mainstream investors, business executives, and policymakers.
Photo from World Economic Forum.
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