Driving impact through investments

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Sustainable investing is a collective descriptor for a range of investment approaches that enable investors to meet both sustainability and financial objectives. Sustainable investing harnesses capital and innovation in an attempt to contribute to solving some of the world’s most pressing environmental and social challenges ranging from climate change and biodiversity loss to social inequality. 

Sustainable investing has grown rapidly over the past decades and reached over USD 30 trillion invested globally as of 2022.1 Impact investing is one of the fastest growing sustainable investing approaches given its economic potential alongside its intention to drive positive externalities.

What is impact investing

 

The term ‘impact investing’ was first coined by the Rockefeller Foundation in 2007.2 There are different definitions of impact investing, and its interpretation varies by context. 

At Citi Wealth, we define impact investments as investments that seek to generate risk-adjusted financial returns alongside environmental and/or societal impact. This impact needs to be intentional, measurable and incremental.

This means the impact is specifically envisioned and targeted at the outset and it must be exhibited with measurable performance metrics. At the same time, the investment must drive positive change beyond what would have been achieved had the investment not been made. 

An example would be investing in an impact-centered business that provides an affordable essential service such as healthcare, education, water or financial service to underserved communities, which would otherwise not have access to these services. The enterprise would have clear performance metrics to demonstrate their impact and track progress. Moreover, investors could contribute to impact through capital allocation and often other forms of non-financial support such as active engagement and stewardship. 

It is the combination of intentionality, robustness of impact management and the focus on the theory of change that makes impact investing different from other sustainable investing approaches (Click here to learn more about other sustainable investing approaches). 

Impact investing on the rise

 

Global impact investment assets under management (AUM) estimates range from over US$1 trillion to around US$2 trillion as of the early 2020s. This number is expected to grow at double-digit annual growth rates in the next decade.3 4 5

Impact investing has attracted a wide variety of investors, including institutional investors, foundations, family offices and High-Net-Worth-Individuals, with the latter two groups having the highest growth, as of 2020.6 

Increasing numbers of investors are looking beyond risk management and aim to purposefully embed sustainable outcomes into their investments. Impact investments attract investors who seek to access competitive returns and portfolio diversification; gain exposure to innovations that drive sustainable development; invest in a way that complements their philanthropic efforts or a combination of all. 

Just as venture capital was the response to the investment needs of tech entrepreneurs, impact investment is the response to the needs of impact entrepreneurs and businesses that want to improve lives and help the planet.

According to the 2020 GIIN annual impact investor survey, 88% of impact investor respondents report that portfolio performance of impact investments meets or exceeds their financial expectations and 99% says impact investments meet their social and environmental impact expectations. This is an indicator that helps to show that impact investments can meet both investors’ financial and impact objectives.8

How can investors participate in impact investing 

 

There are now a variety of impact investments in both public and private markets that investors can seek to match with their risk-return-impact preferences across geographical focus, themes, sector and asset classes. These strategies incorporate impact in different ways and seek to offer various levels of financial outcomes depending on their investment objectives and asset classes. There are some investments which are impact-first or catalytic and some are financial-first.

Impact investments that meet Citi Wealth’s definition are mostly in the private markets, especially in private equity and private debt. Other asset classes that apply an impact lens include real estate and direct private investments (Click here to learn more about Impact Investing and Private Markets).

Investors may also make impact investments in the capital markets via green, social or blue bonds in the primary market. These types of bonds have specific guidelines on how the proceeds from the sale of the bonds are intentionally used for some environmental or social benefits. 

Moreover, for suitable investors, there are vehicles that use a pay-for-success financial structure, in which investors’ returns are linked to the achievement of the pre-agreed project outcomes. These vehicles usually blend both public and private capital. It is one way to help diversifying the investor base that provides capital to underfunded non-profit organizations and projects and at the same time allow investors to  seek competitive risk-adjusted returns. For example, we have seen outcome bonds used in numerous realms such as supporting children affected by the COVID-19 pandemic, conserving critically endangered umbrella species like the rhinos and reducing plastic pollution. 

Continuing the momentum

 

Although impact investing still accounts for only a relatively small proportion of sustainable investments, we expect to see further innovation and acceleration in impact investing. By 2030, we envisage more impact strategies emerging which address a broader range of sustainability challenges, and to address the huge funding gap to reach the 17 United Nations Sustainable Development Goals (UN SDGs) and global climate goals. We believe enhancements in transparency and measurement of impact would also further strengthen the credibility and growth of impact investments. 

 

KEY TAKEAWAYS:

 

At Citi Wealth, impact investments refer to investments that seek to generate competitive risk-adjusted financial returns alongside intentional, measurable and incremental environmental and/or social benefits.

There are now a variety of impact investments in both public and private markets that investors can seek to match with their risk-return-impact preferences across geographical focus, themes, sector, and asset classes.

Impact investing is a growing phenomenon, and it has already surpassed the trillion-dollar mark. The impact investing market is expected to continue to expand with more strategies, greater transparency, and standardization of impact metrics.

