Energy transition and private markets driving continued appetite for impact
By Catherine Macaulay and Anne Dardelet
Despite apparent political headwinds and an oft-cited ESG (environment, social, governance) backlash in some parts of the world, investor demand for impact investing strategies has continued to grow. This has been driven by potential for positive diversification and the opportunity to access return opportunities across the global energy transition and via private markets.
According to the Global Impact Investing Network’s (GIIN) Sizing the Impact Investing Market 2024 report, there is currently close to $1.6 trillion (R31trl) in impact investing assets under management (AUM) globally, being managed by more than 3 900 organisations.
For the first time, GIIN was also able to calculate a compound annual growth rate (CAGR) for impact investing AUM since 2019. At 21%, this rate is well above that for the wider asset management industry and outstrips even the fast-growing private markets segment, albeit in both cases from a much lower base.
Opportunities in the global energy transition
One of the key sector and thematic areas that is driving this continued appetite for impact investing, and sustainability-related investing more broadly, is the global energy transition.
This reflects a continued investment focus towards decarbonisation that we believe will continue even despite political changes in the US. It is fuelled by both a strong economic and regulatory rationale across multiple jurisdictions, as well a growing opportunity set related to the evolution in broader energy transition technologies.
In relation to impact investing specifically, the GIIN State of the Market 2024 report, based on its annual impact investor survey, found energy-related investments accounted for the largest share of impact AUM at 21%. Half of all survey respondents have allocated at least some of their impact AUM to this area.
Investments linked to housing and financial services came in second and third respectively, with both accounting for 14% of impact AUM. Financial services incorporates microfinance, a segment that has helped to shape the modern impact investing market over the past two and half decades through a focus on offering inclusive access to commercial financing across emerging markets.
Impact asset allocations by sector
Meanwhile, and in relation to sustainability-aligned investments more broadly, just 9% of the more than 800 institutional investors that responded to Schroders’ Global Investor Insights Survey 2024 stated their organisation has ‘little to no appetite’ for sustainable investing, while 90% said they are either already investing (60%) or planning to invest (30%) in the global energy transition.
Importantly, in terms of what is driving the decision to allocate to this theme, portfolio diversification (39%) and potential for positive returns or alpha generation (38%) were the second and third most cited responses, following closely behind the role energy transition assets can play to aid the decarbonisation of portfolios (41%).
Private markets remain key area of focus
Private markets, which are noted for their potential for higher returns, as well as a long-term investment horizon and hands-on approach that can be especially relevant for sustainability and impact investments, are the key area of focus for those looking to make impact allocations.
GIIN’s report states that 43% of all impact AUM is allocated to private equity specifically, making this by far the largest single asset class for impact investing. A substantial 73% of survey respondents have at least some of their impact AUM in private equity.
Private debt was also a prominent area, accounting for 14% of impact AUM but with close to half (48%) of impact investors having allocated to the asset class. Overall, GIIN noted that 78% of respondents allocate more than three-quarters of their impact AUM across private equity and private debt combined.
Real assets, covering private infrastructure and real estate, was the second largest asset class by impact AUM at 16%, and the third largest by investor allocation at 20%.
Outside of private markets, we expect impact investments through public debt and equity, currently accounting for 12% and 7% of impact AUM, will increase over time, as more asset managers, including Schroders and BlueOrchard, an impact asset manager that is part of the Schroders Group, launch dedicated listed strategies focusing on delivering impact alongside financial returns. These strategies could enable a wider range of traditional investors to invest in line with impact objectives while prioritising liquidity.
Impact asset allocations by asset class
Emerging focus on biodiversity
Turning to emerging drivers of impact and sustainability investing, there has been a notable surge in interest in strategies targeting biodiversity.
Biodiversity loss is recognised as an increasingly urgent global challenge and is a growing area of focus in regulation and public policy. Given that anywhere from a third to more than half of assets held by financial institutions are considered to be ‘dependent on ecosystem services’, according to a review of central bank studies cited by the OMFIF’s Sustainable Policy Institute, biodiversity risk is also increasingly recognised as a key investment risk.
In its review of how impact investments align to specific UN Sustainable Development Goals (SDGs), GIIN noted remarkable increases of 82% and 64% in allocations targeting SDG 14 (life below water) and SDG 15 (life on land). Currently 28% and 32% of impact investors have made at least one investment aligned to these SDGs, respectively.
The uptake of the Task Force for Nature-related Financial Disclosures and the growing number of its adopters (from 320 in January 2024 to over 500 as of end 2024), in particular, will provide tailwinds for nature-related risk management and corporate reporting.
Catherine Macaulay, Impact Investment Lead at Schroders and Anne Dardelet, Sustainability and Impact Investment Lead at Schroders.
BUSINESS REPORT