ESG and Impact Investment Space Future

Large c013bb33 70af 4c3b ada8 deef81fc8bee

This month marks the end of my four-year tenure on the board of Investing for Good, an impact-driven sustainable and social finance intermediary. Founded in 2004, Investing for Good has a mission to grow the pool of investment capital that is mobilised for social purpose, resulting in measurable benefits for society. My departure seems like an appropriate time to reflect on the recent evolution of this investment space and look ahead to its future in light of the global pandemic.

What is Impact Investment and ESG?

Impact investment is geared towards mobilising capital on the calculated assessment that it will deliver direct impact to a specific cause or community. Most investments are small-scale, in private-markets, and can cover an array of asset classes, including infrastructure and private debt, making for highly varied portfolios. In terms of its market size, the IFC claimed in their 2020 ‘Growing Impact’ report that 887 funds worldwide subscribe to the IFCs impact criteria of intent, contribution and measurement[1] and had $505 billion of assets under management (AUM) in 2019. A more generous reading, incorporating the 891 funds without a robust measurement system takes this figure to $2 trillion AUM[2]. Closely related is ESG (environmental, social and governance) investment which also emphasises sustainable solutions, however there are two fundamental divergences from impact investment. The first is lower intentionality and evaluation precision, and the second is that financial return drives social impact, not vice versa. Partners Capital report that approximately 13% of global invested assets (which are worth $270 trillion) are now in ESG[3].

How has Impact Investment and ESG investment grown in the last four years?

Impact investment and ESG investment have grown rampantly in the last four years. According to Investing for Good, the impact investing market size has doubled in two years[4], while capital inflows into the ESG market have increased by 14% a year for the last four years[5].  Much of this growth, particularly that of ESG, has come from an increasing recognition that environmental, social and governance considerations are no longer considered a minority concern, but are simply best practice. The issues at the receiving end of invested capital, such as climate protection, infrastructure, and national health drive economies in the first place, and their security is intimately tied to holistic portfolio performance. In the same way, subscription to ESG investment means firms avoid the risk of severe regulatory penalty and the threat to stock market valuation of shareholder, investor, and employee exile. These costs were all incurred by both Boohoo and Volkswagen following their respective supply chain and carbon emissions scandals and will continue to be administered if firms dismiss their contribution towards the achievement of the UN Sustainable Development goals. Therefore, it certainly cannot be said anymore that ESG is a case of trading value for values.

On the impact side, we have witnessed the emerging phenomenon of impact-adjusted returns – a proposed reform to accounting standards which many experts in social finance expect will become more authoritative in the years to come. This year, Harvard Business School ran the Impact-Weighted Accounts Project which assessed corporate environmental impact using technology and big data. Strikingly, it found that of the 1,694 companies assessed, 15% would see all profit more than wiped out by the environmental damage they have caused[6]. The turn to this alternative, rigorous form of portfolio assessment is a pattern corroborated by my old colleagues at Investing for Good, who attest to higher recent demand for their consultancy in proving impact to stakeholders[7].

Growth of impact investment may also be reflected in the boom of green bonds. One of the fastest-growing markets, green bond issuance has grown rapidly over the past four years and is still forecast to hit $175bn-$222bn for 2020 despite the incidence of Covid-19[8].  These investments are perhaps the most attractive and best-suited to an impact-adjusted returns standard because their impact can be dependably and independently verified and empirically compared to other investments of the same class. In fact, Sir Roger Gifford, the Past Lord Mayor and Chair of the Green Finance Institute, goes as far as to say that “green bonds are the best example of impact investment”[9]. Further than just producing a perceptible, quantifiable impact, green bonds also tend to offer competitive yields. The World Bank green bond yield, for instance, is the same as other issued non-green bond yields, and has thus far been unaffected by the recent high demand.

The impact of Covid-19

As impact investing primarily occurs in private markets, assets managed for impact have escaped significant impact from the Covid-19 pandemic. For the likes of Investing for Good, structuring work has occurred as before, but there are fewer grants available to clients in developing countries. However, in terms of sector trajectory, the onset of Covid-19 has arguably attracted greater interest in impact investing and ESG than ever before. Covid-19 has reminded us that both our domestic and global economies are highly complex and interconnected, shaking our habits and our narrow lenses. It has proven that matters of sustainability like human health are inextricably linked with our financial system. As a result, we are surely wise to take a more holistic approach to investment than we did pre-crisis, allocating capital based on an accounting of the entire operations of a firm.

