Top 10 Reasons Why Investing for Positive Social and Environmental Impact Will Continue to Grow
Follow us for fact-based insights and trends on impact investing, social impact startups, sustainability, ESG, CSR, innovation & AI. See additional article insights here.
Definition and Sector Size
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Interest in and attention on impact investing has been growing steadily since the term was first coined 15 years ago.
Even with this narrow definition, measurements of impact investing assets under management (AUM) can be tricky because true impact investments are often combined with other sustainable and socially responsible investing philosophies, such as Environmental, Social, and Governance (ESG) investing.
Impact and Markets’ Impact Investing Global Market Report 2023 found that the global impact investing market grew from $420.91 billion in 2022 to $495.82 billion in 2023 at a compound annual growth rate of 17.8%.
The Global Impact Investing Network (GIIN) found a similar growth rate of 18% between 2017 and 2022 in its most recent annual survey of global impact investors managing a collective $371 billion. However, as we note below, the GIIN estimates the actual size of the impact investing market to be much larger at over USD 1 trillion.
Predicted Growth in 2024
But here’s the billion-dollar question for companies — including startups — looking to tap into impact funding:
Will impact investing continue to grow in 2024?
Here are the top 10 reasons why we think it will.
Read on for more details.
1. Recent Growth Despite Obstacles
It’s been a rough couple of years for impact investing. A lot of the negative news on impact investing stems from its confusion with ESG and recent political scapegoating.
ESG and impact investing are often lumped together in the mainstream media, but they are not the same. ESG investing is the consideration of non-financial factors when making investing decisions and doesn’t necessitate intentional, positive social and environmental impact (even though many times such considerations do have positive impact.) Often focusing on the environmental, social or governance actions of a company will reduce the risk in an investment, which is why we believe such considerations should be taken into account. And at the very least, investors shouldn’t be prevented from considering these non-financial factors if they so choose.
Intentional investing for positive social and environmental impact could have become collateral damage in the political war on corporate “wokeness” and ESG. Indeed there is increased cynicism and distrust of motives for making short and long-term non-financial business decisions that result in “doing good.” Yet even through a global pandemic, inflation, a ground war in Europe, and politically fueled backlash, impact assets continue to grow, as referenced above. This growth bodes well for impact investing’s future.
2. Growth in Private Markets
While public companies may get the bulk of our attention (for good and bad), private companies are embracing impact investing. Private companies can focus on long-term strategies without facing the immediate demands of shareholders, and they are often responsible for developing and scaling the most impactful technologies and solutions.
The Sizing the Impact Market 2022 report, published by the GIIN, estimated that the private impact investing market grew 63% from 2019 to 2021, topping out at USD 1.164 trillion.
Private equity (PE) firms have the potential to be key drivers of impact investing growth, and many are exploring more sustainable, equitable and impactful practices as a way to drive performance in portfolio companies. To help PE firms transition towards sustainable investing practices, the NYU Stern Center for Sustainable Business (CSB) recently collaborated with Arthur D. Little to research ways private equity can unlock value and tackle risks using sustainability strategies. The resulting toolset allows general partners to “approach sustainability as a strategic value driver, instead treating it as a reporting and compliance issue.”
PE players like TPG, KKR and Bain Capital have raised multimillion- and billion-dollar funds dedicated to measurable social and environmental impact. KKR announced in November that it closed its Global Impact Fund II at $2.8 billion, which more than double the size of KKR’s first global impact fund. Both funds invest in companies “that contribute measurable progress toward the United Nations Sustainable Development Goals (SDGs).”
3. Stronger SDG Alignment
It’s not just private equity that’s strengthening its ties to the SDGs. Many impact investors already use the SDGs as a framework for measuring “success”. Recent initiatives are making these connections easier to identify and report on.
For example, JPMorgan and French bank Natixis CIB, recently launched the Impact Disclosure Taskforce to encourage data-sharing around SDG-related investments. The idea is that better data will help companies and sovereign entities — especially those in developing countries — “attract more impact-oriented capital from international investors.” This consortium includes banks, asset managers, and research firms and will spotlight social impact over environmental reporting.
