Global impact investment market and potential for growth in Ukraine

Global impact investment market and potential for growth in Ukraine

During russia’s war against Ukraine, the russian occupiers destroyed 574 health facilities worth $1,087 million and 1,067 educational facilities worth $1,437 million. Private and public impact investors can be involved in the reconstruction of these infrastructure facilities.

Impact investments are investments made by companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside a financial return. Impact investments are a particular type of sustainable and responsible investment, which have an explicit intent to generate positive social and environmental impact, in addition to considering environmental, social, and governance (ESG) risks to operational or financial performance. 

ESG practices refer to business decisions that could affect the returns of that company. Impact investing, on the other hand, is the practice of seeking investments that specifically optimize a goal other than profits. This might include investments in clean energy, education, or microfinance.

Just over 10 years ago, JPMorgan and the Rockefeller Foundation, together with the Global Impact Investing Network (GIIN), published a report claiming that impact investment was an emerging asset class that would reach between $400 billion and $1 trillion in assets under management by 2020. At the time, this prediction seemed like a very ambitious. In 2020, the market reached roughly $715 billion in assets under management, according to GIIN. IFC put the estimate even higher: $2.3 trillion were being invested for impact in 2020. This is equivalent to about 2 percent of global assets under management.

IFC identifies impact investors by three observable attributes that distinguish them from other investors: intent (to achieve social and/or environmental goals through the investment), contribution (achievement of the intended goals) and measurement (system that links their intent and contribution to improvements in social and environmental outcomes). 

The size of the market for impact investing is assessed along two dimensions: by whether the assets are managed by privately or publicly owned entities; to what extent these assets are managed with intent, with a credible contribution to impact, and with a measurement system in place. At the core of the market where intent, contribution, and impact measurement are identified, there are $286 billion of investments managed by privately owned asset managers and institutions, and $349 billion managed by 36 DFIs, for a total of $636 billion. The broader market also includes $1.646 trillion of intended impact assets managed by publicly owned DFIs and national/regional development banks. In conclusion, investments of $2.3 trillion could be considered impact investments under a broad definition.

52% of impact funds focus on investments in developed markets, while 40% invest primarily in emerging markets. Another 7% invest globally. The largest private impact funds include RockCreek, Apollo, Arcano, Neuberger Berman.  
DFIs, their contribution to the achievement of impact is clear: they deploy capital necessary to solve a market failure, or provide risk mitigation or some other benefit to a market that is not delivering these services adequately through private finance alone, based on screening to ensure that their investments are ‘additional’ to what the market can provide. The biggest public impact investments are made by IFC, EBRD and EIB. The group of DFIs includes large national development banks (NDBs) such as the China Development Bank, the Brazilian National Bank for Economic and Social Development (BNDES), and the German Kreditanstalt fuer Wiederaufbau (KfW) and others.

Impact Measurement
To contribute to this effort, IFC worked with other impact investors and the GIIN (Global Impact Investing Network) to bring together the two leading impact indicator sets into a set of Joint Impact Indicators (JII) that can provide a common basis for measuring and reporting impact. 

The joint indicators for climate, gender, and jobs were published in March 2021. These indicators are specifically tied to SDG 5 (Gender Equality), SDG 13 (Climate Action), and SDG 8 (Decent Work and Economic Growth). This is a major step forward for harmonized impact measurement and reporting. 

According to IFC 2020 Report, the Companies-Signatories to the Operating Principles for Impact Management report financial inclusion, green/sustainable tech, agriculture and employment-generating projects as major impact investment trends. There is a $2.5 trillion annual gap in the funds needed to deliver the Sustainable Development Goals (SDGs) by 2030. Besides the COVID-19 pandemic has also made it even harder to achieve the SDGs as governments shift resources and take on new levels of debt to survive the threats of the disease, including the exacerbation of inequalities. Therefore, Impact investing is expected to play a pivotal role in channeling private capital into projects and companies that could help to address key social and environmental challenges. The huge gap between potential demand and the current market size shows that there is great potential for the impact investing market to grow.

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