David Blood, Generation Investment Management (former Goldman Sachs CEO of Asset Management): “Impact can no longer be an externality in investment”.[10]

Sir Roger Gifford, Past Lord Mayor and Chair of the Green Finance Institute: “we are receiving new understanding of the triangulation of finance, science and society”[11].

Indeed, recent findings from J.P. Morgan Chase suggest that 71% of polled top global investors believe the incidence of a high impact, low probability event like Covid-19 will heighten awareness and feed efforts in finance to address similar threats with a higher probability, like climate change[12], especially in a time when the public sector is shackled by immense debt and reflation challenges. However, it is feasible that the catalysing effect on impact or ESG investing will not be realised for a few years yet. The financial sector will first have to deal with major economic disruption, risk-averse investors, and the fast rebalancing of portfolios in the short-term, which may jeopardise some impact investments.

How Covid-19 might affect the emphases of E/S/G

In normal circumstances, social bonds are traditionally one of the least prominent investment vehicles because of the difficulty of accurately comparing performance across different investments of the same class, and for their relative illiquidity compared to the green bond market. Nevertheless, in 2019, there was a 61% increase in social bond issuance from the year before[13]; a trend that Covid-19 has only accentuated with matters of public health, social security, and social housing sitting high on political and investment agendas, and more salient in the consciousness of the wider citizenry, who care more now than ever about where their pensions are being spent. The outworking of this is already manifest – on the 21st October, the EU issued an inaugural €17bn social bond under the EU SURE instrument (Support to mitigate Unemployment Risks in an Emergency) which was met by a monumental €233bn of investor demand – the largest supranational transaction ever launched[14].

Alex Jarman, Head of Investment Advisory, Investing for Good: The social component of ESG investing is still the laggard, but this could well be a fightback”[15].

Considerations of governance have also received more emphasis during the pandemic. Whilst transparent governance structures are integral to effective business practice in any period, Covid-19 has crystallised the reputational significance of upholding high standards of protection for workers and stakeholders, and the ability to demonstrate stability and ongoing viability to investors amidst turbulent conditions.

The effect on environmental considerations is perhaps a little more complicated to discern. The green bond market suffered sharply in the first quarter, brought on by economic uncertainty and the subversion of environmental debate to international health, and it also endured a muted second quarter. Nevertheless, demand for these instruments, along with red and blue bonds, have rallied to a comparably healthy rate to last year. In a similar fashion to the social considerations, it appears likely that instead of slowing the environmental charge, the pandemic will instead push the reality of crises deeper into the public conscience. The steady stream of trillions that investors are willing to contribute to the decarbonisation effort show no signs of tailing off and I call on all those that have influence over allocation of capital to consider how their future decisions and actions might consider environmental, social and governance factors and be more impactful for the greater good.

Supporters of Investing for Good

Buzzacott  Cabinet Office  City Bridge Trust  Esmée Fairbairn  Link Laters  Russam gms


[1] IFC report: 9 principles for impact management, p.16

[2] Ibid.

[3] Partners Capital, A Roadmap for an Evolving Frontier Agenda (webinar), 13/10/2020

[4] Personal contact with Alex Jarman, Head of Investment Advisory, Investing for Good, 16/10/2020

[5] Partners Capital, A Roadmap for an Evolving Frontier Agenda (webinar), 13/10/2020

[6] Harvard Business Review: How to measure a company’s real impact

[7] Personal contact with Alex Jarman, 16/10/2020

[8] Business Green, Global Green bond market rallies toward Covid-19 recovery

[9] Personal contact with Sir Roger Gifford, 13/10/2020

[10] Quote from ESG and Impact Investing: A Roadmap for an Evolving Frontier Agenda (webinar) ESG and Impact Investing: A Roadmap for an Evolving Frontier Agenda (webinar), 13/10/2020

[11] Personal contact with Sir Roger Gifford, 13/10/2020

[12] JP Morgan, Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing

[13] IFC, Growing Impact Report: New Insights into the Practice of Impact Investing, p.11

[14] CNBC, The EU makes market history with record demand for its ‘social’ bonds’, [Accessed via:]

[15] Personal contact with Alex Jarman, 16/10/2020