The size of the impact investing market is growing, and specialized impact investors could be best placed to capitalize on this changing focus
The size of the impact investing market is growing, and specialized impact investors could be best placed to capitalize on this changing focus
The COVID-19 pandemic has had permanent effects all around the globe. Furthermore, the outbreak exposed many existing social and economic weaknesses. How has this new paradigm shift changed the scope of impact investing?
The pandemic magnified existing global problems. It took issues like poverty, gender inequality, and job insecurity, and exacerbated them. It has also added further fuel to the debate surrounding the climate crisis. However, I wouldn't say that all of this has changed the scope of impact investing; rather, it has highlighted the importance of, and opportunities presented by, impact investing. These are exactly the areas on which BlueOrchard has focused over the past 20 years.
Impact investing is the most promising investment approach to alleviate some of the negative effects of the pandemic. To achieve climate targets and the Sustainable Development Goals (SDGs) by 2030, we need significantly more private capital to flow into these areas.
How has impact investing evolved from a niche market into the mainstream, and are specialized asset managers better positioned to take advantage of this paradigm shift compared to their larger, more diversified peers?
Impact investing isn't a niche market anymore. The size of the impact investing market “largely defined” shows strong growth, reaching almost $2.3tn, according to 2020 data. As indicated by International Finance Corporation and by the Global Impact Investing Network, in the “strictly defined” market, namely high-conviction impact investing where a system of measurement is in place, assets under management (AUM) passed the $700bn milestone in 2019.
We're already seeing enormous capital inflows into impact investing, as much of the asset management industry is moving in the direction of sustainable investments. Specialized impact investors are certainly better suited to capitalize on this paradigm shift with the necessary know-how, experience, networks, and impact management tools.
I firmly believe that both large asset managers and specialized asset managers are needed to take advantage of this paradigm shift, and that both have a clear role to play. A good example is in natural resources, where forestry managers with specialized capabilities are partnering with large asset managers to scale up and mobilize capital at scale.
In addition, a clear role for established asset managers is setting best practice standards. An example is in the Operating Principles for Impact Management (Impact Principles), an overarching framework for investors that ensures considerations are integrated throughout the investment lifecycle. These principles have been set by a diversified group of impact investors, comprising asset owners, asset managers, multilateral development banks, and development finance institutions.
The Impact Principles signatories (now numbering about 140, managing almost $420bn) are also bound to high level of transparency by an annual disclosure statement indicating the level of alignment of their respective impact investing strategy to the Impact Principles, and an independent verification process is required.
Sustainability and impact investing (S&I) data in private markets presents a challenge and an opportunity, so how is the industry ramping up? Is regulation helping to make the case for more S&I data and benchmarking?
Both the availability and quality of S&I data in private markets are important. The way around the challenges of accessing large datasets is partly dealt with by developing proprietary sustainability and impact tools, which allow for collection of data from the underlining portfolio companies on tailored key indicators.
BlueOrchard has developed a proprietary impact management and measurement framework, called B.Impact, which collects materially important indicators from its investee companies looking at ESG practices, impact potential, and SDG alignment. Defining which data really matters, like the mapping of Sustainability Accounting Standards Board (SASB) materiality, is crucial to ensure that the quality and relevance of data collected is really supporting the measurement of the impact pursued.
Regulations like the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) have moved mountains, that’s for sure. Investors and asset managers now have a clearer understanding of the type of data, reporting, and disclosure required when looking for alternative investment opportunities. This is an important step in increasing alignment and transparency in sustainable and impact investing. Still, it's critical for impact investment managers like BlueOrchard to go beyond simple regulatory requirements to drive innovative and impactful investment solutions, and to continue to lead the way in providing best-practice examples with adequate disclosure and transparency.
Climate change is a large part of the E in ESG and its very apparent effects are top of mind when thinking about ESG. How can impact funds work to ensure that the S and the G are not forgotten, and what are impact funds doing to work to address issues like diversity & inclusion?
The fact that the E has such a status is simply due to urgency – and that's a good thing. But for impact investors like BlueOrchard there's no priority between planet and people. Both are naturally interlinked in our impact management and measurement framework. So, we don't see the risk of the S and G being forgotten in our climate adaptation and mitigation investment strategies, in which every climate measurement has a human face, so to say, be it in terms of underserved communities in emerging and frontier markets, or a gender lens reflecting on the needs of different end-clients, for example.
About Maria Teresa
Maria Teresa Zappia is Deputy CEO, and Chief Impact & Blended Finance Officer at BlueOrchard. She also leads the Sustainability and Impact team at Schroders Capital. Maria Teresa has over 25 years’ experience in EM & frontier markets, has authored and co-authored several publications and is a guest speaker at several universities’ postgraduate impact investing classes. She is a member of the Impact Principles Advisory Board and represents BlueOrchard at the G7 Impact Taskforce created by the UK under its G7 Presidency.