A study of the state of what is called impact investing shows more money is pouring in and large asset managers want a piece of the action - which may also raise some problems.

The arrival of larger firms into the space known as impact investing raises the risk that such money managers will drift away from the core of what this sort of asset management is meant to achieve, a study of the sector shows.

The cautionary note was raised by a survey from the Global Impact Investing Network, a pan-industry group gathering data on the sector. More positively, the study, which covers an array of groups including wealth managers and family offices, said investors intend to boost capital to this style of asset management by 17 per cent this year, reaching $25.9 billion and covering 9,557 deals.

The impact investing field has become increasingly visible as a wealth management talking point, tapping into a desire among high net worth individuals to use their wealth to improve the environment, tackle poverty and poor education, and other objectives. The process is, its practitioners argue, not at odds with hard-nosed pursuit of investment returns because investing for "good" equates to smart practice anyway.

GIIN survyed 209 organizations, reporting a total of $114 billion in impact investing assets under management. Survey participants committed a total of $22.1 billion in 7,951 impact investment deals in 2016.

Fund managers raised $11.1 billion in 2016, with plans to raise $18.5 billion in 2017, the report showed.

Investors who responded to the survey reported that returns met or exceeded their expectations in both impact (98 per cent) and financial performance (91 per cent).

Among details of the report, it showed that there have been an "increasing number of large, well-known asset managers and other financial firms entering the impact investing space". In 2015, for example, the world's largest listed asset manager, BlackRock, said it was throwing its weight behind the impact investing space. Goldman Sachs and Bank of America are involved in areas such as social impact bonds; banks including UBS have created impact investing funds.

As far as social impact bonds are concerned, for example, the sector is in its relative infancy. This news service recently interviewed the University of Virginia’s Darden School of Business about the topic. (See here.)

According to a survey of US asset managers by Cerulli Associates, the analytics firm, a rising percentage of asset managers look at environmental, social and governance factors alongside more traditional financial tests to identify opportunities and risks. And a recent report by Boston Consulting Group and MITSloan Management Review found that investments that deliver financial results are closely correlated with those that are deemed sustainable (Investing For A Sustainable Future, 11 May 2016). Separately, a study by Barclays found that investment-grade bonds with higher ESG scores outperformed those with low ESG scores between 2007 and 2015 (source: MSCI).

One assumption by impact investing evangelists is that Millennials are keener than their parents on the idea, and this is significant because a large volume of financial assets are expected to transfer from baby boomers to their Millennial heirs over the next 30 to 45 years, with an estimated $30 trillion changing hands in North America alone.

Mission drift
The arrival of large firms will "help professionalize the market, bring in much-needed capital, and enhance the credibility of impact investing", the report continued, but there is the risk that arrival of prominent players will cause "mission drift" - in other words, that the original idealism of impact investing will be undermined in a chase for returns.

Investors reported progress on a number of factors, including an increasing abundance of professionals with relevant skillsets (90 per cent noted progress) and greater availability of market research and data on products and performance (89 per cent reported progress).

About 26 per cent of respondents track their impact investment performance to the United Nations Sustainable Development Goals and another 34 per cent plan to do so in the near future. The SDGs have served as a rallying cry for many impact investors to link their investments to a broader international initiative.

Respondents to the study measure the social and/or environmental performance of their impact investments, using a mix of proprietary metrics, qualitative information, IRIS-aligned metrics, and other tools and frameworks.

The top sectors to which respondents allocated capital were housing, energy, and microfinance. Top geographies of investment were the US & Canada, Europe, sub-Saharan Africa, and Latin America & the Caribbean.

While two out of three respondents target risk-adjusted, market rates of return, there was broad agreement among respondents that below-market-rate capital plays a valuable role in impact investing. Roughly four out of five respondents agreed that this type of capital has several benefits, including its ability to mitigate risk of investments to attract new investors, act as a bridge between philanthropy and market-rate capital, and capitalize opportunities that may never lend themselves to risk-adjusted returns.