Impact investing is set to penetrate capital markets, and passive investments such as ETFs and mandates will be an important driver of this development is the central finding of the latest study by DWS and CREATE-Research: Impact Investing 2.0 – Advancing into public markets.
The firm explains that impact investing is generally understood to mean forms of investment that have a social and/or environmental goal in addition to a financial return.
The study shows that the advance of impact investing is driven by two key data points: to reach the global net zero target by 2050, investments of USD100 trillion are likely to be required; and to implement the United Nations’ 17 Sustainable Development Goals (SDGs) by 2030, annual spending of USD5 trillion to USD 7 trillion is needed. Private markets cannot raise this capital on their own due to their limited scalability. However, publicly traded instruments such as funds and ETFs offer both the scale and reach to mobilise the needed capital.
The extent to which this development has progressed is shown in the report, which is based on a survey of 50 of the largest pension funds in North America, Europe, Asia and Australia, which together manage assets of EUR3.3 trillion (As of July 2022). The report finds that 22 per cent of pension funds have already implemented, or are currently implementing, impact investing as part of their passive investments.
“Pension funds increasingly see it as their duty to contribute, on behalf of their pensioners, to mitigate the negative effects of past economic development on the environment, climate and biodiversity. There is still a long way to go, but the important first step has been taken,” says Amin Rajan, Chief Executive of CREATE-Research.
As net zero and the UN’s SDGs can be replicated with rules-based indices, such as EU Paris-aligned and EU climate transition benchmarks, SDG index products, green bond indices, as well as thematic passive exposures using ETFs and mandates, these can help impact investing make a breakthrough in the public markets.
The report backs this up, with 58 per cent of survey participants believing the growing interest in thematic funds will evolve into impact investing over time. Sixty-four per cent believe that the net zero target will favour impact investing, while 54 per cent expect SDGs to provide new opportunities. Twenty-eight per cent of pension funds expect to use SDG and EU Paris-aligned and EU climate transition indices over the next three years.
“CREATE-Research’s important study shows that ETFs and passive mandates can make all the difference in helping impact investing break through on a broad scale. We are already seeing high demand from private and institutional investors for index concepts that formulate concrete goals, and we will be further expanding our efforts in this area,” says Simon Klein, Global Head of Passive Sales at DWS.