Market Insights
The impact investing market has seen significant attention and activity in recent years, particularly with a focus on climate solutions. Nearly $100 billion has been directed into funds targeting climate solutions in the past three years, showcasing global investor commitment to addressing climate change. In 2023, 51 funds with at least a partial alignment with this sector ranged from large-scale funds like a $7.1 billion Blackstone private debt fund to much smaller VC funds, indicative of a wide-ranging effort across geographies including the UK, Australia, Canada, Japan, India, and Singapore.
Contrary to the once-prevalent assumption that impact investing necessitates lower financial returns, current data contradicts this narrative. Fund return data reflects that impact investing is not equivalent to concessionary returns. In fact, median Internal Rates of Return (IRR) data for impact investments does not lag significantly behind non-impact investments. Furthermore, analysis of fund performance has demonstrated that the worst-performing impact funds from 2007 to 2013 outperformed the worst non-impact funds, and the top decile of impact performers often exceeded those of their non-impact counterparts.
Despite headwinds faced by the broader economic environment and shifting perspectives on ESG strategies by some asset managers, the private markets for ESG and impact investing have adapted to new challenges and opportunities. With the inclusion of infrastructure as an impact category by the Global Impact Investing Network’s (GIIN) IRIS+ framework, funds like KKR’s Global Impact Funds have raised significant capital. Additionally, funding earmarked by large-scale legislation such as the 2022 Inflation Reduction Act and 2021 Infrastructure Investment and Jobs Act in the US has provided public financial support, which private investments can complement.
The emergence and success of dedicated impact fund managers, often from the realm of emerging managers, indicate a maturing market with specific investor demand. These emerging managers accounted for a higher percentage of total impact assets raised compared to their representation in the broader private capital universe, suggesting a dynamic and evolving marketplace. This trend extends to fundraising endeavors in 2024, where signs indicate a recovery in impact fundraising, with 25 funds closing and intentions for significant fund targets in the same year.
The impact investing market, especially in the domain of climate solutions, is robust and global, disproving myths about lower returns and showing an increasingly diverse and intricate network of investments and strategies. The data and trends outlined indicate a market that is continuously evolving, with a growing appreciation for the importance of aligning investments with environmental and social goals without sacrificing financial performance. [The State of Private Market ESG and Impact Investing in 2024].