The impact investing market is gaining steam, as evidenced by nearly daily announcements of new products and entrants, not least of which is Temasek's $500 million investment in LeapFrog Investments in March.
Notwithstanding Temasek's catalytic move, however, there remains a major challenge to moving the market into the mainstream: the limited participation by other large institutional investors.
A June 2020 report from International Finance Corp. estimates that the total size of the private fund impact investing market was $415 billion in 2019, or a fraction of the $8.3 trillion managed by conventional private funds.
Why aren't more institutional dollars flowing into impact investing? There are many potential reasons for the slow trickle of capital to date. For instance, large institutional investment programs are generally managed according to well-defined policies, structured with considerable oversight and embedded with existing managers.
What's becoming increasingly clear, however, is that dynamics are changing. Just as we have seen traditional asset managers ramping up development of products incorporating impact strategies, we are now seeing similar momentum with institutional investors.
To evaluate the private impact market's level of institutional readiness, we came up with a grading system featuring five dimensions:
- Proof of concept. Are there established impact managers and funds?
- Depth. Is there a wide enough range of impact products?
- Data. Can impact performance numbers be classified, scrutinized and benchmarked?
- Connectivity. Is there a multilayered landscape of intermediaries to help design, provide due diligence and place funds?
- Awareness. How aware and knowledgeable are institutional investors when it comes to impact investing?
We have rated each of these market dimensions as "ready," "almost ready" or "getting ready" for institutional investors.