Over the past decade, the impact investing market has seen significant growth, thanks to increasing consciousness of social and environmental issues, and more engaged and informed consumers. Socially conscious investing and stakeholder capitalism have moved to the core of business strategy, thanks to a confluence of events and forces, from racial unrest, to growing economic inequality, to severe climate-related disasters.
There is also greater awareness of the critical role that the financial services industry can play in creating positive societal change by mobilising capital. Asset and capital owners, including both individuals and institutions, and capital managers have been acting boldly to meet this imperative, innovating with new products and services that seek to deliver intentional positive impact alongside financial returns.
EY collaborated with the Impact Investing Institute on a timely and much-needed baseline study of the size of the UK impact investing market. The UK Department for Digital, Cultural, Media and Sport (DCMS), and Big Society Capital also provided invaluable support.
Other impact investing markets and the entire global market have been studied previously, but our research is a first for the UK. The full results of this ambitious study can be seen in the recently published report. This article will describe our methodology, and highlight some of the key findings and takeaways. We know we are in the early stages of a journey. As such, we hope the report will be a catalyst for ongoing debate and further maturation of the UK’s impact investing market.
How we measured a largely undocumented market
Like environmental, social and governance (ESG) more generally, impact investing is deceptively difficult to measure because it is hard to define. In fact, many veterans of the impact investing space define ‘impact’ differently. Executives at the same organisation may even disagree on whether it is an impact investor.
Our methodology for this study began with the Global Impact Investing Network (GIIN) definition of impact investing as “Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Such investments can include debt and equity in private and public companies, with flexibility to target a range of returns based on investors’ goals.
According to the GIIN, meeting the definition requires demonstrating:
- Intentionality of outcomes
- Measurability
- A clear process to measure impact
- Financial returns
The burgeoning market for green, social, sustainable and sustainability-linked bonds do not meet the GIIN definition due to their lack of proven criteria for intentionality, and measurability. Therefore, they are categorised as impact-aligned, rather than core impact, investments.
From this definition, we established cornerstone data from the Investment Association (IA), which draws on self-reporting of UK asset managers and via a survey (pdf) of 74 UK-based investment managers controlling £9.4tn of assets under management (AUM). We used the most current data available — from 2020 — to provide the basis for revelatory insights into a relatively undocumented market.
Regarding the data, the methodology combined top-down and bottom-up quantification with a three-part model, multiplying:
- Total assets managed in the UK, by
- The percentage of those assets that are impact investment, by
- The impact investment that is invested directly, meaning capital that is allocated directly in public and private companies.
The last step was critical to avoid double counting of investments flowing in pooled vehicles, such as open-ended investment companies (OEICs).
We created a rigorous approach consisting of four modules designed to source, validate and triangulate the data used as inputs in our model. For instance, where data was scarce, we sought multiple sources to cross-reference, which helped us achieve a greater degree of comfort with our assumptions, calculations and conclusions.
It is important to note that there are limitations to using the IA as our primary source. For instance, IA data focusses only on investment and asset managers, and the capital they receive and then invest. Therefore, it excludes bank lending, which is a particularly vital element of the impact sector, given the amount of lending dedicated to social housing. Further, banks do not — at this point — report the percentages of their loan books dedicated to impact. Remedying these gaps is at the top of our list of improvements when we issue our next edition of this report in 2023–24.
As a part of our market-sizing methodology, we also conducted a survey of UK investment and asset managers to fill in key data gaps. We received 41 responses, out of a total universe of 240 — a number we hope to increase dramatically in our next edition.
A market of at least £58bn
Following seven months of research, modelling and consultations, we determined that as of year-end 2020, the UK impact investing market had an estimated £58bn in AUM, with an additional £53bn of impact-aligned investments. The AUM figure is aligned to the UK’s leading position in global impact investing as well, representing an estimated 3.3% to 8% of the global total.
A full 75% of impact investing is managed by investment and fund managers (39%), insurance companies (16%), and private equity and venture capital firms (14%). The dominant role of these firms is certainly not surprising, given the amount of capital they control. They also typically manage capital owned by the public sector, non-governmental organisations (NGOs) and endowments, which are regarded as the most high-profile impact investors. Each of these sectors will continue to be core actors in driving the future growth of capital allocated to impact investments.
According to our survey results, more than half (55%) of this capital is going to private companies, with 35% in private debt and 20% in private equity. Approximately 90% of the respondents reported that 2020 financial returns from impact investing were either in line with or exceeded their benchmarks and investment targets. That finding runs counter to the common perception that impact and socially responsible investing delivers poor returns — a perception that is a barrier for many potential investors.
Health care, affordable and clean energy, and sustainable cities and communities were reported as the top three focus areas for investment. Further, a full 90% of the respondents indicated that they plan to increase their asset allocation to impact investments within the next five years, with roughly 75% planning to increase their allocation by more than 10%.
Case studies – investing with impact
A variety of organisations are fuelling the growth of impact investing in the UK. For example, Friends Provident Foundation is demonstrating how asset owners can make impact investment available via investment managers. One of its investments is an impact fund managed by Snowball LLP, that applies a social and environmental lens to its investment process in microfinance in the developing world, housing for the homeless in the UK, and UK renewable energy projects that are cooperatively owned by local communities. All of these investments reflect the goals of the Foundation’s endowment.
Another example (pdf) is the South Yorkshire Pensions Authority’s push for greater local impact. With £9.9bn in AUM as of March 2021, and representing more than 500 employers and 160,000 members, the organisation has been directing assets to real-world outcomes (for example, the reuse of redundant buildings) since 2015. Other impact investments have been focussed on affordable and clean energy, as well as climate action. Currently, 1% of its AUM is allocated to impact investments with a goal to allocate up to 5% over the long term.
The future of impact investing
One of the critical data gaps that our report needed to address was the sector’s anticipated pace of growth. We relied on our survey to provide the answer, as no other source is currently collecting or reporting this kind of information. More than half of the respondents predicted a growth of 10% to 30% over the next three to five years.
Multiple factors will influence this growth. There is a need to expand the number of experienced impact investing professionals in the sector. Investors, investment consultants, and other market actors must develop impact investing criteria and processes in order to deploy impact capital effectively.
Continuing growth also requires standardisation — of definitions, of data and of reporting — which will drive greater transparency to investors, beneficiaries and other actors in the impact investing ecosystem. Highlighting the positive outcomes of impact investments, and encouraging more proactive measurement and reporting on the actual impact delivered — to whom and with what benefits — will further accelerate the scale of impact capital flows.
To learn more about our study of UK impact investing, you can read the full report here.
Thank you to EY colleagues; Kartik Jhanji, Matthew Latham, Ivy Tang, Natasha Perera and Peter Gosling for their contributions to this article.
