Impact Investment: Aligning Profit with Purpose

In recent years, a growing number of investors have sought to align their financial goals with their values, leading to the rise of impact investment. This innovative approach to investing not only seeks financial returns but also aims to generate positive social and environmental outcomes. Whether it’s addressing climate change, reducing inequality, or improving access to education and healthcare, impact investment is reshaping the way we think about the role of capital in society.

What is Impact Investment?

Impact investment refers to investments made with the intention of generating measurable social or environmental impact alongside a financial return. Unlike traditional investing, where the primary focus is on maximizing profits, impact investing emphasizes a dual objective: achieving competitive financial returns while driving positive change.

 The Global Impact Investing Network (GIIN), a leading organization in the field, defines impact investments as "investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return." This definition highlights the importance of intentionality and measurement in impact investing. (https://thegiin.org/publication/post/about-impact-investing/#what-is-impact-investing)

Key Characteristics of Impact Investment

1. Intentionality: Impact investors actively seek to address social or environmental challenges through their investments. This intentionality distinguishes impact investing from other forms of sustainable or responsible investing, which may focus primarily on avoiding harm rather than creating positive impact.

2. Measurability: A core principle of impact investing is the measurement and reporting of social and environmental performance. Investors use metrics and frameworks, such as the Impact Reporting and Investment Standards (IRIS), to track progress and ensure accountability.

3. Financial Returns: Impact investments can range from those offering below-market returns (concessionary) to those targeting market-rate or above-market returns. The spectrum allows investors to choose investments that align with their financial goals and risk tolerance.

4. Diverse Asset Classes: Impact investments can be made across various asset classes, including private equity, debt, real estate, and even public markets. This flexibility enables investors to support impactful projects at different stages of development.

Key Sectors for Impact Investment

Impact investment spans multiple industries, including:

• Renewable Energy: Investments in solar, wind, and other sustainable energy solutions (e.g., storage, green hydrogen) help combat climate change and reduce reliance on fossil fuels.
• Sustainable Agriculture: Supporting responsible farming practices that promote food security and environmental protection.
• Water Access & Sanitation: Investing in water treatment plants, desalination, and distribution systems. Promoting technology to improve water efficiency and prevent water pollution.
• Affordable Healthcare, Education and Housing: Expanding access to essential services, particularly in underserved communities. Providing funding for housing projects that cater to low-income populations.

Diversity, Equity, and Inclusion (DE&I): Allocating capital to businesses, funds, and initiatives that promote fair opportunities, representation, and economic empowerment for underrepresented or marginalized communities.

Measuring Impact

A key aspect of impact investment is the ability to measure and report its impact. Common frameworks used include:

• Impact Reporting and Investment Standards (IRIS+): A globally recognized system for measuring, managing, and optimizing impact performance.
• United Nations Sustainable Development Goals (SDGs): Many impact investments align with the 17 SDGs, such as reducing inequality and promoting clean energy.
• Environmental, Social, and Governance (ESG) Metrics: While ESG factors are broader, they help investors assess the sustainability of their investments.

The Growth of Impact Investment  

The impact investment market has experienced significant growth in recent years. According to the GIIN’s 2020 Annual Impact Investor Survey, the market size was estimated at $715 billion, with over 1,720 organizations actively managing impact investments. This growth reflects increasing recognition of the potential for capital to drive positive change.

Institutional investors, including pension funds, foundations, and family offices, are playing a key role in scaling the impact investment market. For example, the Ford Foundation has committed $1 billion to mission-related investments, demonstrating how large institutions can leverage their assets for social good.

The rise of impact investment has been largely driven by the growth of open-ended funds and Exchange-Traded Funds (ETFs) that incorporate ESG criteria into their investment strategies. These global sustainable funds have emerged as a key option for investors aiming to align their portfolios with their values while maintaining liquidity and flexibility.

