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Impact investing market poised for rapid expansion

 

  • Growth of impact investing is accelerating, driven by strong demand
  • Investment opportunities abound as companies tackle critical global issues
  • Sectors to watch include healthcare, IT, recycling and renewable energy 

The USD 715 billion[1] impact-investing market is poised for rapid expansion driven by surging investor demand, government green-growth initiatives and supportive regulation. While impact investing is still a niche compared with the broader USD 35.3 trillion[2] sustainable-investment market, momentum has built since the adoption of the UN SDGs and the signing of the Paris Climate Agreement in 2015. However, investors need to be wary of ‘impact washing’ as the sector grows.

Ivo Luiten, Lead Portfolio Manager Impact Equity, NN Investment Partners says “From a fundamental point of view, looking at the type the companies our impact funds invest in, the outlook has never been better. There can always be cyclical headwinds, but structurally there’s tremendous growth.” He sees three sectors to watch: healthcare, technology and ‘green’ industrials.

Healthcare

The US spends about 18% of gross domestic product — nearly USD 4 trillion[3] a year — on healthcare. Companies that can help reduce that bill are in demand: for example, innovative high-tech medical devices can improve patient outcomes and cut treatment costs; the life-sciences segment — firms that develop and manufacture pharmaceuticals, biotechnology-based medicines and a range of other products — is also growing fast because of the increasing focus on the prevention of disease.

Picking winners in the drug-development space can be tough, but many suppliers to this market, such as clinical research organisations and life-science equipment manufacturers, offer interesting investment opportunities.

Technology

Another sector turbo-charged by the pandemic is information technology, with digitisation accelerating around the world. Software producers have high operating leverage and rapid revenue growth, alongside strong competitive advantages such as pricing power and a loyal customer base. They tend to have a high percentage of subscription revenues.

Companies that service physical infrastructure also present substantial opportunities as governments roll out plans to spend as much as USD 10 trillion[4] to upgrade or replace decaying and obsolete facilities and systems, and green development plans bring long-term spending on new types of infrastructure.

The cybersecurity sector is also expanding rapidly, as companies race to protect themselves against the sort of high-profile breaches that have accelerated in recent years. The shift to remote working and transition to the cloud are changing the way companies protect their digital assets, with an ongoing transition to a multi-location approach capable of covering employees who work from home. This challenge requires new solutions such as the zero-trust or perimeterless security model predicated on the concept that devices shouldn’t be trusted by default, even within a corporate network

The skyrocketing popularity of digital payment apps and decentralised finance will also create plenty of investment opportunities. Agile, disruptive payment processors are on course to create so-called closed-loop payment and loan networks — payment ecosystems that circumvent the traditional banking system and enable users to get loans that wouldn’t be possible through standard channels.

‘Green’ industrials

The urgency behind efforts to tackle climate change is intensifying in the run-up to 2030, the target date for the UN’s 17 Sustainable Development Goals. Companies building solutions to reduce emissions and speed the transition to sustainable energy are particularly well placed to benefit from ongoing global policy and regulatory changes, such as China’s drive to decrease pollution[5] and the EU’s waste and recycling initiatives[6]. The industrials sector is a good place to look for firms that are helping companies and consumers to shrink their carbon footprint.

Innovative companies are also contributing to the drive for a more circular economy, which involves extending the lifecycle of products, reducing waste and reusing materials wherever possible to create further value.

Luiten comments: “Companies tackling the proliferation of plastics are a key area of opportunity, with new technologies such as chemical recycling being developed to complement traditional mechanical methods. Firms that are helping lower emissions and develop recycling solutions in heavy-emitting industries such as steel and cement are also making strides.” Hydrogen power and carbon capture and storage are in their early stages, but remain sectors to watch.

Impact washing

NN Investment Partners notes that impact washing — misleading marketing claims about a company’s actions or a financial product’s real-world impact – is something to be aware of. The related issue of how to measure impact also looms large, and more robust key performance indicators, as well as a standardised reporting framework, will be essential to addressing this issue.

Luiten concludes: “While these challenges remain, they also create opportunities for asset managers and banks to boost transparency on how they measure the real-world impact of their investments. True impact funds that seize this opportunity will set themselves apart as the market develops over the next five years.”

[1] Source: Global Impact Investing Network: https://thegiin.org/research/publication/impinv-survey-2020

[2] Source: Global Sustainable Investment Alliance: http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf

[3] Source: Centers for Medicare & Medicaid Services: https://tinyurl.com/r9yn3239

[4] Source: McKinsey & Company: https://tinyurl.com/4n4hfptm

[5] Source: UN Environment Programme: https://www.unep.org/interactive/beat-air-pollution/

[6] https://ec.europa.eu/environment/topics/waste-and-recycling_en

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