As corporations make big commitments around net zero carbon emissions and the push to achieving the UN’s Sustainable Development Goals by 2030 continues, the need for the finance to back these ambitions grows more pressing.
Impact investing as a sector has grown tremendously over recent years and according to experts from Palladium's capital advisory team and Bamboo Capital Partners, Palladium’s asset management arm, 2022 will see further growth thanks in part to more mainstream players in the market and explosive growth in climate finance.
Focus on Climate
All eyes were on the environment and tackling climate change this year. According to the UN, protecting the earth’s plants, animals, and ecosystems, and repairing the damage already done by humans, will require upwards of USD 700 billion a year in extra funding from governments and businesses over the next decade.
As Florian Kemmerich, Managing Partner of Bamboo Capital Partners asks, “Is ESG [environmental, social, and governance] investing the flavour of the decade or the urgency of the century?”
Thanks to COP26, momentum has grown behind anything climate finance-related, both in the financial institution world and within corporates. “There’s no doubt that this is a hot topic for major institutional investors and renewed interest in impact investing is at least in part driven by climate considerations and, more specifically, net zero ambitions,” says Steven van Weede, Palladium Managing Director.
The blue economy is seeing growing interest thanks to the increased attention on the vulnerability of coastal communities, the state of biodiversity in the oceans, and the role oceans can play in addressing climate change. Van Weede stresses that there will be an increased focus on ocean finance in 2022.
While the momentum generated around COP26 is good news, van Weede is concerned that there is a risk that the noise around funding climate projects will drown out some other sectors that are just as important. “Everything in climate is huge, it’s obvious to see, but I think in these COVID-19 times, there’s a huge interest in social equity too.”
He notes that there has been progress in gender lens investing, as evidenced bv the Project Sage survey that found the number of gender lens funds has increased by nearly 50 percent in the past year. “Moreover, we are seeing interest developing in our work on LGBTQI lens investing, and strategies around racial equity. These shouldn’t lose momentum. And the same goes for themes around financial inclusion, SME [small and medium-sized enterprises] finance, health, education and beyond.”
Partnerships and Mainstream Impact
“Impact investing in the past had been a niche market – the tree huggers of the financial markets,” notes Kemmerich. “But this is very exciting, we’re actually seeing a landslide happening in something that used to be very niche, and now we’re seeing the UN talking to private bankers and asset managers, and NGOs are looking to see how to do things jointly, and how to do it with net positive investments.”
Mainstreaming impact investing was a core theme of the G7 Impact Taskforce. Meeting the UN’s Sustainable Development Goals and financing the transition to net zero will require investment in the trillions of dollars.
Tom Adlam, Palladium’s Team Leader for UKAid’s Impact Programme, which funded the work of the G7 Impact Taskforce, notes there is an increasing focus by donor countries on the mobilisation of private sector capital through blended finance and through co-investment strategies with multilateral development banks and development finance institutions as a means of addressing risk/return constraints. We are even seeing initiatives aimed at involving institutional investors through the listed markets, such as in the UK FCDO’s Mobilist programme, which Palladium leads.
“Public and philanthropic capital alone cannot finance the achievement of the UN’s Sustainable Development Goals and the transition to net zero. Trillions of dollars, not billions, are needed.” Kemmerich agrees, adding that “blended finance and public-private partnerships are growing, and the importance of alignment between the two is now better understood by the market”.
Van Weede notes these partnerships are also cropping up in other areas of the market. From the acquisition of advisory firms and fund management firms by mainstream operators, to big name private equity and venture capital firms turning their attention to impact, and finally new products emerging in fintech that allow individuals to curate their own impact investment portfolios.
The increase in corporate impact as a means for organisations to better engage and control their climate commitments, adds van Weede. “Corporates are making net zero commitments and rather than being reliant on buying carbon in the market, which is prone to price fluctuations and questions about quality we’re seeing corporates increasingly turning to direct investments into offsetting projects.”
“In addition to corporations knowing that they’re working with properly designed projects, there’s the element of owning a narrative around how they’re creating the impact,” explains van Weede. In short, impact investing has gone mainstream, which makes the next trend all the more important: measurement and disclosure.
Standardisation for All
And as the number of participants in impact grows, so do the chances of impact washing and the need for a common language to better combat the risk of impact washing, notes Adlam. “Over the last year, great progress was made towards the standardisation of impact management, measurement, and reporting, culminating in the launch of the International Sustainability Standards Board in November 2021.”
“Of particular long-term significance is the continuing progress towards mandatory disclosures of impact by corporations and the development of methodologies for valuing impact, both through accounting adjustments, like the Impact-Weighted Accounts Initiatives, or through the monetisation of impact,” he adds.
Finally, and with a positive outlook on the influx of new players to the market, Kemmerich expects that 2022 will see more people jumping into impact investing for the good, rather than the pay-out. “I think we’ll continue to see huge growth in impact investing, with fewer questions on returns, rather people wanting to participate and show, and learn from it.”
“Of course, there will still be a focus on the return on investment, but there will be a shift in focusing in on what the investment is actually doing on the ground.”
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