In 2023, sustainable fund flows began to recover, particularly in Europe, while the U.S. market lagged. However, by 2024, inflows into global sustainable funds had declined by 50%, diverging from the broader market rally fuelled by a surge in U.S. stocks. Despite these fluctuations, total Assets Under Management (AUM) in global sustainable funds continued to rise, reaching a record $3.2 trillion by the end of 2024—an 8% increase from the previous year and more than four times the market size in 2018.

Europe remains the dominant force, holding 84% of global sustainable fund assets. The U.S. market share fell to 11% in 2024, down from 15% in 2018, while the rest of the world expanded its share to 2.3%, up from just 0.7% in 2018.

Despite these challenges, investors interest in sustainable investing remains strong, as reflected in recent surveys. A 2023 Morgan Stanley survey found that 54% of individual investors intended to increase their sustainable investments in 2024, while 77% expressed interest in the approach. Similarly, Morningstar Sustainalytics' Voice of the Asset Owner Survey revealed that 61% of North American asset owners now view ESG factors as more material than they did five years ago. For many, incorporating ESG considerations is regarded as an essential aspect of their fiduciary responsibility.

Impact Investment in Asia  

Sustainable fund assets in Asia ex-Japan expanded by 4% in Q4 2024, reaching USD 73.7 billion, with Taiwan maintaining its position as the largest market, representing over one-third of the region’s total assets. Thailand recorded the most substantial growth, as its sustainable fund market more than doubled to USD 933 million, fuelled by strong capital inflows and the introduction of new funds. 

Singapore also saw robust expansion, with assets surging 81%, primarily driven by the growth of the iShares MSCI Asia Ex-Japan Climate Action ETF (Ticker: ICU SP). This ETF, which targets companies with strong climate-related credentials, attracted significant institutional investment. The remarkable growth in Thailand and Singapore signals a broader shift towards ESG-focused investments, reflecting investor confidence in the long-term viability of sustainable assets. Taiwan’s continued leadership in the sector further cements Asia’s role as a pivotal player in global impact investment.

 Impact Investment by Swiss-Asia

Swiss-Asia is committed to advancing impact investment by actively encouraging portfolio managers to integrate sustainable investments into their strategies. In 2023, aligning with the Monetary Authority of Singapore's (MAS) guidelines on sustainable investing, the company implemented an internal ESG framework to help managers assess and enhance the sustainability of their portfolios. These ESG metrics are also shared with investors, providing them with greater transparency and insight into their exposure to impact investments.

We believe that ESG ratings, as a key measure of impact investment, offer valuable insights into a company's long-term performance. ESG-related risks—such as poor labour conditions, weak corporate governance, high energy dependency, or inadequate financial transparency—can pose significant financial threats. By incorporating ESG as an additional dimension in investment analysis, we aim to enhance risk management and drive sustainable value creation, ultimately benefiting investors over the long term.

One of the funds managed by Swiss-Asia, the Arrowhead New Energy Fund, is actively investing in renewable energy opportunities. The fund follows a bottom-up strategy, targeting mining, battery-related, and renewable energy companies globally to capitalize on the transition to new energy sources and achieve long-term capital appreciation.

Swiss-Asia is built on diversity, with women representing 75% of management and 60% of our staff.  Our team possesses deep expertise in impact investing and its broader ecosystem, enabling us to support fund managers in capital raising, from marketing to introductions with capital providers. We welcome fund managers to join us on this long-term journey toward sustainable investing.

Sources:

1.    Global Impact Investing Network (GIIN). "What You Need to Know About Impact Investing."  https://thegiin.org/publication/post/about-impact-investing/#what-is-impact-investing

2.    GIIN survey: Global impact market reaches $1.57trn AUM https://impact-investor.com/giin-survey-global-impact-market-reaches-1-57trn-aum/

3.    International Renewable Energy Agency (IRENA). "Renewable Energy and Impact Investment."  https://www.irena.org/

4.    Ford Foundation. "Mission Investments."  https://www.fordfoundation.org/

5.    MorningStar. “Global ESG Fund Flows Increase in Q4.” https://www.morningstar.com/sustainable-investing/global-esg-fund-flows-increase-q4