Impact investing: Helping to solve major global challenges
The Global Impact Investing Network (GIIN) defines impact investing as 'investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return'.
GIIN makes it clear that impact investing provides capital to solve some of the world's most pressing challenges in a wide array of sectors such as energy, healthcare and infrastructure.
We align with GIIN's definition. We also adhere to the BNP Paribas Group's framework, which we were a key architect of. This framework sets out three characteristics of impact investing:
Intentionality: Investments must be made with the intention of generating a measurable positive social or environmental impact – the impact can't be an unintended by-product, but should be a focal point. The intention should be stated clearly.
Additionality: Without the investor's involvement, the investment would not have had a positive impact. Additionality can take various forms: for example, the investor's capital can support underserved populations or be used to provide financing at below market rates.
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Impact management: The social and environmental performance of the investments must be measurable, reported on and fed back into the investment process. The impact might be in terms of, for example, avoided emissions or the number of people who have access to affordable housing as a result of the investment.
There's a misconception among some investors that impact investing involves sacrificing return potential, but that's not necessarily always the case: according to GIIN's 2024 state of the market report, 74 per cent of impact investors are targeting market-rate risk-adjusted returns, and 86 per cent reported that their financial returns were outperforming or in line with their expectations.
A growing market
The impact investing market has been growing steadily, with assets under management increasing from US$1.2 trillion in 2022 to US$1.6 trillion in 2024, according to GIIN.
Europe has played a leading role in this growth: 45 per cent of the world's impact investors are based in the region and they hold 53 per cent of impact assets.
According to Mercer's survey of large asset owners in 2024, 39 per cent integrated impact investing in their policies. Large investors hold a sizeable share of impact assets: although pension funds, insurance companies and banks only account for 22 per cent of impact investors, they provide 66 per cent of the impact capital, according to GIIN.
Many asset owners are embracing impact investing, and a number of pension funds and insurers have publicly said they intend to invest several billion in impact strategies. Insurer-owned asset managers often manage impact strategies for their parent companies, enabling them to offer these strategies to external clients.
Some of the opportunities available
Investors can make a positive impact by allocating to asset classes including green and social bonds, real asset (such as infrastructure and real estate) funds, venture capital, or even private equity funds of funds. Such asset classes give investors access to themes such as renewable energy, climate change mitigation, affordable housing, social inclusion and healthcare.
Impact strategies result in a wide range of environmental and social benefits. Below we list some of our investments and their positive impacts.
Our social bond strategy invests in a 600-million-euro (S$896 million) sustainable bond issued by a French institution in 2022. Over 50 per cent of the bond's proceeds help fund projects linked to education and social inclusion, mainly by providing career development, training and employment opportunities for disadvantaged people under 30, people older than 55, and people with disabilities.
Our green bond strategy invests in a 575-million euro green bond issued by a Danish energy company in 2022.
The proceeds have been used to finance two offshore wind and two photovoltaic projects that, according to the issuer, help avoid 160,000 tCO 2 e1 – or tonnes of carbon dioxide equivalent – of emissions per year.
Our private equity impact fund of fund strategy invests in a US company that converts unsold and undonated food from major food retailers into renewable fuels and nutrients for fertilisers. In 2022, its activities helped avoid emissions equivalent to those produced by 17,600 cars and avoid waste that could fill 17,000 rubbish trucks .
Challenges to overcome, but progress is being made
While impact investing is playing a role in solving major global challenges, we believe more private capital is needed to speed up the process: the Organisation for Economic Co-operation and Development has calculated that US$4 trillion per year of extra financing is required if the UN Sustainable Development Goals are to be achieved by 2030.
What's more, impact investing faces challenges such as the need to overcome some investors' perception that it can be difficult to make a profit while making a positive impact.
Another challenge is impact washing – when companies or impact investors claim to be making a bigger positive impact than is actually the case.
Investors should know that impact investments involve not just financial risk, but also impact risk – that is, the actual impact may be higher or lower than that targeted. If it is lower, this is not necessarily a case of impact washing.
Transparency is central to avoiding impact washing. The expected impact must be defined carefully at the outset as do the actions to achieve the target and measure the impact.
Progress is being made with the development of tools and frameworks to help companies and investors report on standardised measures of impact. Examples include Iris+ from GIIN and the Operating Principles for Impact Management.
Meanwhile, fresh approaches to help make a positive impact are being developed. One example is blended finance, which aims to attract private capital to impact projects that might otherwise be deemed to involve too much financial risk. Blended finance has the potential to play an important role in helping emerging markets move closer to meeting the UN Sustainable Development Goals.
Berenice Lasfargues and Maxence Foucault are sustainability integration lead and ESG specialist – private markets lead, respectively, at BNP Paribas Asset Management
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