By Michael Nelson
The appetite for impact investing declined by 5% in the UK in 2023, with adverse market conditions, greenwashing concerns and the sustainability backlash all cited as potential reasons, according to the latest impact investing report from American Century Investments (ACI).
There was also a decline in the share of UK-based respondents willing to sacrifice returns to create a positive impact, down from 38% in 2022 to 33% in 2023. Only the US market showed an increase in this metric, with the UK followed by Germany (31%) and Australia (29%), and the US and Singapore showing the most willingness to sacrifice returns at 40% and 47% respectively.
The report – which surveyed 5,021 people from a diverse cross-section of society – also showed that the UK was far from an outlier, with the appeal for impact investing declining across all markets covered by the report, including Germany, Australia, the US and Singapore.
However, the UK had the second highest rate of participants who were willing to sacrifice up to 10% of their returns in order to create a positive impact at 74%, following Germany at 76%. This was a new question in the study – now in its seventh year – designed to a create a more nuanced data point on how much of a return investors were willing to sacrifice for a positive impact.
Meanwhile, perhaps one of the more surprising results to come from the study, according to ACI’s head of sustainable investing, Sarah Bratton Hughes, was the fact that, across generations, appeal for impact investing dropped most among Gen-Z investors – those the study categorises as younger than 25 years of age.
Speaking to PA Future, she said that, although appeal dropped for every generation, the drop among Gen-Z investors was almost double that seen from Baby Boomers, Gen-X or Millennials, even though, for so long, Gen-Z had led the way.
“It might be because there’s an element of wanting to move faster, and some disillusionment from that perspective. But I think it’s also possible that we’re in such a chaotic period right now, with geopolitical tensions, rising inflation, concerns around greenwashing and – certainly in the States – the impact of the ESG backlash: perhaps it’s just a case of Gen-Z investors not having been through as many market cycles as other generations.”
‘Flexibility in how people use sustainable investment terms’
For Bratton Hughes, although interest in impacting investing is still higher than in earlier years of ACI’s research, the results suggest that there is room for improvement in the way the asset management industry communicates what investors should and should not expect from impact investing.
Participants do want some of their investments to have a positive impact, she said, but they “are not naïve or overly idealistic – they are not keen on sacrificing return”. Investors, therefore, typically allocate only a proportion of their portfolio to impact funds, meaning that impact investing is not seen as an all-or-nothing proposition.
“What’s important is that we continue to educate people on what impact investing is, and we continue to provide solutions that are not concessionary, from a returns perspective,” Bratton Hughes added.
“There has been some great progress on this over the course of my career, but the financial services community needs to continue to adapt and evolve. When I think about the ecosystem of sustainable investing, and where impact fits into it, we need to be clear about what those strategies are setting out to achieve and how they’re going to get there. Are there time-based expectations? How will this be communicated and reported on, while continuing to articulate how the impact thesis and investment thesis are aligned? Because they’re not two separate things.”
Asked whether there are issues with people’s understanding of the definition of impact investing, Bratton Hughes said “there’s still a lot of flexibility in how people utilise all sustainable investing-related terms”.
“This is probably where the financial services industry has done a disservice to itself, and it’s led to a lot of confusion and concerns around greenwashing, but also some of the backlash in the US around ESG – people are asking ‘What is it actually doing?’, ‘What are you setting out to achieve?’ and ‘Is this an exclusionary or an inclusionary strategy?’.
“If the sustainable investment industry could rewind the clock, I think we probably could have done a better job on the terminology and what we mean by specific terms. But hopefully, we’ll begin to see more cohesiveness in time, with the work the Financial Conduct Authority has done on the sustainability disclosure and labelling regime – something we’re still awaiting from the Securities and Exchange Commission in the US.”
This article was originally written for our sister publication, PA Future
