Impact investing, which aims to generate social and environmental benefits alongside financial returns, has seen increasing interest in recent years. As a form of responsible investment, impact investing is appealing to investors who want their capital to create positive change. Private equity firms have started launching dedicated impact investing funds and incorporating impact strategies into their investments. This trend is driven largely by rising demand from institutional investors and high net worth individuals who recognize it is possible to realize market-rate returns while achieving social objectives. However, impact measurement remains a key challenge. Successful impact investing requires strong capabilities to identify and quantify impact, in addition to demonstrating attractive risk-adjusted returns.
Impact investing funds have grown rapidly amid rising LP interest
Many leading private equity firms such as TPG, Bain Capital and KKR have recently announced new impact investing funds. For example, TPG’s Rise Fund targets investments aligned with the UN Sustainable Development Goals. This growth coincides with greater emphasis from limited partners on environmental, social and governance (ESG) factors as well as accountability and transparency. Large institutional investors increasingly view ESG elements as part of their fiduciary duty. This mainstreaming of impact strategies builds on a decade of rising LP focus in this area.
Impact measurement and benchmarking enables transparency
Measuring and reporting the social or environmental impact of investments remains an important challenge. Best practices involve identifying 3-5 metrics during due diligence that are closely tied to the investment thesis and business plan. For example, Partners Group’s PG LIFE impact fund measures and discloses fund-level impact using metrics such as lives touched, jobs created and CO2 emissions avoided. Standardized impact measurement methodologies are emerging that will further enable transparency.
Responsible investment practices are moving toward fiduciary duty
The growth of dedicated impact investing funds reflects the alignment of fiduciary duty with ESG priorities. Leading firms recognize they can deliver market returns alongside social impact without contradiction. Success requires integrating impact considerations through the full investment lifecycle rather than viewing impact as a constraint. Over time, responsible investment practices seem likely to be increasingly viewed as part of fiduciary duty.
In summary, private equity impact investing strategies are achieving growth amid rising investor demand. Success requires strong impact measurement capabilities combined with financial discipline. As measurement methodologies emerge, responsible investing practices appear poised to become an integral component of fiduciary duty.