Impact investing is capturing the attention of investors across the world. Last year, 209 leading impact investors committed $22 billion into nearly 8,000 impact investments, and planned to increase capital invested this year by 17% and the number of investments by 20%.
Throughout the industry’s development, however, some investors have questioned the ability of impact investments to generate financial returns similar to traditional investments, and lack of data has left this question unanswerable.
This research shows that impact investors that target market-rate returns can achieve them. Across the three largest asset classes in impact investing — private debt (34%), real assets (22%) and private equity (19%) — the distribution of fund returns is similar to those in analogous conventional markets.
According to the report, these fund managers pursue a variety of impact themes, among them financial inclusion, access to clean energy, sustainable timber and low-income housing.
The research also shows that performance varies considerably among funds, as it does in conventional markets. The implication: fund manager selection is key to achieving robust returns.
One important aspect of impact investing, often overlooked by critical observers, is that not all impact investments seek to achieve market rates of return. Some impact investors intentionally target below-market returns given the nature of their strategies.
According to the research examined by GIIN, these so-called concessionary impact investments can be a sustainable funding source for impactful organizations historically reliant solely on grant funding.
The research further shows that many impact investors take a portfolio approach to building an impact investment strategy across multiple asset classes in order to meet their overall risk/return preferences.
GIIN’s report emerged from a synthesis of findings across more than a dozen studies on the financial performance of investments in private debt, real assets — including timber, real estate and infrastructure — and private equity, as well as individual investor portfolios allocated across asset classes.
In addition, the report summarizes portfolio-level performance from five impact investing organizations that have publicly released their own financial performance data.
The studies examined by GIIN were produced by a wide range of organizations, including Boston Consulting Group, Cambridge Associates, EngagedX, Impact Investing Australia, McKinsey & Company, Symbiotics, Wharton Social Impact Initiative and GIIN itself.
“Increased transparency around financial performance will enable current players to make more informed portfolio allocation decisions, allow new players to more confidently develop market entry strategies, and allow both to set well-informed performance expectations and more accurately evaluate performance,” GIIN Research Director Abhilash Mudaliarsaid in a statement.
“To continue to advance and exponentially scale the industry, active impact investors and other field-builders need to embrace an openness to sharing data on the financial and impact performance of their investments, either directly with the public or by contributing to third-party research.”
The report identifies gaps in current financial performance research and suggests that future analyses should include the following:
- Target financial returns across strategies and investors’ abilities to meet them
- The performance and role of below-market capital across asset classes
- Fund and investment performance across asset classes at a more granular geographic and sector level
- The relationship between impact objectives, impact measurement and management practice and financial returns