IFC: Investors Appetite for Impact Investing to Reach US$26T
Indonesia' international investment recorded worth of US$326.2 billion or 29.8 percent of gross domestic products (GDP) in the third quarter (Q3) of 2019 - Photo: Special

JAKARTA (TheInsiderStories) – Investors’ appetite in “impact investing” or investments that have positive social and environmental impacts in addition to strong financial benefits can reach US$26 trillion, according to the International Finance Corporation (IFC) report on Monday (04/08).

In a report entitled “Creating Impact: The Promise of Impact Investing”, IFC estimates that there are potential funds of up to $268 trillion from various institutional and household financial assets from around the world that can be channeled to these investments.

IFC underlines, if 10 percent of this potential fund is channeled to investments that focus on improving social and environmental conditions, funding will be available to achieve the goals of the Sustainable Development Goals (SDGs) and facilitate future low-carbon conditions.

“Worldwide, the desire to invest has an impact. Investors are eager to show that they are broadly a force for good – that profit is not their sole purpose,” said its report.

The growing demand for impact investment, partly a reflection of changes in demographic conditions. According to Accenture, in the north of America there are at least $30 trillion in wealth that will be transferred in the coming decades from the “Baby Boomers” generation to the X and millennial generations.

IFC assesses, young generation investors are increasingly inclined to choose investment strategies with social and environmental backgrounds, and want to invest in a large value.

“More and more investors – including the younger generation – want their investments to be channeled into funding that has a positive impact on society and the environment,” said IFC CEO Philippe Le Houérou. “We have a historical opportunity to grow this market – and this is good news for the planet and various communities around the world,” he continued.

This was confirmed by the Barclays survey findings that social and environmental causes were considered most important for investors in the SDGs which included aspects of health, education and water and sanitation. In short, potentially transformative alignments have begun to occur between the main global development goals and the urgent needs of private investors.

In the stock and bond markets, IFC estimates that investor interest can reach $21 trillion. In addition, there is an additional $5 trillion that can come from investment companies (Private Equity), non-government debt and venture capital. The realization of this potential will depend on the availability of opportunities and investment vehicles that enable investors to obtain financial impacts and benefits on an ongoing basis.

We know that private impact funds currently number around $71 billion. Larger amounts are invested by development finance institutions (including more than $700 billion by those who follow harmonized measurement metrics) and in green and social bonds (more than $ 400 billion in circulation). In addition, a share of the $8 trillion dedicated to investment activists in the public market can be managed for impact.

IFC estimates that opportunities for impact investment are available to households and private institutions. On the private market – which includes markets for private equity and debt, real estate, infrastructure, and assets – IFC identified around $71 billion in assets managed by private investment fund managers with verified intentions to contribute to the measurable impact in addition to financial returns. The impact of investors is very large focusing on infrastructure, with 62 percent of those assets in advanced markets devoted to asset classes.

While the public market is an extraordinary place to hold financial assets – especially household assets. IFC identified two investment classes, namely corporate involvement and investment action shareholder strategies ($8.4 trillion), which operate mainly in Indonesia public equity, and green and social bonds ($456) billion), which are increasingly being offered to the public.

Outside of private households and institutions, many government-owned development finance institutions (DFIs) have a mandate to contribute to social and environmental impacts. For example, 25 DFIs has signed a memorandum of understanding on the joint metric impact – the Harmonization Indicator for Personal Operations Sector (HIPSO) with an investment of $742 billion.

In addition to these institutions, IFC identified 81 other institutions, with an extraordinary portfolio of $3,083 billion. Many of these involve government sovereign loans, but insofar as assets are invested in companies and organizations with the intention to contribute socially and measurably to environmental impacts, they can be considered as an impact investment.

IFC assesses that investors’ appetite for impact investments can reach $5 trillion in the private market – private debt and equity, real assets, infrastructure and natural assets – and as much as $21 trillion in the public market, not including DFIs activities.

To support these industrial growth, IFC identified the third main solutions that could help deal with congestion. First, a series of new operating principles for management impact is an important step in bringing clarity and discipline to managing impact investments.

Second, adoption of uniform standards for frameworks and measurement tools will bring greater transparency and comparability to the performance of investment impacts. The investment impact growth places greater demands on companies to measure and report on their impacts, and to consider the potential positive and negative impacts of its investment decisions.

Finally, to open up a larger pool of capital, regulators must reduce the obstacles faced by institutional investors who are interested in the impact. The main changes in regulations and laws needed are related to 1) investment policy, and 2) rules related to disclosure and reporting.

Written by Daniel Deha, Email: daniel@theinsiderstories.com