The Institutional Impact Investing Revolution

Institutional investments that generate social and environmental impact are increasing, and they are changing the field of impact investing as they go.

ABP, Europe’s second largest pension fund, with more than 380 billion euros (about $430 billion) under management, announced last year that it would increase its allocation to high sustainability investments (those aiming to create positive and measurable social or environmental value) to 58 billion euros in 2020, up from 29 billion in 2015. Meanwhile, the Dutch pension fund PFZW intends to allocate 12 percent of its entire investment portfolio to solutions in renewable energy, water, food security, and healthcare. By 2020, this will reach 25 billion euros (about $28 billion)—up from 5 billion at the end of 2014. In addition, insurance companies such as AXA and Zurich, and banks like BNP Paribas, JP Morgan, and Barclays have committed up to 5 billion euros of their proprietary capital to impact investment programs while developing solutions for their clients.

These examples show that institutional investors are accelerating their pace of investment in what many see as opportunities to positively impact our global society, environment, and economy. They are investing increasing amounts of money in the reduction of carbon emissions, improvement of global supply chains, developing tiered capital structures and public-private partnerships, and building “digital supply chains” in business and financial services. These efforts will not only help solve some of the biggest challenges of our times, but also help transform the current practice of impact investing, as they did with socially responsible investing a little over a decade ago.

Looking at the gigantic efforts required to solve global problems, institutional investors tend to think big, differently, and historically. And their efforts will redefine how we view finance for societal purposes—slowly, but gradually.

Thinking Big

In 2015, the Global Impact Investing Network (GIIN) and J.P. Morgan reported a total amount of some 60 billon dollars in impact investments—up from 48 billion in 2014. This indication of the steady growth of the impact investing market is encouraging. Compared to the capital required for boost sustainable development across the globe, however, it’s a drop in the ocean.

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Why HNIs should become impact investors – making money by making a difference

As India is becoming richer , we now have a large number of high net worth individuals who have become wealthy. They have made plenty of money, and many would like to be able to deploy some of it for a good cause. They’ve achieved a lot in their own lives, and they want to make sure that their money works as hard as they have worked. In the prime of their life, they’re no longer just looking for a financial return, but are also interested in investing for impact. They want their money to be used for a higher purpose, because they know that money can be a force for good.

Often they’re not sure how to do this, so that effectively their money ends up leading a schizophrenic life , Most of their money is utilized in order to generate the best return possible (typically , either through equity investments, or in real estate); and a small proportion is used for philanthropy or charity. However, they are never sure whether this money is being utilised effectively, because there has been little transparency when grants are provided to NGOs, who often do a poor job with documentation and reporting.

This approach is not very efficient or effective, because this reduces the amount of money which they can deploy for philanthropy. This bothers them, because they understand that they are not doing a good job at giving back to society.

It’s now time for an integrated holistic approach, and the good news is that there are now lots of impact investing success stories . This new area gives sophisticated, mature investors a chance to make sure that their money doesn’t only provide a financial return, but also creates social impact – it allows them to get the biggest bang for their buck ! This is an ecosystem which has gradually been maturing over the last 20 years, and it’s just a matter of time till it becomes mainstream. There are now lots of structured financial products within the impact investment space , which are ripe for investment. Not only do these provide a financial return, they allow investors to engage with young social entrepreneurs who are out to change the world.

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