The Geography of Impact Investing

November 16, 2020.

Written by Charlotte Yan, Miguel A. Larrucea-Long, Nora Zaouk

Edited by Grace Choo

The emergence of impact investing has shaken up the financial industry and heralded a shift in investor mindset towards socially responsible investing. Yet, clear differences in growth rates and regulation have been observed between different geographical regions. A closer look at the impact investing scene in Europe, the USA and Asia, reveals key insights pertaining to these differences.


In Europe, demand for sustainable assets started to grow in 2005 – especially by large institutional investors – due to increased public awareness of ESG-related risks, strong legal debate on sustainability’s relevance to fiduciary duty and the theory stressing the adverse effect of suboptimal corporate governance on financial markets. 

In the subsequent decade, the popularity of impact investing in Europe gained further significance following three notable events. The first was the establishment of the UN Sustainable Development Goals (SDGs) in 2015, which are a collection of 17 interlinked goals addressing global challenges related to poverty, inequality, pollution, peace and justice among others. The second was the signing of the UN Paris Agreement in 2016 that aimed to control greenhouse gas emissions and limit the yearly increase in global average temperature. The third event was the release of the European Commission’s Action Plan on Financing Sustainable Growth in 2018 that implemented minimum ESG standards to be respected. These three events catalysed a shift in mindset as more investors began to incorporate ESG considerations into their investments. 

In 2020, sustainable investment funds in Europe are estimated to hold over 1.5 trillion EUR in assets under management, that constitute 15% of the total European fund market according to the European Impact Database. Additionally, a recent study by PwC expects this share to rise to reach 41-57% of the European fund sector by 2025 (equivalent to 5.5-7.6 trillion EUR). 

Investors in regions across the global, including Europe, have raised concerns in light of the ensuing coronavirus pandemic and severe environmental problems. These concerns have accelerated a transition towards impact investing, as investors increasingly pursue positive financial returns in conjunction with positive global impact.

Substantial changes to facilitate and encourage impact investing growth are being supported by both European policymakers and regulators. For instance, the European Commission is working to create a classification system for green assets to enhance ESG corporate reporting by writing benchmarks that issuers of green investments must comply with. In parallel, regulatory frameworks such as MiFID II, UCITS and AIFMD are attempting to incorporate sustainability factors in investment suitability assessments and decision-making.


Impact investing has also firmly established itself in the US, though not quite to the same degree as in Europe. Significant tax breaks for charitable donations are part of the reason for this as they encourage profit maximization and then donation instead of directly investing in ESG projects. The lag of the US behind Europe can also be attributed to an outdated perception that there is an offset between ESG considerations and financial return. 

Nevertheless, impact investing has witnessed significant growth in the US in recent years as sustainable assets expanded by 38% from 2016 to 2018. The sustainable fund market is expected to continue this rapid development and reach USD 150 billion by 2021. Moreover, while sustainable index funds grow in size, number, and complexity, there is still a lot of runway since they make up less than 1% of the overall market. Such potential for expansion is likely due to a greater focus on social issues as a result of the Covid-19 pandemic and movements for racial injustice. Furthermore, investment research firms have awarded high rankings to sustainable funds even during the pandemic, with Morningstar ranking the 2020 returns of 72% of sustainable funds as above average. The acknowledgement of the strong performance of these funds has helped to dispel the notion that ESG considerations incur a trade-off of lower returns. 

In terms of the structure of the impact investing market in the US, there is usually a fairly even split between environmental, social, and governance criteria. In 2016, each of these criteria was applied to USD 7.7-7.8 trillion in assets under management. More specifically, a 2018 study indicated that climate change, conflict risk, and tobacco were the issues that affected the most assets, identifying them as the most prevalent ESG topics of late.

In the long-term, the impact investing landscape in the US may undergo significant changes. For one, the department of labour is introducing a controversial new rule that places much greater restrictions on the use of ESG criteria in retirement accounts.In light of a potential change in president, the SIF, a forum for sustainable investment, has released recommendations for the next US administration. These include the creation of a white house office of sustainable finance and business, and the appointment of new leadership with impact investing expertise for the Securities and Exchange Commission and Department of Labour.


Despite its growing prominence at the centre of the global economy, Asia lags behind the rest of the world in its commitment to impact investing and sustainability. According to the GIIN, only 5% of assets under management are invested in sustainable projects in Asia, compared to nearly 30% in the US and Canada.

Misconceptions regarding the ability of impact investments to generate a financial return has historically made Asian investors reluctant to adopt ESG solutions. Fortunately, this is beginning to change.  In the last four years alone, the compound annual growth rate in impact investing in East and Southeast Asia alone was 20%. Moreover, in Japan, MUFG announced in 2019 that it was reversing its policy on investing in coal-fired power generation projects. While this demonstrates great progress in the industry, there are some common challenges facing impact investors in Asia.

Crucially, a lack of information surrounding sustainable investing and inconsistency of impact measurement and management continue to hamper the growth of the industry. According to the ADB, 70% of investors cited greater information about the availability of impact investing opportunities as a prerequisite for entering the industry. Indeed, while investors are increasingly willing to integrate ESG solutions into their portfolios, such is undermined by the lack of clarity and standardisation of impact both in the region and worldwide.

These misconceptions are compounded by the lack of regulatory support for such initiatives. Unfamiliarity with impact investing has resulted in inefficient and restrictive policies, causing higher actual and perceived risks, as well as greater barriers to entry for stakeholders. Regulators must support the scope for expansion and implement the necessary framework to encourage industry growth. For example, Hong Kong’s Securities and Futures Commission requires listed companies to disclose all their sustainability credentials. Mainland China will soon follow suit, making it compulsory for all listed companies to report their ESG credentials from 2020.

Asia has great potential to become an industry leader in sustainable investing. Still in its infancy, rising levels of investable wealth, greater opportunities for investment and an increasingly supportive regulatory environment demonstrates the capacity for environmental and social considerations to be integrated into investment solutions. There is also greater demand for socially responsible investing from millennials in Asia, who are predicted to hold 35% of the region’s wealth in the next 5-7 years. By removing barriers to investor participation, impact investing has great potential become a catalyst to drive sustainability in Asia. 

Comparisons between regions

Due to differences in what classifies as impact investing, market sizing estimates of impact investing vary significantly in methodology and final outcome. Thus, direct comparisons using figures quoted from different sources are discouraged due to poor accuracy. 

While consensus agrees that impact investing is more prevalent in Europe and USA as compared to Asia, the difference in industry size between Europe and USA is less distinct. Our analysis uncovered evidence that the European impact investing industry is currently more developed than its American counterpart. Yet, the GIIN Annual Impact Report 2020 contradicts this observation, with 50% of surveyed impact investing professionals hailing from US & Canada, and 29% from Western, Northern and Southern Europe. What conclusion should we draw? Given that 70% of respondents belong to asset management firms which tend to be multinational in nature, as well as the globalisation of capital flows, it may be simpler (and more accurate) to size the global impact investing industry as a whole. Instead of comparing market sizes between regions, we could consider local client demand for impact investing, which could be more accurate in determining the prevalence of impact investing in a particular region.


While there are definite regional differences, we cannot refute the huge growth potential of the global impact investing industry. With the influence of key factors including government regulation, impact investing is set on a path to become mainstream – but only time will tell if the industry will be able to sustain its upward growth trajectory in the long-term.


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