What is the appetite for impact investing?
JP: Infrastructure, by its nature, provides critical services to communities, but the accelerated transition to net zero and urgency for energy security means that it is a natural home for impact investment. We expect the asset class to remain robust in terms of underlying performance, coupled with an increase in equity investment opportunities amid higher cost of borrowing.
AW: Some projects that have yet to be financed may find it challenging to raise capital in a higher interest rate margin environment, rendering those investments uneconomic. Secondly, for infrastructure projects under construction, there is a risk of failure if contractors and suppliers cease operating or cannot access materials on account of supply chain issues and higher costs. But despite the headwinds, we still see strong appetite for infrastructure investing in emerging and frontier markets.
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MJ: GIIN’s announcement last year estimating the size of the global impact investing market at more than $1 trillion is an indicator of the continued appetite in impact, despite near-term headwinds and greenwashing concerns. The demand for impact investing cuts across geographies and generations, so when considered alongside an increasingly supportive regulatory environment and broader industry co-operation, this investment sector is set to observe continued growth.
How are LP attitudes towards impact investing evolving?
AW: We see a continued focus from LPs on the impact theme. There is a particularly strong interest in strategies that centre on climate risk mitigation and adaptation. In our view, investments in sustainable energy and infrastructure assets are well suited to that interest.
JP: Many LPs no longer hold the view that you must choose between impact or financial returns. This view also reflects the heightened level of ESG sophistication we are seeing among LPs, marked by the level of engagement and questioning over impact claims and ESG disclosure more generally.
JM: In the last seven or eight years, impact investing has transformed from a niche, philanthropic activity into a mainstream investment strategy. This was initially catalysed by funds offering commercial returns and social impact. Increasingly, decarbonisation and the energy transition are viewed as a critical, high-impact and mainstream investment strategy that has significant potential for further growth.
Are decarbonisation initiatives the most important element of impact investing?
JM: Potentially, yes. Because climate change is an environmental issue with profound social consequences. Impact investing strategies focused on affordable healthcare and education, universal access to banking and the digital economy are all important impact themes, but the negative impacts of climate change will compound these social problems if we cannot decarbonise society and decouple economic growth from carbon emissions.
AW: Decarbonisation is a critical element when it comes to impact objectives. The outcome of decarbonisation, whether through the modernisation of energy production, or the construction of new and more sustainable transportation networks, is a tangible and quantifiable impact metric that we are actively pursuing.
MJ: We have seen net-zero commitments exploding in recent years, galvanised by Mark Carney’s ‘GFANZ’, the umbrella group of over 550 financial institutions with net-zero commitments (covering $130 trillion of AUM). The doubling down on decarbonisation initiatives aligns naturally with impact investing, given both the environmental and social outcomes at stake.
What will the next round of regulatory changes in 2023 mean for the impact investing market?
JP: The EU’s Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy will distinguish managers with experience in ESG investing and are likely to increase flows of capital to the right managers, positively affecting the EU’s sustainability objectives. It has been interesting to see the number of funds that had to downgrade from Article 9, perhaps highlighting the challenge of delivering on sustainability commitments and the need to have adequate resourcing and ESG experience in-house.
AW: The current regulatory environment is presenting both opportunities and challenges in the impact investment market. The bottom line is that a lot of funds with an Article 9 label in 2022 will not be able to claim that distinction going forward, or simply do not want to manage the increasingly comprehensive disclosure requirements.
JM: The EU Taxonomy and SFDR have fundamentally changed the landscape for sustainable investors, in terms of the reporting, disclosure and data capture requirements. However, in some respects, impact investors were slightly ahead of the curve, as there has been a requirement and expectation for several years that any credible impact investing strategy includes intentionality, measurement and disclosure.
Which areas and subsectors do you expect will offer the best opportunities to accelerate positive change?
JP: We believe one of the biggest – and perhaps most straightforward – opportunities for accelerating positive change is to focus on increasing energy security through the rollout of infrastructure that supports a low-carbon future. Local, low-carbon generation is critical – particularly in Central and Eastern Europe.
AW: We see the definition of infrastructure investment evolving and expanding to keep up with the changing needs. Investments in core infrastructure such as renewable energy, transportation and digital infrastructure will continue to deliver positive change. And newer subsectors such as green hydrogen, clean fuels and energy efficiency investments are starting to have a greater impact.
MJ: In addition to investments aligned with the energy transition, there is a growing expectation to factor in nature or ecological considerations into investment decisions. Reporting requirements are mirroring this trend, with the recent Task Force on Nature-related Financial Disclosure providing a steer on how private sector investment should factor in nature-based risks and opportunities.