The UK impact investment market, which delivers a positive, measurable social and environmental benefit alongside a financial return, was worth approximately £58bn in 2020 according to a new report -Estimating and describing the UK impact investing market.
It said the UK represents between 3.3% and 3.8% of the total global impact investment market. The study clarified that when investors are typically looking to “avoid harm” or “generate benefits to stakeholders”, they are generally employing responsible or sustainable investing strategies. Impact investment is specifically marked by an intention to create measurable social or environmental benefit alongside a financial return.
The first estimate of the UK impact market was published in a report by the Impact Investing Institute, in collaboration with EY, funded by the UK Department for Digital, Culture, Media and Sport with additional support from Big Society Capital.
Penney Frohling, financial services strategy partner in EY Parthenon, said in the report: “The convergence of factors such as the pandemic and recent severe weather events, and the increasing focus on ESG, are intensifying the demand for investments that deliver positive outcomes for people and the planet.
The spotlight is firmly on the financial services industry and the critical role it can play in helping to resolve these societal and environmental challenges.”
Impact investing still accounts for less than 1% of total assets under management in the UK despite rapid growth. Social investors, private equity, venture capital firms and foundations are the leading impact investors in the market but institutional investors are expected to be the primary drivers of future growth (see graph).
“We recognise that there is a large and growing green, sustainable, sustainability-linked and social bonds market in the UK. As of 2020, this was c.£7.9bn of capital raised,” said the report.
“However, due to the lack of clarity available on which of these investments are made with intentionality and measurability, we are unable to distinguish the proportion that is specifically attributed to impact investment.”
The report surveyed more than 40 market participants and found that nearly all, 97%, believed that asset allocation to impact had increased over the past two years with 90% stating that 2020 returns were either in line with or exceeded their targets.
Three quarters, 75%, of respondents are planning to increase their allocation to impact by more than 10% in the next five years.
“Applying a weighted average of all respondents to current estimated impact AUM results in a potential 15% growth, which would double funds allocated to impact to £100bn in five years,” said the report.
Respondents said sophistication of measurement processes, appropriate returns across the risk / capital spectrum and data on impact investing were the biggest challenges.
Interviewees also highlighted the need to establish common standards for impact measurement and reporting frameworks to promote greater transparency, comparability of financial/impact returns, and accountability for evidencing impact outcomes.
©Markets Media Europe 2022
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