 

1  Global Sustainable Investment Review 2022 | Global Sustainable Investment Alliance

2  Bringing Scale to the Impact Investing Industry (rockefellerfoundation.org)

3  4 key trends driving private market impact funds | World Economic Forum 

4  Investing for Impact: The Global Impact Investing Market 2020 | International Finance Corporation

5  Impact Investing Market - Value, Statistics & Trends | The Brainy Insights

6  Annual Impact Investor Survey 2020 | Global Impact Investing Network

7  Impact: Reshaping Capitalism to Drive Real Change | Cohen, Ronald

8  Annual Impact Investor Survey 2020 | Global Impact Investing Network

 

Important Information

Environmental, Social and Governance (ESG) and sustainable investing may limit the type and number of investment opportunities, and, as a result may affect performance relative to other approaches that do not impose similar sustainability criteria. Sustainable investment products are subject to availability. Certain sustainable investment opportunities may not be available in all regions or not available at all. No guarantee is provided regarding the financial or sustainability performance of such products and the products may not meet their investment or sustainability objectives. 

Investment strategies, portfolios and products offered via the Citi Global Wealth Investments’ (CGWI) sustainable investing platform, Investing with Purpose (IwP), meet CGWI’s defined criteria for a sustainable investment. Every sustainable investment on the IwP platform incorporates one or more approaches: Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) Integration, Thematic, and Impact. 

At CGWI, we define the four approaches to sustainable investing as follows. Socially Responsible Investing (SRI) involves the exclusion of sectors or companies that may not to be aligned with sustainability values or objectives. The investment mandate must explicitly state the intention to exclude certain exposures to such sectors, industries and products based on values-related criteria. 

ESG Integration uses ESG data and metrics to identify investments with potentially attractive risk and return characteristics. Investment mandates will incorporate ESG risks and opportunities that are considered material and integral drivers of investment decisions into their investment process. Managers of ESG integration strategies may directly engage with portfolio companies and / or use their proxy votes to help drive positive ESG outcomes.

Thematic investments access exposure to investments aligned to sustainable themes such as climate change or access to healthcare. Investments seek alignment to sustainable themes through their business lines as demonstrated by their current and future revenue exposures. 

Impact investments demonstrate measurable impact in a particular environmental or social area. Investment mandates not only state intent, but also manage to a desired sustainable outcome by providing measurable environmental and/or social metrics alongside a potential financial return. To be considered ‘impact’, the outcome must be incremental, meaning it would not have occurred had the investor’s capital not been allocated to the investment. 

A single investment product can combine multiple approaches. These approaches may limit the type and number of investment opportunities, and, as a result may affect performance relative to other approaches that do not impose similar sustainability criteria. Sustainable investment products are subject to availability. Certain sustainable investment opportunities may not be available in all regions or not available at all. No guarantee is provided regarding the financial or sustainability performance of such products and the products may not meet their investment or sustainability objectives. Strategies and products must meet certain criteria for sustainable investing to be marketed as such on CGWI’s IwP platform. Investments outside the IwP platform may still consider sustainability criteria in the investment process, such as potential impact of climate risk on investment value.

There is currently no globally accepted framework or definition (legal, regulatory or otherwise) nor market consensus as to what constitutes, an “ESG”, “sustainable”, “impact” or an equivalently labelled product, or regarding what precise attributes are required for a particular investment, product or asset to be defined as such. Different persons may arrive at varied conclusions when evaluating the sustainability attributes of a product or any of its underlying investments. Certain jurisdictional laws and regulations require classifications of investment products against their own sustainability definitions and as such there is likely to be a degree of divergence as to the meaning of such terms. For example, the term “sustainable investing” where used in this disclosure is by reference to CGWI’s internal framework rather than any defined meaning under jurisdictional laws and regulations. There is no guarantee that investing in these products will have a sustainability impact.

There are numerous ESG data providers that evaluate companies on their ESG performance and provide reports, ratings, and benchmarks. Report, rating and benchmark methodology, scope, and coverage, vary greatly among providers. ESG data may not be available for all companies, securities, or geographies and as such, may not necessarily be reliable or complete. Such data will also be subject to various limitations, including (inter alia): i) limitations in the third-party data provider’s methodologies; ii) data lags, data coverage gaps or other issues impacting the quality of the data; iii) the fact that there are divergent views, approaches, methodologies and disclosure standards in the market, including among data providers, with respect to the identification, assessment, disclosure or determination of “ESG” factors or indicators and which precise attributes are required for a particular investment, product or asset to be defined as such; iv) the fact that ESG information, including where obtained from third-party data providers, may be based on qualitative or subjective assessment, and any one data source may not in itself represent a complete ‘picture’ for the ESG metric that it represents; v) the fact that such data may be subject to change without any notice of this to CGWI by the third-party data provider or other source. Furthermore, some of the data CGWI obtain from third-party providers is not obtained directly from investee companies, but rather represents estimated / proxy data that the third-party data provider has prepared using its own proprietary methodologies (e.g. because there is no actual investee company data). Such proprietary methodologies are also subject to various limitations of their own, acknowledging that estimates / proxies are in and of themselves an inexact science. CGWI does not make any representation or warranty as to the completeness or accuracy of any such third-party data (whether actual or estimated), or of data that is generated using this third-party data. CGWI shall have no liability for any errors or omissions in the information where such information has been obtained from third parties or not.

Due to their narrow focus, impact investments can be more volatile than, and underperform, other more diversified investments and the stock market generally.

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