When a Movement Becomes a Market: Recentering the Impact in Impact Investing
At its genesis, impact investing was rooted in innovation, creativity, and possibility. Increasingly, the sector is being shaped by traditional capital markets.
What began as an impact-first approach, with the potential for meaningful financial returns, is now often driven by market-rate expectations and institutional investing structures, with impact, at times, seemingly secondary. How did it happen, why does it matter, and what can we do about it?
How Did We Get Here?
Over the last decade, impact investing has grown by leaps and bounds, drawing the attention of more institutional investors. This year’s Global Impact Investor Network (GIIN) State of the Market report shows that over 50% of impact investments in 2024 came from pension funds, insurers, and banks.
While additional impact-oriented capital is welcome and a promising sign, it has also meant that the small family offices, individual investors, and foundations that originally drove the sector forward are now often overshadowed by larger players. Boutique firms were bought out by investment banks, bringing both greater scale and shifting priorities. In many instances, these trends have tilted the focus more toward the financial bottom line.
These mega assets owners have now concentrated much of the impact holdings in the market - 84% of total assets under management (AUM) in the GIIN State of the Market report are managed by companies with more than $500 million in impact assets. On top of that, they often target “market rate” returns on their investments. High-impact markets where capital is most needed are many times being overlooked in favor of what are considered safer bets.
Take for example the geographic distribution of impact investments. The vast majority of investments last year took place in Western countries (52% in North America and Western Europe combined). And 86% of respondents indicated they allocate at least three-quarters of their impact AUM to high-income regions; only 5% to low-middle-income regions.
Smaller, impact-first investors have been crowded out of some impact investing deals as a result of the numerous larger players that have joined the fray. We believe this stifles innovation and the willingness to be a first mover or risk taker. For many people who have been around since the early days of impact investing, this move toward scale and structure has dampened the spark they once felt about the work.
What’s At Risk?
Recent political and economic instability has reduced the risk appetite of impact investors and resulted in a wait and see approach for many. Impact investor capital deployment fell 30% in 2024 as compared to the prior year, according to the GIIN survey. The bigger the institution, the more risk-averse they tend to be, which means a significant amount of financing (and the work it enables) is grinding to a halt.
There also are significant concerns about the validity of impact results within the field. Exaggerated and unverifiable impact claims (known as “impact washing”) was listed as a major concern for the industry by more than 70% of investors surveyed by GIIN.
Challenges associated with impact data add to the trust issue. More than 55% of survey respondents pointed to cost, time, verification, availability, and quality of data as moderate or significant challenges. We must increase transparency to regain trust in the positive outcomes produced by impact investing.
As the field becomes more established and mainstream, we ultimately risk losing the flexibility, community responsiveness, and values-driven experimentation that made impact investing so powerful in the first place.
What Can (and Should) We Do?
Impact investors that center beneficial outcomes for communities, nature, and society have a huge opportunity right now. We have the knowledge and experience to make our voices heard and lead the sector toward more innovative, transparent funding mechanisms through our actions.
Fortunately, there is some movement in this arena both by force and by choice. As the field “goes big” there are concerted efforts to focus at the local level with impact investors collaborating to support community-led efforts.
By investing with community rather than on behalf of, place-based impact investing can be customized and right-sized, while using the investment tools that make sense for the programs and services at their particular stage of development.
We also continue to see an evolution of structures and diversification in the mix of people and organizations in the sector. ImpactAlpha recently wrote about Trimtab Impact, a newly created holding company that has raised more than $60 million to “generate the highest risk-adjusted impact possible, rather than the highest risk-adjusted financial returns.” Another evolution is simple agreement for future impact (SAFI) developed by Roots of Impact and the Innovative Finance Institute, which is one example in a suite of impact-linked financial instruments that provide mission-driven enterprises better deal terms when they produce greater impact.
Blended finance also is an area of significant opportunity. In 2024, $1.9 Billion was deployed across 4,000-plus deals. Yet, just 20% of those deals employed concessionary capital and just 2% leveraged catalytic capital, according to the GIIN report.
We can also be more collaborative and structured in how we collect data and report out on our impact results. Building trust is key and it has to be built into our systems and deals from the very beginning.
The opportunity now is to use what we’ve built to reconnect purpose with performance, not because we seek a return to the past, but to move forward with clarity about what impact really means.You can read more about ReHealth’s commitment to impact monitoring and measurement in our recent blog.
Impact investors are change-makers. We are the best-positioned industry to meet the moment our society finds itself in. For years now, we’ve been working directly with organizations and mission-driven enterprises that have a finger on the pulse of the needs of everyday people living everyday lives and we’ve been able to consistently move capital to areas that serve their needs.
Now is not the time to throw in the towel or hand over the work entirely to larger players with greater reach, scale, and distance from the community. It’s time to get scrappier, think more creatively, and find even more ways to drive impact. It’s time to work together in collective, collaborative ways. The work ahead will take persistence, partnership, and purpose. And it’s ours to do.
