Impact Investing Trends to Know for 2023

Insights from the Global Impact Leaders 2022 Impact Survey

Introduction

The field of impact is growing exponentially — with an expected 18% annual growth in market size. As more investors commit their dollars to support a more sustainable and equitable future, the needs of the impact space and the support impact investing can offer are shifting.

To better understand the challenges, progress, and trends shaping the future of impact, the Sorenson Impact Center surveyed the Global Impact Leaders, a diverse network of impact practitioners and thought leaders working toward positive social and environmental impact around the world. The network was formed to recognize, elevate and amplify the contributions of those working to solve the world’s most pressing social and environmental problems.

From finding value in non-financial returns to promoting education technology to abandoning the top-down model, the emergent trends the Global Impact Leaders identified recognize the challenges our world faces and the urgency required to find innovative solutions that will make a significant impact at scale.

Brigit Helms

BRIGIT HELMS | Executive Director, Miller Center for Social Entrepreneurship

“Having worked in this space for more than 35 years, I believe we’re at an historical moment where the impact field has an unprecedented opportunity to flourish, given a much broader range of stakeholders indicating their commitment.”

The Needs are Urgent

The biggest message from the impact leaders was that impact is now becoming mainstream—and the field still isn’t moving fast enough.

TEMPLE FENNELL | Managing Partner, Clean Energy Ventures

“I believe the intention to generate impact is genuine and urgent; however, this intention is not sufficiently activated.”

Andrew Edgecliffe-Johnson

ANDREW EDGECLIFFE-JOHNSON | US Business Editor for the Financial Times

“Impact investing has defined a relatively small niche of the financial sector, even at a time when ESG investing and corporate social responsibility have become de rigueur. That may be changing, but believers in the importance of impact still need to find more ways to embed it in broader financial and corporate movements.”

Elizabeth Corley

ELIZABETH CORLEY | Chair, Impact Investing Institute

“There has been significant growth in impact. However, the lack of clear definitions, consensus on what ‘good’ looks like, and confusion about the term ESG and ‘woke capitalism’ are hampering the scale and pace of growth.”

When the term “impact investing” emerged, the field consisted of a few boutique investors and a handful of social entrepreneurs working to shift capital to benefit the greater good. Today, impact funds are created by mainstream asset managers, and impact is a major topic of conversation in boardrooms. The field continues to expand as impact tools, management, measurement, and regulation are introduced. 

Yet we are not making nearly enough progress — or quickly enough — to meet the Sustainable Development Goals (SDGs). While impact fund managers have seen rapid increases in the amount of capital under management, the totals are not yet close to the estimated $1.4 trillion to $2.5 trillion of additional spending required to achieve the Sustainable Development Goals (SDGs) set forth by the United Nations by 2030. “To close the gap,” a McKinsey report states, “asset owners and fund managers will need to adopt investment strategies that put still more emphasis on positive social outcomes, rather than strategies that merely seek to minimize or prevent negative outcomes.” 

Following Covid, our world faces a plethora of social and environmental challenges from food security to racial inequity to climate change. In order to preserve the stability of the planet, we must act urgently to find replicable, scalable solutions to solve these global challenges. We need to innovate with a collaborative, solutions-oriented and forward-thinking approach.

In order to drive real change and take on global social and environmental challenges at a meaningful scale, these trends must continue. Much of the growth in impact investing is being driven by the increasing numbers of millennial investors, who are adopting sustainable investing as a means to both affect positive change and generate wealth. Millennial investors “believe impact investing is the best way to increase their share of social change and good as compared to the traditional forms of philanthropy to create long-term positive change in society.” Impact-driven investing needs to be commonplace in order for us to make a difference that will matter.

What are the most important challenges facing the field of impact today? Results are ranked by percentage of first-place votes.

From the 2022 Global Impact leaders Survey
  1. Lack of clear impact leadership among government, business and social sector leaders (24%)
  2. Insufficient or ineffective government policy, regulation and enforcement (20%)
  3. Lack of standardized impact measurement methods (15%)
  4. Insufficient impact capital (12%)
  5. Insufficient or unrepresentative voices at the table (12%)
  6. Corporate green-washing/impact-washing (10%)
  7. Myths and negative press (2%)
  8. Insufficient research, data and analysis (2%)
  9. Insufficient institutional-grade impact investment management firms (2%)

There is Real Value in Impact

Impact investors know ESG and impact investing yield a financial return — and equally important non-financial returns.

