How has the impact investment asset class evolved over the past decade?
Ten to 12 years ago, there was a lot of debate about impact investing being a separate asset class. Today we don’t hear that so much. Instead, we see impact investing embraced as a style or approach to investing within established asset classes, particularly private equity and venture capital. This has made it easier for both asset owners and asset managers to dip their toes into the waters through their existing allocations and investment platforms – which has led to an explosion in AUM to more than $715 billion today.
How has private equity’s role within impact developed?
With the right leadership, the thesis-driven approach of private equity is well suited to add new theses that focus on the integration of social and environmental impact and financial performance.
From afar, the entrance of large global private equity firms signals a notable shift – and yet each is taking a distinctive approach that builds on their strengths and traditional investment successes. Where contemporary private equity has become increasingly specialised by sector and geography, impact investing within private equity is still in the early innings.
What about private debt and infrastructure?
There’s room for significantly more focus on impact in both debt and infrastructure. In credit, there’s a lot of space between big green bond issuances and focused private credit transactions where lenders can hone in on specific covenants, for example ensuring a focus on high-impact customer segments for a SaaS business.
How have institutional appetite and expectations evolved?
Universal asset owners have come off the sidelines in the past five years. For the first time, there are impact investing products available to them at a sufficient scale for their mandates. Since these big owners and their stakeholders have diverse interests and priorities, they have been open to asset managers defining diversified impact portfolios that span health, education, quality employment and more of the UN Sustainable Development Goals. Climate is one notable place where there’s more of a demand for specific products and progress.
What do you think impact investing can ultimately achieve?
Impact investing is another tool in the chest to advance social progress. It is not the silver bullet but is well positioned to address issues where markets are a key part of the solution, from reducing emissions to expanding access to financial services to unbanked customers.
What effect is covid-19 likely to have on the asset class?
Covid has accelerated opportunities for impact investors with dry powder but slowed the product development and fundraising process for the next wave of investors. At the same time, covid has also reversed progress of the UN Sustainable Development Goals, and in the US has made bare stark racial injustice. If anything, investors will leave the covid crisis with a renewed sense of the importance of a business’s responsibility to employees and customers, exactly the kind of non-financial considerations that impact investors have been championing for years.