Impact invest­ments and market-rate returns are not a mere utopian dream

In 2022, the Fede­ral Initia­tive for Impact Inves­t­ing (BIII) conduc­ted its second market study on the status of impact inves­t­ing in Germany. The first study, in 2020, showed the volume of impact invest­ments in Germany to be around 6.5 billion euros. By the time of the second BIII market study in 2022, this figure, based on the amounts declared by the parti­ci­pants them­sel­ves, added up to almost 39 billion euros. The impact inves­t­ing market in Germany can ther­e­fore report a large increase in inves­tors and volu­mes in recent years. This increase is due in part to the wider accep­tance and inte­gra­tion of impact inves­t­ing in various asset clas­ses. The survey also showed that conven­tio­nal assets – inclu­ding ESG-rela­ted assets – still account for over 90 per cent of the total invest­ment volume of the stake­hol­ders surveyed.

Market-rate returns

Across all groups, 65 per cent of respond­ents wanted to achieve at least market-rate returns with their impact invest­ments, while only 16 per cent were satis­fied with lower returns. Various surveys have shown that impact invest­ments with market-rate returns are not a mere utopian dream: the majo­rity of impact inves­tors had their finan­cial expec­ta­ti­ons met. Howe­ver, there tend to be diffe­ren­ces among the various stake­hol­ders. Although the majo­rity across all groups expects market-rate returns, 19 per cent of the asset mana­gers group tend to expect higher returns, while 18 per cent of asset owners, 28 per cent of smal­ler impact inves­tors and 19 per cent of private inves­tors are more willing to accept lower returns. This can also be explai­ned by the fact that the asset owners group includes many foun­da­ti­ons and family offices in which phil­an­thro­pic aspects can play a role in invest­ments in addi­tion to purely finan­cial incentives

Lack of stan­dar­di­s­a­tion is the biggest shortcoming

It must be noted that all amounts mentio­ned in connec­tion with impact inves­t­ing need to be inter­pre­ted. One of the biggest short­co­mings of the indus­try is the lack of stan­dar­di­s­a­tion in the area of impact measu­re­ment and manage­ment (IMM). The authors of the study write: ‘There are various approa­ches that impact inves­tors can use to measure and manage chan­ges in the real economy. Howe­ver, no uniform stan­dard has yet emer­ged and a variety of measu­re­ment and manage­ment tools are used in prac­tice.’ Although the majo­rity of respond­ents say they have an impact-driven invest­ment stra­tegy, less than half consider the impact of their invest­ments across the entire invest­ment process – and one in eight respond­ents said they do not measure the impact of their invest­ments at all. But ‘without good moni­to­ring, it remains unclear whether chan­ges in the real economy have actually occur­red,’ write the authors of the study.

The impact must be measurable

Owing to the incon­sis­tency in the evalua­tion and docu­men­ta­tion of impact, the authors of the market study took a closer look at the 38.9 billion euros repor­ted by the parti­ci­pants. They then clas­si­fied them on the basis of the available infor­ma­tion into impact-gene­ra­ting invest­ments, for which the impact is clearly measura­ble, and impact-aligned invest­ments. An impact-aligned invest­ment also gene­ra­tes an impact on the real economy through its speci­fic sustaina­bi­lity goal, but this impact is much more diffi­cult to quan­tify. The study concludes that only 32 per cent of the impact assets declared by the parti­ci­pants can be assi­gned to one of the two cate­go­ries. Accor­ding to these calcu­la­ti­ons, the volume of impact-gene­ra­ting invest­ments is still just under ten billion euros. The authors make it clear: ‘This result does not imply that the remai­ning 68 per cent are non-impact-rela­ted assets.’ Rather, incon­sis­tent data coll­ec­tion and lack of stan­dards are the reason why no clas­si­fi­ca­tion could be made.

A market with a lot of potential

This hete­ro­gen­eity also redu­ces the attrac­ti­ve­ness of impact inves­t­ing; a clear distinc­tion from other sustainable invest­ment approa­ches is neces­sary. In addi­tion to the many posi­tive aspects, clear frame­work condi­ti­ons also have a down­side: ‘[There is] a risk that the regu­la­tory frame­work may be overly complex, too speci­fic and ther­e­fore imprac­ti­ca­ble on the market.’ Impact invest­ment has the poten­tial to make an important contri­bu­tion to tack­ling global chal­lenges by contri­bu­ting to a sustainable trans­for­ma­tion of the real economy. ‘Should the predic­ted advan­ces in impact inves­t­ing become a reality in the near future, the vast majo­rity of respond­ents see the chance that impact inves­t­ing will become a signi­fi­cant market segment in the next three years,’ concludes the market study.

Plans for BIII expan­sion into Switzerland

In order to ensure effec­tive coor­di­na­tion of acti­vi­ties at local level, the Fede­ral Initia­tive for Impact Inves­t­ing has estab­lished a network of regio­nal chap­ters. In addi­tion to five in Germany, there is also an Austrian chap­ter, and the organisation’s expan­sion into Switz­er­land is in the pipe­line – the last compo­nent needed for it to func­tion as a DACH orga­ni­sa­tion (i.e. cove­ring all three count­ries with a German-spea­king majo­rity). ‘The Switz­er­land chap­ter is curr­ently in the deve­lo­p­ment phase, in which we are working out the foun­da­ti­ons for its future struc­ture,’ says BIII Mana­ging Direc­tor Susanne Bregy. ‘As a leading finan­cial centre, Switz­er­land plays a crucial role in the deve­lo­p­ment of impact inves­t­ing, as the Swiss capi­tal market is also atta­ching incre­asing importance to this area.’