We’re standing at an inflection point regarding private capital’s role in improving socioeconomic realities globally. As of 2018, 84% of individual investors were interested in investing in companies trying to make a positive difference in the world. And in 2022, the global impact investing market was estimated to exceed $1 trillion>, according to the Global Impact Investing Network (GIIN). 

Investors and stakeholders are increasingly requiring their portfolio companies to disclose their performance along financial as well as social, economic, and environmental metrics. Thus it is increasingly becoming necessary — and non-negotiable — for private companies to generate financial and social returns simultaneously. Over the long term, ESG mitigates risks and can pay off financially, as well. Research shows that “adoption of strategic ESG practices is significantly and positively associated with both return on capital and market valuation multiples.” Additionally, “firms that improved on material ESG issues significantly outperformed their competitors.” 

While data shows that ESG portfolios often outperform, many investors allocate a portion of their capital in a catalytic manner and are willing to accept a reduced financial return for a greater potential impact. A report by Cicero exploring how to quantify the value of impact investing showed that investors are willing to not just forgo financial returns but pay significantly for impact as long as they are confident their money is making a difference. The study notes investors are willing to give up as much as 1.3 percentage points in financial return and pay an additional 58 basis points in management fees. When capital is used to successfully drive and demonstrate impact, it will accelerate the growth of the field and the accompanying frameworks needed to support it. Cicero concludes that maximizing investors’ confidence in impact could shift trillions of dollars toward impact investing.

ESG investing looks at long-term value creation rather than short-term profits. Over the long term, ESG mitigates risks and can pay off financially, too. Research shows that “adoption of strategic ESG practices is significantly and positively associated with both return on capital and market valuation multiples. Those firms that improved on material ESG issues significantly outperformed their competitors.”

Laurie Spengler

LAURIE SPENGLER | CEO, Courageous Capital Advisors

“As a field, we need to reframe the way in which we see the role of capital and how it is deployed. Money is in service of people—all people—and the planet, not the other way around. With that reframe we need to provide clear approaches for how we can deploy capital effectively and efficiently to meet the needs of people and the planet.”

ROSEMARY ADDIS | Founding Managing Partner, Mondiale Impact

“The ultimate goal of impact is to see the majority of activity and investment contributing positively to sustainability and the SDGs and significantly more capital flowing to solutions delivering impact at scale and meeting the SDGs. This requires us to move from the dominant system being one that over-emphasizes financial considerations and return to one that integrates impact.”

It is Time to Abandon the Top-Down Model

Bringing more types of people into the decision-making process is good for everyone.

Chintan Panchal

CHINTAN PANCHAL | Founding Partner RPCK

“The impact field is relatively more diverse and inclusive than its counterparts in the ‘legacy’ industry, but capital—and the power and voice that comes with it—is still concentrated in the same circles it has been for centuries. To make real change, that power and voice, along with a genuine opportunity to create wealth, needs to be opened to those historically excluded members of our society.”

Impact investing can lead the way in shifting power dynamics. Many investors note the need to abandon a model where those with the money make the decisions and instead bring those close to the work into the decision-making process. Experts in the space suggest investors start acting as facilitators rather than experts, bringing new and more representative voices onto boards and committees. 

It is also time to rethink structures that give preference to those with privilege and networks, such as warm introductions and highly restrictive grants. New decision-making structures and participatory models enable more types of people to connect with investment capital. 

Impact investors have the opportunity to change the culture of investing to support those who have been historically underserved. Women and BIPOC entrepreneurs, for example, face barriers when it comes to securing funding. Female founders secured just 2% of venture capital in the U.S. in 2021 while Black and Latinx founders only represented 2.6% of all VC funding in 2020. By supporting these underrepresented entrepreneurs, impact investors can help rebuild the entrepreneurial ecosystem, ensuring all businesses and founders are given a fair chance.

ESG Needs Clarity

ESG and impact investing aren’t the same thing.

ESG has become a hot-button issue amid the political and cultural divides in the U.S. Much of the controversy stems from a misunderstanding of ESG, with ESG and impact investing often conflated. Experts clarify that ESG is an investment screening tool and a form of risk analysis — it does not ensure or demand specific impact. Impact investing, on the other hand, is a specific type of investing that is aligned with particular desired impacts. Or, as Impact Entrepreneur summed it up: “Simply put, ESG measures how a company operates while impact measures what a company does.”

