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Impact finance has immense transformative potential. Photo via envato.
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Impact finance is ripe for its next phase: Democratization

Luxembourg spotlights untapped private wealth to achieve the Sustainable Development Goals

This article is brought to you by the Luxembourg–GLF Finance for Nature Platform.

A trillion dollars sounds like a lot of money. Just think of all the problems it could solve.

But this huge sum pales in comparison with the masses of untapped private wealth that could be mobilized to help deal with today’s multiple crises of climate change, biodiversity loss, poverty, hunger and global inequality.

Impact finance is a term often used to describe investments in projects and enterprises that not only generate financial returns but also produce positive social and environmental outcomes.

In 2022, the global impact investing market reached a new milestone when its estimated size surpassed the USD 1 trillion mark for the first time.

Yet this is a fraction of the private sector’s capital, which was estimated to be as much as USD 300 trillion as of 2021.

And if you look at household wealth, the figure is even bigger. The Global Wealth Report, compiled by Swiss bank UBS, measured total net private wealth at a whopping USD 454.4 trillion in 2022.

The bottom line is that there’s still a lot of room for impact investing to grow.

Impact finance has immense transformative potential to shape a resilient world, where financial decisions actively contribute to achieving the UN Sustainable Development Goals (SDGs) by the end of this decade.

This will require a sum of USD 5‒7 trillion to be invested every year until 2030, according to the UN.

To begin chipping away at this daunting sum, financiers and investors can follow a set of UN Principles for Positive Impact Finance, helping guide them in their efforts to increase their positive impact on the economy, society and the environment.

Last October, industry leaders, financial experts and investors gathered in Luxembourg to exchange ideas on sustainability and responsible investing, including the growing potential of impact finance.

Held from 17 to 19 October 2023, the conference was organized by the Luxembourg Finance Labelling Agency (LuxFLAG), staging the fifth edition of its Sustainable Investment Week (#LSIW23).

The event brought more than 40 speakers to the stage to discuss topics such as the green transition, thematic investments, decarbonization, regulatory issues and impact finance.

One session was led by the Luxembourg-based advisory and fund management company Innpact, which delivered a presentation examining ways to unlock the potential of global private wealth for sustainable change.

Innpact called for the democratization of impact finance, redefining the boundaries of investing and extending the power of finance as a force for good beyond traditional financial elites to a broader, more diverse group of stakeholders.

To date, impact investing has largely been the domain of public institutions and institutional investors, the latter representing a third of global private wealth. However, the other two-thirds – private banking clients and retail investors – have remained disconnected from impact investing due to traditional market structures and perceptions.

Democratizing impact finance means making impact investing accessible to all, regardless of the size of their portfolio. According to Innpact, the key to this is overcoming the barriers faced by private individual investors. These barriers include: 

  • Knowledge: Impact products use complex instruments and investment strategies (private equity and private debt), which are difficult for non-professional investors to grasp
  • Awareness: Distribution channels and promotion campaigns have been scarce, failing to reach and inform private individuals about impact investing 
  • Size: Most impact products require a minimum single investment (usually around USD 1 million), effectively excluding most private individuals
  • Liquidity: Impact investing requires patient capital and lacks exit options, making it difficult for most individuals and leading to strict regulations intended to protect them.

Innpact says new solutions are being tested and then scaled to provide access to impact-driven projects for small investors, with impact crowdfunding platforms, such as Lendahand and LITA.co, increasingly connecting impact projects with individuals.

Meanwhile, other innovative solutions have emerged, including new ELTIF European regulations, liquidity guarantee platforms, impact securitization platforms like Imagine Impact Bonds,  new sustainable banking services such as Green-Got, and small-impact investor platforms such as Carbon Equity

These tools aim to simplify investment procedures, providing clarity and ensuring more fluid investment channels into impact-driven ventures.

And the democratization of impact finance encompasses a growing range of domains, from green infrastructure to sustainable agriculture to renewable energy. This shift could shake up the financial landscape, enabling every individual and institution to be an agent of change.

As impact finance opens its doors to everyone, could it be the spark we need to achieve the SDGs and finance the transition to a sustainable future?

LuxFLAG is a non-profit association created in Luxembourg in 2006 by seven founding members. The agency aims to promote the raising of capital for the responsible investment sector. It awards a recognizable label to eligible investment vehicles to reassure investors that the applicant is investing responsibly.

Innpact is a Luxembourg-based advisory and fund-management company that supports about USD 8 billion in impact investments. Its partners include the European Investment Bank, KfW, UNEP, the UN Convention to Combat Desertification and the International Finance Corporation.

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