ESG Investing

What Is Institutional Impact Investing?


When it comes to the latest impact investing trends, developments, and major moves, institutional investing tends to dominate headlines. Why? Institutional investors play a central role in the field, as they manage more capital than retail investors and thus hold a larger share of the market. In fact, three-quarters of sustainable impact assets are held by institutional investors, from asset managers and other financial institutions to pension funds, insurance companies, foundations, endowments, and faith-based organizations.

Why Institutions Pursue Impact

The latest annual survey by the Global Impact Investing Network (GIIN) suggests that institutions put their resources toward impact investing for a variety of reasons. Foundations, endowments, and faith-based organizations, for example, frequently have missions advocating for social or environmental values that can be advanced through impact strategies. In fact, the GIIN finds that almost all institutional investors cite mission alignment as part of their motivation for seeking impact.

Another key driver is demand from clients or constituents. Asset managers regularly receive requests for sustainable investing opportunities or hear from student activists urging university endowments to incorporate environmental, social, and governance (ESG) considerations into investing decisions.

Institutional investors are often in a stronger position than individual investors to participate in shareholder dialogue around ESG issues.

Institutions may also be motivated by a desire to minimize exposure to long-term risks. For example, some institutional investors say that impact investing grants them exposure to growing sectors and emerging markets.

Finally, regulation can play a role, as in the case of a new European Union policy that requires asset managers to report on ESG risks and the impact of investments.

How Institutions Invest with Impact in Mind

Like retail investors, institutions may buy shares in impact funds. However, institutions can also directly back companies and projects and make use of financial instruments that are typically unavailable to individuals. The main vehicles employed by institutional impact investors include private debt, private equity, equity-like debt, public debt, real assets, deposits and cash equivalents, and public equity, as well as pay-for-performance instruments.

Institutional investing often targets ESG factors. In 2018, the top ESG concerns for institutional investors ranged from conflict risk to tobacco, climate change, board issues, and executive pay. Institutional investors are often in a stronger position than individual investors to participate in shareholder dialogue around their concerns due to their size and the resources they devote to addressing shareholder resolutions.

Some institutional investors have won recognition for their engagement with the companies they invest in. For instance, the Nathan Cummings Foundation has successfully backed resolutions calling for environmental reporting, and Glenmede Investment Management’s Women in Leadership portfolio has voted 100% of its proxies in support of gender diversity.

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