We can make progress on both by clearly defining each so that there is a common understanding of their differences. Despite the controversy, the consensus from impact leaders is that ESG is here to stay.

How important a role do you believe ESG will have in advancing the impact space and achieving the SD?

From the 2022 Global Impact Leaders Survey
Very important (38%)
Important (20%)
Somewhat important (15%)
Not important (3%)

PHYLLIS COSTANZA | Co-Founder and President, OutcomesX

“While there is a lot of opposition to ESG investing, particularly amongst conservatives in the U.S., consumers and investors have already jumped on the bandwagon and care about these issues. The mainstream media seems more interested in the controversy than the benefits, and they should present both sides of the story.”

Mark Campanale

MARK CAMPANALE | Executive Chair, Carbon Tracker Initiative

“We need to differentiate between a risk management system that includes social and environmental factors (ESG) as opposed to an investment strategy, with purpose, that aims to deliver social and environmental outcomes (impact investing).”

Measurement, Measurement, Measurement

Creating reliable measurement tools is an important development that’s currently underway.

Ben McAdams

BEN McADAMS | Sorenson Impact Center Senior Fellow

“The current state of the field of impact involves too many buzzwords and not enough empirical measurement.”

The impact investing sector is in the midst of developing the tools needed to measure impact reliably, and those tools will evolve and improve over time. A 2018 McKinsey article, “Catalyzing the growth of the impact economy,” states: “Among the impact-economy stakeholders we have interviewed or spoken with…there is…a broad consensus on this point: The impact economy will not reach maturity until it develops policies, practices, and standards to govern the social dimension of impact-related economic activities.”

As noted in the Cicero study, as impact investing grows, proper impact measurement can help capture funds. Better data should be easily accessible and easy to understand, measuring the outcomes of impact investing. This will instill confidence in investors that their investments are making the impact they desire. 

Creating comparable structures for measuring social and environmental impact will require, according to McKinsey research, increasing engagement with public policy, instituting operational and reporting norms for fund managers and social entrepreneurs, and establishing an impact investing industry body to promote policies and standards. The ability to accurately and analytically evaluate the return on impact will allow the field to expand further and faster. Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) can support these efforts by using their status, networks, and expertise to create investable pipelines and track records, enabling the private sector to follow. They can further mobilize private capital investments by offering capacity-building support, risk mitigation instruments, performance data, and partnerships.

Impact-weighted accounts are another solution being tested. “Investors struggle to embed those metrics in financial models because it’s not clear what they mean or how they can affect the financials,” Harvard Business Review reports. “One solution might be the creation of a system of impact-weighted accounting that could measure a firm’s environmental and social impacts (both positive and negative), convert them to monetary terms, and then reflect them in financial statements.”

Education Technology is a Key Topic

While many areas are critical investments, education came up again and again as a top opportunity.

Access to education and availability of job opportunities remains limited to many. As the number of learners continues to grow and more people come into the global workforce, the education gap is set to widen. 

As a result of Covid, education and work have become increasingly remote. At the start of the pandemic, as Zoom school suddenly became the norm, education technology saw a flurry of investment — from $7 billion in 2019 to $14.6 billion in 2020 to $20 billion in 2021. 

Today investing in ed-tech has slowed a bit after the so-called “pandemic bump,” but it is safe to say ed-tech investing is now mainstream and will continue to be an area of growth and opportunity. A number of signals and trends are pointing toward a deep reconceptualization of education and a shift in thinking about the future of work to democratize access for millions. As noted by Impact Entrepreneur, “The emergence of ed-tech is a financial and impact area that is about to have its moment in the spotlight. Last year, the global ed-tech market had an estimated value of US $74.2B. This is now expected to almost quadruple in the next 10 years.”

The impact investment community can help ensure education technology meets the demands of our world by providing better educational opportunities while addressing issues of inequity and accessibility. “Breaking down traditional barriers to education is one of the most impactful ways ed-tech is helping pave the way for progress,” says Impact Entrepreneur. “Broader ed-tech adoption helps dismantle limitations such as cost, location, and opportunity, allowing for education to reach new audiences and level the playing field.”

Noor Sweid

NOOR SWEID | Managing Partner, Global Ventures

“Technology solutions focused on redefining education and the future of work have the potential to bridge gaps in affordability and update traditional models in ways that reflect and are relevant to the direction in which our world is moving.”