In an era marked by market volatility and economic uncertainty, investors are increasingly seeking opportunities that deliver both financial returns and positive social/environmental impact. Amidst concerns about the Federal Reserve’s inflation-fighting measures and their repercussions, such as the Silicon Valley Bank fall, investors may wonder whether impact investing can continue to fulfill this dual promise. A closer examination reveals that impact investing has demonstrated resilience in past crises and is well-positioned to maintain this performance even during challenging times.
According to the Global Impact Investing Network’s (GIIN) 2022 Annual Impact Investor Survey, the global impact investing market soared to nearly $1.2 trillion by the end of 2021, representing a remarkable 62% year-on-year growth from $715 billion in 2020. Much of this capital is secured in long lockup strategies, insulated by market fluctuations, and ready to deploy into investments valued for upside.
Since New Summit’s inception in 2015, we have aimed to generate measurable social and environmental impact alongside market-rate financial returns. Over the years, impact investing has evolved from a niche specialization to a mainstream strategy, gaining widespread popularity among investors seeking to align their investment decisions with their personal values and contribute to positive global change.
Impact investing has demonstrated remarkable resilience during market downturns, as evidenced by its performance during past crises. The GIIN’s 2021 report on the financial performance of private equity impact funds revealed that nearly three-fourths of respondents (71%) felt that their private equity impact investments were in-line with their financial expectations, while 19% felt that their investments outperformed relative to their financial expectations. Moreover, impact investments have historically displayed low volatility and low correlation with conventional asset classes during market downturns, offering a measure of insulation to impact investors.
The resilience of impact investing can be attributed to several factors. First, impact investments are characterized by their long-term nature, as impact investors typically commit to companies or projects with positive social or environmental outcomes for extended periods. This long-term focus insulates them from short-term market volatility. The GIIN’s 2020 report on financial performance further supports this assertion, indicating that the average holding period for impact investments was 6.9 years compared to 4.8 years for traditional private equity investments.
Second, impact investing emphasizes sustainable business practices. By targeting companies with sustainable models and practices, impact investors inherently support organizations that are more resilient to economic shocks. These companies, which prioritize social and environmental impact, often foster stronger relationships with stakeholders like customers and employees, enabling them to better withstand downturns.
The COVID-19 pandemic has underscored the significance of impact investing in addressing global challenges. Impact investments have exhibited robust performance throughout the pandemic, with many investors focusing on healthcare companies involved in COVID-19 vaccine or treatment development. Others have extended financing to small businesses or nonprofits tackling pandemic-related issues.
At New Summit, our impact pillars are focused on climate solutions, healthy communities, and economic opportunity. We are encouraged by the mega-trends supporting the direction of our impact investing thesis.
For example, the passage of the Inflation Reduction Act last year provides unprecedented support to investments in environmental technologies, from renewable power to energy efficiency in buildings and electric vehicles. Healthy Communities focuses on technologies or services that reduce the cost of healthcare and increase access to products that advance the well-being of everyday people, from the distribution of healthier food to cutting-edge biotech. Our investments in Economic Opportunity focus on local and national efforts to provide more affordable housing, living wage jobs, and access to education. Our funds are also invested in real asset managers preserving affordable housing, private credit providers lending to businesses that treat their employees well, and venture capital funds propelling cutting-edge education.
Impact investing continues to present a compelling opportunity for investors to attain both financial returns and positive social or environmental impact. Its historical resilience during market downturns and strong performance throughout the COVID-19 pandemic demonstrate the potential to deliver both financial and social returns amid economic uncertainty. Investors considering this approach should conduct thorough due diligence to ensure their investments align with their values and have a proven track record of delivering both financial and social returns. We believe that by making informed and conscientious investment decisions, investors can actively contribute to positive global change while simultaneously achieving their financial objectives.
Alex is the lead Managing Partner at New Summit. He co-founded the New Summit Impact strategy and is a member of the Fund’s investment committee.