Additionally, Bloomberg has introduced a tool that leverages data from the UN Environmental Programme Finance Initiative — combined with Bloomberg’s data, research, and analytics that covers such topics as carbon emissions and climate risk — to help investors gauge the positive and negative impacts of a company’s operations on the SDGs.
These new solutions will not only benefit impact investors as they seek to better quantify outcomes, they will also help attract much-needed capital to the SDGs, which are facing an estimated $4 trillion per year funding gap.
4. Climate Solutions Investment
An undeniable bright spot for impact investing is the love that investors are finally showing to startups and companies that are innovating towards climate change solutions.
According to the latest World Energy Investment report published by the International Energy Agency (IEA), about USD 2.8 trillion is set to be invested globally in energy in 2023. Of that, more than $1.7 trillion is projected to be invested in climate-friendly technologies such as wind, solar and nuclear power, electric vehicles, and energy efficiency improvements. That’s a rise in annual clean energy investment of 24% between 2021 and 2023, compared with a 15% rise in fossil fuel investment over the same period.
Even in the startup world, where it’s been a challenging year for fundraising, climate tech investment continues to gain ground. Per the February 22nd CrunchBase article Funding Slowdown? Not For Climate And Clean Energy Software:
In recent quarters we’ve seen unprecedented sums going to software startups focused on tracking and reducing carbon emissions, and on speeding up the shift to cleaner energy sources. The funding surge comes amid a broader rise in funding to climate-focused startups of all stripes. A sampling of top funding recipients for climate and clean energy software shows at least $1.68 billion in capital raised since the beginning of 2022…
5. AI Investment for Good
But the real investment darling in 2023 is clearly AI. For startups alone, CBInsights estimates equity funding of USD 14.1 billion across 86 deals, as of the second quarter.
Recommended next reads
CrunchBase identified generative AI as the number one seed-stage category receiving funding in 2023. The highest funded companies focus on everything from coding to insurance underwriting to identifying AI-generated text. Clearly AI is attracting investment to a range of industries.
When you include the billions of dollars that large, established corporations will dedicate to improving and integrating AI into their business operations (over $189 billion in 2022 according to analysis conducted by Stanford University’s Institute for Human-Centered AI), the potential for AI to advance social and environmental impact becomes even greater if done intentionally.
AI’s impact on the global economy will be massive. McKinsey research estimates that generative AI could add the equivalent of $2.6 trillion to $4.4 trillion to the global economy annually, and PWC reports a potential contribution of $15.7 trillion to the global economy by 2030 from AI.
Additionally, AI is well-positioned to make substantial breakthroughs in high social impact sectors such as health, education and climate. For example, Google and BCG released a report in November that outlines AI’s potential to mitigate 5–10% of global greenhouse gas (GHG) emissions by 2030 — that’s the equivalent of the total annual emissions of the European Union!
6. Breakthrough Data Innovations for Measuring Impact
AI and Large Language Model (LLM) technology will also provide breakthrough data innovations for the field of impact investing.
The rise of impact investing necessitated the need for robust ways to measure the returns and social effects of investments. Impact investing practitioners have often struggled with measuring the social impact of their investments while comparing this impact across sectors.
This is where technology is once again proving instrumental. Advances in technology have made it easier to measure and track both the financial and social return on these investments. AI, LLMs and other new technologies will equip impact investors with an expansive suite of cutting-edge tools and data-led perspectives that will not only bolster their current initiatives but also refine their strategic approaches.
Technology has made it easier for investors to manage and monitor their portfolios effectively and in real-time. It allows for the collection, analysis, and interpretation of substantial amounts of investment data efficiently.
