Sustainable investing has evolved significantly in recent years, moving beyond traditional ESG considerations to a more impact-oriented approach. Driven by demands from asset owners, regulators, and the public, asset managers are increasingly looking for investments that not only avoid harm but also contribute solutions to global sustainability challenges. This shift represents an important opportunity to channel more capital towards companies providing products and services that directly support sustainable development goals like climate change mitigation, clean water access, healthcare improvements, and financial inclusion. However, it also requires investors to adopt more rigorous impact assessment frameworks that measure the real-world effects of their capital. As sustainable investing gains mainstream momentum, its core focus on impact will better position the industry to generate competitive returns and drive meaningful progress on society’s most pressing issues.
The limitations of ESG have spurred the growth of impact investing
ESG (environmental, social, governance) investing has experienced tremendous growth over the past decade, cementing itself as a mainstream strategy for assessing corporate sustainability. However, its limitations have also become apparent. ESG ratings often rely heavily on company disclosures and policies rather than real-world impact. Firms with poor environmental records can still score well on governance factors. And ESG analysis is largely backward-looking, focused on past performance rather than an investment’s potential for future impact. Many industry leaders now recognize that ESG alone is insufficient for the scale of global challenges like climate change, which require more proactive capital allocation. This has led to the rise of impact investing, which focuses squarely on the measurable positive outcomes enabled by investment activities.
Impact measurement methodologies are maturing
For impact investing to reach its potential, asset managers need standardized tools to assess the impact of each investment. Methodologies are maturing but remain a work in progress. The impact multiple of money calculates the magnitude of impact per dollar invested. IRIS catalogs a library of metrics for measuring social and environmental performance. B Analytics provides company-level assessments based on the UN Sustainable Development Goals.FRAME establishes indicators of contribution and causation for individual funds and investments. While none offer a perfect solution, these tools enable more rigorous impact quantification and comparison across asset classes. Their continued refinement will support the credibility and adoption of impact investing strategies.
Demand for impact is accelerating across the investment spectrum
The shift towards impact is being driven by asset owners, regulators, and the public. Pension funds, endowments, foundations, and family offices are issuing an increasing number of impact investment mandates. New disclosure requirements like the EU Sustainable Finance Disclosure Regulation are forcing managers to enhance impact reporting. Retail investors, particularly women and millennials, are flocking to funds that integrate impact. As stakeholders at all levels call for investments that contribute solutions to global issues, the industry is responding. Already in Q1 2022, inflows into sustainable open-end funds reached a record $21.9 billion according to Morningstar. The demand trajectory points to impact investing becoming standard practice in the years ahead.
Impact-oriented funds have competitive performance potential
A persistent misconception has been that pursuing impact necessitates sacrificing returns. However, research indicates no systemic underperformance for sustainable strategies, including impact-oriented approaches. In fact, the incorporation of material sustainability factors and impact diligence can potentially improve returns by mitigating risks and identifying growth opportunities. For example, funds focused on climate tech, financial inclusion, and healthcare access target fast-growing markets while contributing solutions. With a solid understanding of impact pathways, asset managers can build high-quality portfolios poised to outperform traditional investment strategies. As impact measurement practices improve, the performance case will continue to grow stronger.
The evolution of sustainable investing towards a focus on impact represents a promising path to channel capital towards positive change. As asset managers adopt more rigorous impact assessment tools and respond to intensifying demands from stakeholders, impact investing will become an increasingly powerful force for enabling progress on global challenges while also generating competitive financial returns.