Impact Investing for Asset Owners: How Impact Investing Compares to Other Responsible Investment Approaches

By Michelle deCordova (Principal), Sarah Green-Vieux (Principal), and Rebecca Zentner-Barrett (Director)

IMPACT INVESTING – defined as investing with the intention to generate positive, measurable social and/or environmental impact alongside a financial return – remains the least adopted approach to responsible investment. For many asset owners, it seems beyond the scope of what is possible within their responsible investment strategy: too challenging, and potentially inconsistent with their fiduciary duty. Yet other asset owners are embracing impact investing across their portfolios.

This series of blog posts will explore whether more asset owners – including smaller asset owners using external asset managers – could adopt this approach to responsible investment, and how can they get started. This first installment considers the state of the market and compares impact investing to other responsible investment approaches.

How Big is Impact Investing?

According to the Responsible Investment Association’s (RIA) 2024 Canadian RI Trends Report, 71% of Canadian assets were managed under a responsible investment approach in 2023 – defined as considering environmental, social and governance (ESG) issues when making investment decisions and influencing companies or assets (for an overview of the spectrum of responsible investment approaches, see Figure 1).

The RIA reported that impact investing was the least commonly adopted responsible investment approach in 2023, used to some extent by 46% of investment institutions covered by the survey. According to the RIA’s  previous trends report, Canadian impact investing assets totaled $14 billion CAD in 2022 – compared to $2.8 trillion CAD in ESG integration assets. In its October 2024 report, Sizing the Impact Investing Market, the Global Impact Investing Network (GIIN) calculated the size of the worldwide impact investing market in 2023 at $1.571 trillion USD. For context, in its 2022 Review the Global Sustainable Investment Alliance reported global responsible investment assets in 2021 of $30.3 trillion USD.

Clearly, impact investing is a small segment of the overall responsible investment market, but it’s growing. The GIIN estimated the compound annual growth rate of impact investing globally over the past five years at 21%. The Canadian Impact Investment Working Group (CIIWG) estimates that the Canadian market could reach $46 billion CAD by 2030.

Even if they haven’t formally adopted impact investing, many institutional investors are exploring the real-world impacts of their investment portfolios. The Principles for Responsible Investment (PRI), which represents over $128 trillion USD in AUM, found that 75% of signatories responding to the 2023 annual PRI Assessment of responsible investment practices claimed to be identifying sustainability outcomes (see Figure 2).

PRI is currently developing a new framework, Progression Pathways, that will distinguish between:

• investors seeking to integrate ESG in order to maximize returns,
• investors seeking to integrate ESG while also seeking to address systemic ESG issues in order to maximize returns,
• and investors intentionally pursuing positive impact.

Does this mean that we might expect a surge in adoption of impact investing by asset owners, as we saw an earlier surge in asset owners adopting ESG integration and stewardship? Currently, there are barriers.

Confusion About Impact Investing Creates Barriers to Adoption

In our experience, many asset owners developing or reviewing responsible investment strategy do not even consider the possibility of impact investing, because they believe it is inconsistent with fiduciary duty, or because it simply seems too challenging. This does not necessarily reflect reality – so why does impact investing create such confusion?

The single term “impact investing” is used to describe a wide spectrum of practices.

For example, some investors pursue impact while seeking market-level returns, while others are willing to accept concessionary returns in exchange for more impact. Some assess impact based on the sustainability of the business activities that an investee company engages in, while others seek to achieve targets against specific real-world environmental and social outcome indicators. And some prioritize investor intervention through stewardship or technical assistance to increase impact, while others are content to provide the finance and leave impact creation to the investee companies.

Some investors assume that to begin with impact investing, they must adopt practices that are, in fact, advanced level practices.

As the CIIWG report rightly observes, “mainstream investors and asset owners looking at impact investing as a potential investment strategy can often confuse leading approaches to impact investing as the bar.”

Navigating impact investing standards can be a barrier for some investors

A wide range of impact investing standards and initiatives have been developed that are unique to this responsible investment approach. While standards are vital to prevent greenwashing and unintended negative impacts, there are inconsistencies between different standards, and language borrowed from philanthropy and international development may be unfamiliar for investment committees and financial professionals.

Demystifying Impact Investing: How Different Is Impact Investing From Other Responsible Investment Approaches?

Aiming to cut through some of this confusion, CCIWG’s May 2024 report, Scaling Impact Investing in Canada Through Mobilizing Asset Owners, identified four principles underlying impact investing, that are broadly consistent across definitions, standards and initiatives:

• Additionality: The investor contributes to positive sustainability outcomes that would not occur without the investment (CCIWG highlighted that there is less consistency on whether this is a core principle of impact investing).

• Intentionality: An explicit intention to contribute to positive sustainability outcomes.

• Financial Return: Seeking a financial return, whether risk-adjusted market-rate or concessionary.

• Measurement: Commitment to measuring, managing and reporting on sustainability impact metrics.

This is helpful clarification, but the impact principles can still seem daunting – particularly concepts that may be unfamiliar to investors, such as “intentionality” and “additionality.” Are these principles fundamentally different from good practice in other responsible investment approaches?

We would argue that intentionality, financial return, measurement and additionality are relevant for understanding all responsible investment approaches (Figure 3).

• All responsible investment should be intentional, in that should involve consistent attention for ESG considerations – it is just that the form of attention differs.

• All approaches involve decisions about expectations for financial returns – it is just that the priority given to “valuation” and “values” differs. Most impact investors (78% globally, according to the 2024 GIIN report) are seeking market-level returns.

• Most responsible investors (72% in Canada, according to the 2024 RIA report) already practice additionality through ESG stewardship – it’s just that impact investing offers a wider scope of additionality opportunities.

• Finally, while impact measurement is not required under other responsible investment approaches, in practice many investors already measure impact: for example, the 2024 RIA report found that 74% of Canadian responsible investors were measuring portfolio carbon.

 Viewed from this perspective, many asset owners may be closer to impact investing than they realize.

The Importance of Making Visible a Spectrum Within a Spectrum

Impact investing is part of the broad spectrum of responsible investment approaches, but also in itself represents a spectrum of different approaches to intentionality, financial return, measurement and additionality. Making this ‘spectrum within a spectrum’ more visible is essential to enable the widest scope of asset owners to consider impact investing.

Later in this series, we’ll explore the range of possible asset owner positioning and practices within the impact investing spectrum – as well as how asset owners interested to explore incorporating impact investing to their responsible investment strategy could get started.

Need help getting started with responsible investment, including impact investing? ESG Global offers customized services for investors (asset owners and asset managers), with portfolios of different sizes and across asset classes. Visit Our Services to learn more.