Impact investing’s virtuous cycle is changing our capital landscape

Allied Market Research estimates the size of the worldwide impact investing market to have reached $US2.5 trillion in 2021, and is projected to reach $US6 trillion by 2031, growing at a compound annual growth rate (CAGR) of 9.5 per cent from 2022 to 2031.

As the Australian investment landscape evolves, global opportunities are reaching scale and the impact bonds market is approaching, or sometimes even exceeding, the size of many established bond markets.

Australian investors are poised to tap deep impact investing opportunities conservatively worth $2 trillion globally over the next decade.

Initially focused on financing renewable energy projects, over the past decade impact investing has expanded across a myriad of social, community, sustainability and climate-aligned themes.

Asset owners and investment managers have also made impressive strides in the sophistication of their models, classifications, investing frameworks and reporting.

Recent developments include blue bonds that focus on ocean preservation and restoration, and orange bonds that raise funds to support initiatives related to gender equality. Social impact investing has grown broadly, with areas such as racial justice and even vocational training generating investor interest and activity.

Natural capital offers an investment opportunity delivering traditional financial returns linked to food and fibre markets, while offering access to nature-positive and climate outcomes as well as ecosystem services benefits.

So how should investors approach impact investing?

Using a three-step framework to guide impact investing, asset managers need to begin with intentionality. This involves identifying positive environmental and social outcomes that fits Nuveen’s clients’ sustainable objectives and financial goals.

Next, an organisation needs to provide clarity on how it will deliver on its impact intentions. This means the impact of the investment must be direct and measurable.

The third step requires engagement with company. As one of the world’s largest fixed income managers, Nuveen maintains strong relationships with underwriters, policymakers, ratings agencies and asset owners.

We use these relationships to engage in ongoing dialogue about how to structure bonds, what characteristics are needed to satisfy investor demand and the appropriate level and quality of impact disclosure and reporting.

This last step is important for Australian investors looking to engage in the global opportunities for impact investing. Successful impact investing requires more than allocating capital - it also requires transparent, evidence-based reporting and visibility into the capital’s measurable outcomes.

Over the past decade, vocal investors have called on issuers to provide reporting with increasingly granular impact data, geographical precision, more frequent and timelier updates, and alignment with UN Sustainable Development Goals.

These advancements in reporting allow investors to allocate capital and track the real-world results of their investments with greater precision.

Add to this the fact that third parties that monitor the market have increased the reach and rigour of their evaluation processes, and there is ample opportunity for investors to generate compelling risk-adjusted absolute and relative returns while at the same time delivering measurable impact outcomes.

Surging investor demand – both in Australia and abroad – has led, not only to the rapid growth of the impact bond market, but to the maturation of the sector as well.

Increasing reporting transparency and stronger frameworks for assessing, monitoring and evaluating impact investments is completing a virtuous cycle that is attracting greater investor interest.

While the sector is not without challenges – not least a fast-changing and increasingly complex regulatory environment - investors, asset managers and issuers must continue collaborating to build on the current momentum.

Andrew Kleinig is managing director and head of Australia, Nuveen

To read Nuveen’s latest thought leadership on impact investing, visit our website.

Responsible investing incorporates environmental social governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.