It has been an active year in impact investing. The reported size of the impact investing market effectively doubled to half a trillion dollars. There has been a healthy dose of headlines and media coverage in global and community outlets, from Bloomberg to the Financial Times to Prince George Matters. Countless national, regional and local governments are committing hundreds of millions of dollars and making policy commitments to explore and advance this approach to investing and business.
Now, when rubber meets road, the financial markets have not yet transformed. And we have yet to see major dents made by impact investing in the pressing challenges we face from climate change to inequality. But, there is clearly (a) movement underway.
So, what are key trends in impact investing and related fields like sustainable finance? We can try to understand what’s happening by looking at market data, commitments, and actions by mainstream and impact leaders around the globe over the past year. Here are six key trends we’ve found:
1. Many Canadian banks are making big commitments to sustainable finance.
Canadian banks went big on sustainable finance commitments in 2019. Billions big. Here are the numbers:
- BMO targeting $400B by 2025 including a $250M impact investing fund
- CIBC targeting $150B by 2027 in environmental and sustainable finance
- Scotiabank targeting $100B by 2025 for climate finance
- RBC committed $100 billion to sustainable finance by 2025
These announcements follow the 2018 commitment by TD of $100 billion invested in the low carbon economy by 2030. And these commitments reflect a broader global trend that cuts across banks and asset managers. But it is important to note that these are commitments to action, and we must track and critically analyze the subsequent actions of individual institutions and the mainstream banking sector as a whole.
2. Place-based impact investing is really taking root.
Place-based impact investing refers to the local deployment of impact capital — that is, investments made with the intent to yield both financial and social and/or environmental returns — to address the needs of particular communities, regions, or ecosystems. In short, it is investing for local impact.* Based on market trends, it may be coming to a community near you:
- A new £10 million fund to tackle hunger, inequality and climate in Bristol, UK was launched, supported by Big Society Capital (BSC) and the local government.
- Australian Super made a $20 million commitment to IIG’s WA Impact Fund, a Western Australia-focused fund financing assets and projects from rooftop solar on community buildings, social impact bonds, sustainable agriculture and financing support for social enterprises.
- Rhiza Capital, VERGE Capital, and EntrepreNorth are emerging with innovative place-based funds alongside existing players in Canada like the Saint John Community Loan Fund and Edmonton Social Enterprise Fund. (Full Disclosure: Rhiza is an SVX issuer and VERGE Capital is an entity partly owned and managed by SVX.)
- Opportunity Zones, first conceived in 2017 as a bi-partisan measure to incentivize investments in lower income communities and regions in the United States, have now been implemented in all 50 states. This place-based investment innovation has experienced a significant amount of criticism and support. But it is clear that there is a lot of action and activity on this front. It should also be noted that this approach builds on top of an already robust place-based system of Community Development Finance Institutions (CDFIs) and associated funds in the US.
* If you want to learn a bit more about place-based impact investing, organizations like Mission Investors’ Exchange do really great research and field building work on this topic.
3. The Sustainable Development Goals (SDGs) are emerging as a leading impact lens for impact investing.
The SDGs are a powerful rallying tool as a “blueprint to achieve a better and more sustainable future for all.” Beyond their utility for public policy and community action, it is clear that the potential for impact investing to leverage this framework and rally behind the goals is starting to be realized. Here are a few signals that point to this trend:
- UNDP launched an SDG Impact Hub, created new impact standards for private equity, and hosted a SDG Finance Summit in 2019.
- Enel Finance International NV issued the world’s first SDG-linked bond, a five-year $1.5bn bond with a penalty to Enel of 25 basis points if they don’t reach their performance target. NB: This bond has sparked significant debate, criticism and analysis
- Many Canadian impact funds leveraging SDG framework, from Amplify Capital to Pique Ventures to Sarona Asset Management.
- The United Nations Development Programme (UNDP) and the Global Steering Group for Impact Investment (GSG) agreed to joint plan in late November to focus capital and solutions towards the UN Sustainable Development Goals (SDGs).
Indeed, this is a positive trend. However, it will be important to balance ambition with reality when it comes to the ability of finance to help meet the goals. Moreover, the SDGs are only one part of a broader impact management framework, acting as a key tool to categorize impact data (and objectives) under a particular goal or set of goals.
4. Governments are getting serious about impact investing and sustainable finance strategy.
The Canadian government made a big commitment in 2018 to a social finance strategy. This past year represented the first steps towards implementation of the strategy:
- The framework of the $50 million Investment Readiness Program was announced in June 2019 with applications expected to open in early January 2020. This program has the potential to build significant capacity for organizations and enterprises to leverage innovative financing to achieve greater impact.
- Concurrently, the federal government began to lay the groundwork for the $755 million Social Finance Fund, an initiative that, “…will give charitable, non-profit and social purpose organizations access to new financing to implement their innovative ideas, and will connect them with non-government investors seeking to support projects that will drive positive social change.”
This domestic strategy was mirrored by Global Affairs Canada with a $900 million commitment over five (5) years to mobilize capital in support of the Sustainable Development Goals (SDGs). The first round of applications closed this year, with implementation and lessons learned expected in 2020 and beyond.
Government action is not limited to the Great White North. Other governments are making big policy commitments and helping to finance the growth of ecosystems around impact investing and sustainable finance.
- Luxembourg’s Government is actively seeking to position that country as the world’s leading centre for sustainable finance.
- UK Government supported the creation of an Impact investing institute.
- Over 40 national delegations were sent to the recent GSG Impact Summit in Buenos Aires with a mix of government, financial services, community and impact investing representatives.
