Impact investment – which is purposely designed to generate tangible social and environmental benefits alongside financial returns – presents promising risk-adjusted prospects. This type of investment not only provides value for investors, but can also advance the UN Sustainable Development Goals.
According to the Global Impact Investing Network (GIIN), the impact investing market has experienced substantial growth, with an estimated worth of $1.6trn at the end of 2023, a compound annual growth rate of 21% since 2019. This also marks a more than three-fold increase from its $502bn valuation at the end of 2018. In GIIN’s 2024 report, impact investors demonstrated strong performance, with 94% indicating that they had outperformed or met their financial performance expectations.
A Maturing Sector
Impact investing continues to expand in both depth and sophistication, with clear indicators of market development since the late 2010s. In a survey conducted by the GIIN that was published in September 2024, respondents said the availability of professionals with relevant skillsets was the area in which the most progress had been made, with 19% reporting significant progress and 60% some progress. Some 17% of investors that took part said they had seen significant progress in research on market activity, trends, performance and practice. The perception of challenges is also illustrative of the sector’s growing maturity, as survey respondents reported that the greatest challenge to the industry’s development is the ability to compare impact results to peers, followed by fragmentation across impact measurement frameworks.
Investors are also shifting their attention to impact investment that accounts for climate factors. This involves more than the usual considerations like risk assessment, management and disclosure – it also entails actively seeking out climate solutions across investment portfolios. In the GIIN survey, 91% of investors said they were aiming for a positive impact on climate change mitigation, adaptation and resilience, with 69% focusing on mitigation, 67% on adaptation and/or resilience, and 51% targeting both. Increasingly, investors see climate as a strategy that applies to almost all impact themes and sectors. Among those polled that are planning to mitigate climate change, 69% of investors are looking to increase allocations to the energy sector over the next five years; 61% for food and agriculture; 55% in infrastructure; 55% in water, sanitation and hygiene; and 49% in the forestry and timber sector.
Tight Market Conditions
Even though projections indicate that China’s economic growth may slow to less than 4% by 2028, developing and emerging economies are expected to fuel the majority of global GDP growth through that year, due in part to stronger contributions from diverse markets. For example, the GDP of Saudi Arabia, which the IMF classifies as an emerging and developing economy, is projected to reach nearly $1.4trn by 2028, compared to $1.1trn in 2024. The same forecast expects Saudi Arabia’s GDP per capita to surpass $37,200 by 2028, up from roughly $33,000 in 2024.
Consequently, the Economist Intelligence Unit forecasts real GDP growth at 2.4% globally in 2024. At the industry level, opportunities can be found in the restructuring of supply chains, and the demand for resources vital to emerging industries and the green transition. While artificial intelligence presents opportunities for cost reduction and could cause some disruption, it is more likely to complement human capabilities rather than replace them, leading to changes in job roles.
Whereas high interest rates have put a strain on global economic activity, there are no signs of systemic debt issues that could trigger a worldwide recession. Emerging markets are expected to benefit from a projected shift towards a more relaxed global monetary environment, coupled with a recovery in global trade. Further progress in impact investment is likely to be driven by the corporate and sovereign issuance of green, social, sustainable and sustainability-linked bonds (GSSSBs). The deployment of this capital will likely aid impact-driven venture capitalists in regaining vitality by co-developing opportunities where financial commitments and risks can be shared by well-established corporates and governments. The global capital intake for venture capital firms has decreased significantly, dropping $200bn from 2021 to 2022, with an additional decline of around $50bn in 2023.
Shift To Emerging Markets
In the past half decade, investors have focused predominantly on developed markets, with the US and Canada seeing the most rapid growth in asset allocations at a compound annual growth rate (CAGR) of 53%; followed by Western, Northern and Southern Europe at 33%; and East Asia at a CAGR of 21%. This was due to the perceived volatility and risk associated with emerging markets. However, attitudes towards these markets have been changing, and investors are increasingly planning to direct their resources towards such regions. When asked about future plans, 56% of the investors surveyed by GIIN said they were intending to boost their impact assets in sub-Saharan Africa; followed by Latin America and the Caribbean, at 48%; and South-east Asia, at 42%.
The GSSSB market in Africa is on a growth trajectory, rapidly outpacing the global market despite multiple challenges. The year 2022 saw a robust 14% increase in issuances in the region, hinting at the potential for further expansion. While scalability may pose a challenge, African governments and regulatory bodies are actively cultivating an environment conducive to sustainable finance. In early 2023 South Africa led the charge, comprising 58% of issuances; Nigeria and Morocco are also making strides, each contributing 7%. Encouragingly, even smaller African economies are making headway. To illustrate, with the support of the International Finance Corporation, in November 2022 the Ghana Stock Exchange partnered with the US Securities and Exchange Commission to launch guidelines for green bonds and sustainability-linked bonds.
Investor Interest
Sustainable bonds were forecast to constitute more than 30% of Latin America’s total bond issuance in 2024, showcasing robustness despite volatility in recent years. Bond deals reached $71.7bn in the first six months of 2024. Countries such as Brazil, Chile and Mexico are anticipated to retain their market dominance, especially through the issuance of sustainability-linked bonds. The ongoing development of local guidelines for sustainable financing is expected to further encourage standardisation and transparency, thereby attracting investor attention and motivating new issuers to participate in the region’s GSSSB market.
The Asia-Pacific region is driving investor interest in green bonds, especially those supporting renewable energy initiatives. South Korea, Japan and China are expected to maintain their position as the top markets for GSSSBs in the region, as they have consistently represented 70-80% of GSSSB issuance in the region since 2019. Meanwhile, Indonesia is making its mark, with the country issuing sustainability-related bonds worth more than $864m in 2023. Of this amount, green bonds accounted for $820m. The country’s Financial Services Authority (OJK) has voiced support for the development of business indices focused on environmental, social and governance (ESG) principles. In February 2024 Indonesia boasted five ESG-oriented indices. The OJK requires that green bond revenue be used for environmentally beneficial activities, while social bonds should fund projects that address social issues.
As sustainability initiatives gain momentum, the release of GSSSBs in the Middle East is seeing a swift rise from a modest start. The first nine months of 2023 saw GSSSB issuance, including sustainable sukuk (Islamic bonds), more than quadruple compared to the same period in 2022, hitting $19.4bn as GCC countries invest in diversification and renewables. That year GSSSBs accounted for 30% of bond issuances in the Middle East, although the region accounted for less than 3% of global issuances.
The UAE and Saudi Arabia are expected to continue leading in terms of issuances, given their commitment to diversifying and improving the sustainability of their economies. Banks have been a primary issuer since 2021, and large corporations, including government-related institutions, have played a key role in GSSSB issuances, especially in 2023. In January 2024 Oman launched the Sustainable Finance Framework in order to issue GSSSBs, including sukuk, with environmental or social benefits across 14 categories, seven of which are green and seven, social. The sultanate aims to reduce oil’s share of GDP to 16% in 2030 and 8.4% by 2040.
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