Every Thanksgiving, Terrence Keeley asks his relatives to review the funds in their retirement accounts and explain why they selected them. All his younger family members tell him they favour funds investing in line with environmental, social and governance (ESG) principles — because they want to do well, and do good. “And it makes me cry because those funds are doing no such thing,” he says. “They are underperforming and doing nothing to make the world a better place.”
Keeley speaks with some authority on this. With four-decades in the financial services industry, including stints at UBS and BlackRock, he is now the author of a book called Sustainable: Moving Beyond ESG to Impact Investing. In it, he argues for a shift away from risk-focused ESG investments and towards investments that drive positive impact. And he is not alone.
“Our take on ESG is that it’s more about exclusion, about trying to avoid companies that have bad scores,” agrees Nancy Pfund, founder and managing partner of DBL Partners, a San Francisco-based venture capital and impact investment firm. “It does help ensure companies manage risk and meet standards, but doesn’t actively help in solving pressing challenges.”
Broadly speaking, ESG investing lies at one end of the sustainable investment spectrum and impact investing at the other. ESG criteria are used to direct capital into existing companies trying to improve their social and environmental footprint. By contrast, with impact investing, capital is directed into enterprises or funds that were created with the goal of having a positive impact.
When it comes to public markets — the focus for much ESG investing — there are certainly opportunities to have a positive effect. Investing in renewable power companies, for example, contributes to a cleaner global energy system.
However, as the ESG approach tends to focus more on creating an environmentally and socially responsible share portfolio rather than a cleaner, more equitable world, investing in this way can often exclude companies or regions offering opportunities for impact.
For example, in 2022, an Intellidex study conducted for the UK government found that, by screening out investments that fail to meet benchmarks for factors such as inequality or corruption, ESG strategies actually direct capital away from emerging markets.
Also, at a public company level, ESG investors tend to have less direct influence on sustainability strategies, as they must hold discussions with their fund managers or secure shareholder voting rights in order to get their views across.
It was for this reason that asset manager TPG turned to private markets when it decided to pursue impact investing through its Rise Funds — the first of which it launched in 2016, raising $2.1bn.
“As owners of companies, we can directly influence the decisions they make to help drive both positive outcomes and business impact outcomes,” explains Maya Chorengel, the fund’s co-managing partner. “When you are an investor in a public stock, it’s more of a passive role.”
The Rise Funds use the UN’s Sustainable Development Goals as a framework through which to invest in companies providing everything from digital education and clean energy to inclusive financial technology and low-cost healthcare.
At venture capitalist DBL Partners, investments are focused on four sectors — clean energy, sustainable products and services, information technology and healthcare — in companies that have the potential for both financial returns and positive impact.
For example, its portfolio includes a stake in Apeel Sciences, whose edible plant coating slows water loss and oxidation in fresh produce. This reduces food waste and helps smallholder farmers who lack access to the temperature-controlled supply chain infrastructure needed to enter new markets.
Pfund stresses the fact that DBL’s portfolio companies have impact at the heart of their operations. “It’s not on the margin,” she says. “It’s part of the business opportunity and the opportunity to scale and move the needle on a global basis.”
Demand is also ticking up. Where, once, impact investing was seen as an alternative to philanthropy, with small-scale investments delivering below-market-rate returns, evidence is now growing that it can deliver healthy financial returns at scale.
In 2021, for example, DBL Partners — an early investor in Tesla — closed its fourth impact fund having raised $600mn, and it has more than $1bn in assets under management. A year later, TPG announced the close of its latest TPG Rise Climate fund, which raised $7.3bn.
Nimrod Gerber, managing partner at Vital Capital Fund, which invests in emerging markets, argues that impact investors can tap into opportunities others miss. Some of the most promising, he says, are in Africa, where the population will approach 2.5bn by 2050 — making one in four of the world’s citizens an African.
“If we don’t improve lives for these communities, we’ll have instability that will shake the world,” he says. “But this is also an amazing opportunity for upside for investors. You’re going to have a billion new consumers very soon consuming potable water, basic healthcare, better food, infrastructure, and education.”
A further attraction is that, in emerging markets, investors meet less competition. “Silicon Valley is not looking at how to solve these huge challenges in Africa,” points out Gerber. “Creative, smart African entrepreneurs that live the problems are developing the solutions. It’s a winning formula.”
But the venture capital and private equity funds raised by the likes of TPG, DBL Partners and Vital Capital are not the only options open to investors seeking a positive impact. “You’re now seeing the availability of products across different asset classes,” says Chorengel.
At Wellington Management, for example, the Wellington Global Impact Bond Fund available in the US invests in the debt issued by companies whose core businesses increase access to essential services — such as housing, water and healthcare — reduce inequality, and mitigate the effects of climate change.
The fund’s manager, Campe Goodman — a fixed income portfolio manager at Wellington — has been surprised by its performance. “When I started doing this, I thought I could do impact in a way that would not hurt the returns,” he says. “But I’ve been astonished at how positive the impact stories are for the fund’s financial returns.”
In contrast with the success of some impact funds, there are signs of shrinkage in the ESG fund market. In 2024, for the first time since more than $300bn flowed into ESG equity funds in 2021, these funds have been experiencing outflows.
This bolsters the argument of ESG critics such as Keeley. “It’s not generating superior returns,” he says. “And you can trace no gains on the Sustainable Development Goals that would not have taken place anyway.” He acknowledges that for impact investing to become an option for mainstream investors the market must become more efficient and transparent. “But the focus needs to be on genuine impact strategies.”
Pfund agrees. “Addressing global challenges requires more than risk adjustment,” she says.