- The European Commission continues to advance work on its Action Plan on Sustainable Finance, as it simultaneously works on a European Green Deal. One key milestone of the Action Plan over the past year was the release of green bond standards.
5. Gender lens investing is emerging as a key feature and focus of impact investing and beyond.
Gender lens investing was a topic of discussion in impact investing over the past few years. It has now emerged as a fundamental feature and focus of impact investing, with full integration as an ideal outcome in all impact investing approaches. Here are a few data points that demonstrate this trend in 2019:
- The Global Impact Investing Network (GIIN) completed two (2) year research project into gender lens investing (GLI) and impact investing, acting as a central knowledge hub.
- BDC completed the first year of operations for its $200M Women in Technology (WIT) Venture Fund, one of the world’s largest venture capital funds dedicated to investing in women-led technology companies and helping to build a robust ecosystem to support women in tech today and in the future.
- Global Affairs Canada (GAC) announced a $300M Equality Fund, designed, “…to contribute to solving the funding gap by providing predictable and flexible funding, along with technical assistance, to women’s organizations and movements in developing countries.”
- There are at least six (6) Canadian impact investing funds targeting gender lens investment opportunities, currently raising an aggregate of $150 million, with new funds like Marigold Capital starting to come on line.
- The federal government in Canada recently announced funding for a Women of Ontario Social Enterprise Network (WOSEN), which will include the development of a Women’s Impact Investing Network (WIIN).
6. Sustainable and social stock exchanges are on the rise (again).
Following initiatives in UK, Singapore, and Canada over the past decade, countries including India and Switzerland are exploring the development of social stock exchanges. There are also emerging initiatives in places like Australia. The activity in India may be among the most advanced and thoughtful so far, with the commitment of a national government and full engagement of the regulators, alongside a high-powered working group advising on the framework of the exchange, including the former CFO of Infosys. It will be very interesting to watch that initiative unfold in the year to come.
Beyond these innovative initiatives, what may be just as interesting is the pursuit of impact and sustainability in existing stock exchanges. Sustainability has emerged as a mandate around the world for mainstream exchanges, particularly in Europe:
- The Nigerian Stock Exchange (NSE) and Luxemberg Stock Exchange (LuxSE) signed an MoU to partner on sustainable finance initiatives.
- The London Stock Exchange launched Green Economy Mark and Sustainable Bond Market.
- Euronext CEO said green finance will ‘transform’ stock exchanges.
- The World Federation of Exchanges (WFE) and UN Sustainable Stock Exchanges (SSE) initiatives will collaborate to enhance ESG disclosure at stock exchanges. They have also jointly published a blueprint for embedding sustainability in stock exchange operations.
7. There are an increasing number of collaborative approaches to measurement, infrastructure, and mobilizing investors.
Ok, we did say six trends. And this would be a number seven. Think of this one as a bonus, as it is just as important as the rest.
As we collectively try to figure out how to advance this field, it is great to see that key players are seeking to work together on impact management, infrastructure and rallying investors. There are many signals pointing to this additional trend:
- The European Venture Philanthropy Association (EVPA) launched a new Charter of Investors for Impact establishing ten key principles that describe an investor that prioritises social or environmental impact, including a focus on collaboration and building ecosystem infrastructure.
- The Impact Management Project, a forum for building global consensus on how to measure and manage impact, is really hitting its stride with a practitioner community of over 2,000 organizations and a Structured Network of the 13 most widely-recognised impact/ESG standard-setters.
- Nine (9) US foundations and family offices collaborated to create and launch the Tipping Point Fund. The Fund seeks to scale field-building efforts and to maintain the integrity of the field as it grows, with $12.5 million in funding focused on two priority areas: 1. public engagement and policy; and 2. metrics and measurement. This effort follows on from the $150 million Catalytic Capital Consortium announced in spring 2019 by a collaborative of three major US foundations.
There are efforts in Canada towards collaboration for the ecosystem, particularly around the federal government’s social finance strategy. And there are exciting individual initiatives founded on collaboration like the Tides Canada ImpactDAF announced this past May. But initiatives are still quite nascent, and there is a lower level of leadership, collaboration, and overall engagement from key funders and major investors on field building outside individual projects or initiatives.
So what?
The field of impact investing has been through a cycle of innovation and development that has rapidly increased in velocity over the past few years. It all started with potential and early action, in some cases dating back decades or more. Interest followed with a long-tail of conversations before there was significant action. Then there were commitments, followed by the money. It seems that the capital has arrived, or hopefully, at least, the cheque is in the mail. Across many parts of this movement, we are now looking at the challenge of execution, followed by an important phase of intensive analysis and evaluation.
In that case, two conclusions come to mind based on these trends over the past year:
- The pressure is on to deliver. The pressure will be on mainstream financial players, governments, and partners to deliver on commitments and to truly achieve and demonstrate impact. There are already concerns about impact washingand greenwashing in sustainable finance, particularly around initiatives like green bonds. So how will they get there? We can’t operate inside magic black boxes that wait to be opened by 2025 or 2030. It will take the right plans, people, partners, engagement, and internal and external reporting and analysis to ensure accountability and to move organizations and ecosystems forward.
- If you are standing still, you will fall behind. There is a clear message to actors from stock exchanges to national governments: those countries, institutions, and organizations who do not act on the opportunity around impact investing and sustainable finance will continue to fall behind. They will fall behind on their performance (financial, social and environmental) as well as on interest amongst clients and citizens. And collectively, we will fall behind in the challenges we face today and in the critical decade ahead.
