Sunday, 16 August 2020

By Chris Georgiou

While sustainable funds remain on track to beat the records set in 2019, impact investors indicate they are unlikely to alter strategies amid the pandemic, although they anticipate their impact outcome to fare better than the financial.

  • Flows into sustainable funds and exchange-traded funds (ETFs) in the US and Europe remain on track to break their 2019 record as reflected in their 2020 first quarter flows
  • Amid the pandemic, impact investors anticipate a greater likelihood of impact investing, although with higher financial risks
  • Foundations, family offices and high-net-worth individuals (HNWIs) are the fastest growing contributors to impact investing over the past five

In the supplementary survey conducted by the Global Impact Investing Network (GIIN) in April 2020, 57% of the 122 respondents revealed that they are unlikely to change the amount of capital they have planned to commit to impact investments in 2020 despite the COVID-19 pandemic. At least 20% are somewhat likely to commit less capital than they have planned, while 15% are likely to commit more.

Key reasons given indicate that their targeted impact themes have been exacerbated by the pandemic, reinforcing the need for the solutions they support.

Moreover, 63% stated that they do not expect to change their targeted sustainable development goal-aligned impact themes for the next five years because of the pandemic, 21% are at least somewhat likely to change, while 17% are uncertain.

In terms of geographical portfolio allocation, in large part due to existing mandates and strategies, overall, 64% of the respondents stated that they are either unlikely or very unlikely to change their target locations for investments over the next five years because of the pandemic, 13% are at least somewhat likely to change, while almost a quarter, or 23%, are uncertain.

In addition, an interesting dichotomy emerged with regard to expectations over the double bottom line representing financial and social impact performance, with almost half (46%) expecting their portfolios to underperform financially, while only 16% expect to underperform on impact, and 18% even see their portfolios outperforming their expectations for impact.

Aside from the effects of the pandemic, the survey released in June 2020 estimated that over 1,720 organisations manage $715 billion in impact investment assets as of the end of 2019.

While just over 1,200 asset managers represent 70% of organisations that are engaged in impact investing, they manage 54% of industry assets, while 50 development finance institutions (DFIs) manage over a third (36%) of total industry assets.

The median surveyed organisation manages $37 million, while the average manages $542 million representing the outsized portfolios of the DFI relative to other impact investors.  Forty-eight percent of respondents invest primarily in developed markets, while 43% are focused on investing in emerging markets.

Among the repeat respondents surveyed since 2015, investments in public equity saw the greatest growth with a 33% compound annual growth rate (CAGR), perhaps indicating the growing mainstream adoption of impact investing. It is followed by real assets at 21%. However, 64% of the respondents who do not invest in liquid equities still do not plan to do so in the future – with a vast majority, or 80%, simply stating “Listed equities is not an asset class through which we invest.”

According to asset managers’ perceptions over the period 2015 to 2019, some significant increases in capital to impact funds came from HNWIs at 66%, family offices at 59% and foundations at 55%, with a CAGR over the same period of 25% for foundations and 19% for both HNWIs and family offices  combined.

In terms of the challenges ahead, 66% see impact washing, or the practice of some asset managers to overstate their commitment, as an important challenge to be overcome. The second and third most noted challenges also concern impact performance: the inability to demonstrate impact results at 35% and the inability to compare impact results with peers at 34%.

First quarter net flows into sustainable ETFs and funds on track to beat 2019 record

In another study, Morningstar’s Global Sustainable Fund Flows found that the sustainable fund universe remains strong and resilient across the globe, attracting an estimated $45.7 billion in net flows and gross flows of $841 billion as of the end of March 2020, down by 12% at the end of 2019 despite the wider market total outflows of 18% equalling $384.7 billion.

With Europe still dominating the landscape with a further $33.8 billion (EUR 30 billion) of inflows keeping it on track to at least equal its total for 2019 of $135.3 billion (EUR 120 billion), it now has an offering of 2,528 funds – 76% of the global sustainable allocation and 81% of the assets.

Positive signals from the US also emerged as sustainable funds set a record in net inflows in the first quarter, reaching $10.5 billion, already half the $21.4 billion for the whole of 2019.

Sustainable fund assets in Asia (excluding Japan) were up by 21% to $7.7 billion, primarily driven by the launch of new funds. The rest of Asia saw record inflows in the first quarter of 2020, with Taiwan and PineBridge Global ESG Quant Bond Fund leading the charge. Excluding Japan, the sustainable fund landscape in the region is dominated by China, which represents 74% of total assets through 45 sustainable funds.

The COVID- 19 pandemic has also driven a rise in social and sustainability-linked loans, particularly from development banks. According to S&P Global Market Intelligence, based on the International Capital Market Association analysis of the Environmental Finance database, social bond issuance totalled $11.58 billion as of 15 May 2020, compared with just $6.24 billion in the same period in 2019, rapidly approaching the total social bond issuance in 2019 of $16.70 billion.

While sustainability bonds already grew to $25.62 billion up to 15 May 2020 from $13.64 billion in the same period last year, green bond issuance dropped sharply to only $53.54 billion as of May 15, compared with $84.09 billion in the same period in 2019.

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