7. Path Towards Standardized Impact Reporting and Regulations
Speaking of data and measuring, we welcome the recent global efforts to standardize reporting and regulation frameworks. News of additional reporting requirements may send chills down the spines of corporate leaders. However, regulatory changes on both sides of the Atlantic intended to create globally consistent standards have the potential to actually reduce the “disclosure fatigue” felt by many companies while significantly increasing the comparable data available to investors.
Leading the charge to consolidate and simplify the reporting process is the International Sustainability Standards Board (ISSB), which released its first two standards this past summer. The ISSB is part of the International Financial Reporting Standards (IFRS) Foundation, which also administers the International Accounting Standards Board (IASB), adding credibility and authority to the effort. Additionally, the European Union and the Securities and Exchange Commission (SEC) are working closely with ISSB to agree on a global baseline. The new standards, which were based on the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), have been endorsed by the International Organization of Securities Commissions (IOSCO).
Don’t Be Confused by Recent ESG Regulations and Legislation. Read our Primer!
This global, concerted effort indicates a promising trajectory towards greater transparency, reliability, and trust in impact reporting and measurement.
8. Shift in Investor Mindsets and Demands
Let’s hear it for our young people! In a world where you can find a study that confirms or dispels any belief one might have, younger generations refuse to give up on the premise that profitability and positive impact are not mutually exclusive.
With Millennials and now Gen-Zers making up an even greater percentage of employees, consumers, and investors, their power to influence change will only continue to grow.
Younger generations are already leaders in climate change activism. A report from the World Economic Forum indicates that Gen Z is influencing others with their heightened concern for the planet’s well-being, valuing sustainability-first in their buying decisions.
Younger generations’ preferences for aligning their money with their values is becoming more evident. According to U.S. Bank’s Young Investor Research, which surveyed 4,000 active and aspiring investors in May 2023, Gen Z investors overwhelmingly want their portfolios to support the causes they care about, and they are willing to give up returns to make that happen. 85% of Gen Z investors said they’d accept returns below the S&P 500’s 10-year average of 12% compared to 73% of Gen X and 65% of Boomer respondents.
It is clear that the upcoming generations are rewriting the rules, focusing not just on economic growth but also on social and environmental impact.
9. Diversified Impact Investing Options
To attract these younger investors, providers must broaden their range of impact investing options across different asset classes and themes. We highlighted above how impact private equity is already playing a greater role in impact investing. There will be even more opportunities to develop new investment products that extend beyond public markets and accommodate various investment levels. These diversified products will allow younger investors with limited funds to engage in impact investing, while also appealing to those who will receive substantial inheritances from impending generational wealth transfers.
These newly-minted impact investors, motivated and diverse, will also want to support a variety of impact themes beyond climate action, such as racial and gender equality, access to affordable housing, and financial inclusion. This expanding array of investment choices will ultimately help to attract a wide range of investors of all ages, fueling overall growth in the sector.
10. Impact Investor Satisfaction
The last, and perhaps most important reason, we are bullish on impact investing is that current impact investors are happy with their financial and impact results.
According to the GIIN’s 2023 survey of impact investors, 79% of respondents thought that the performance of their investments met or exceeded their financial targets, and 88% said their investments met or exceeded impact targets.
Investing is a personal decision, often driven by life experiences and a desire to leave a legacy. The fact that the vast majority of impact investors have gotten the financial returns they wanted — in addition to the social or environmental benefits they set out to create — means that impact investing is filling a need.
Conclusion
These are just a few of the many reasons we believe that impact investing is not a just passing fad. Impact investing is a unique investing approach that capitalizes on societal changes and investors’ growing desires to make their money make a difference. Startups and established companies alike would do well to intentionally incorporate positive, measurable social and environmental impact into their business strategies in 2024 — and beyond.
Do you agree with our reasons to be bullish on impact investing? We want to hear from you!
Leave a comment below.
StartingUpGood supports fresh entrepreneurial approaches to social impact. FOLLOW US on social media:
For the latest on tracking SDG progress, check out our partner SDGCounting on Medium, Twitter / X, and LinkedIn.
