Impact by any other name?

Where once, GPs were shouting their green or social credentials from the rooftops, the politicisation of sustainable investing has turned down the volume on these claims. What effect is all this having on impact strategies?

Impact investing has been on a sharp upward trajectory in recent years. In Europe, for example, the impact investing market in private assets was worth €190bn in 2024, up from just €80bn in 2022, according to a report by Impact Europe. That's impressive growth by any standard.

But to what extent can the market continue growing rapidly at a time when the noises from the US – private capital's largest market by far – are distinctly less positive than just a few years ago?

In the months since his inauguration, president Trump has rolled back swathes of environmental protections and green incentives, withdrawn from the Paris Agreement, placed effective bans on certain DEI initiatives and is proposing removing a rule allowing pension funds to consider ESG factors when making investment decisions. The Securities and Exchange Commission has also abandoned plans to mandate that companies report on their climate risks.

Anti-ESG sentiment and policies have had quite an effect. The past few months have seen many large US companies and investors disavow previous sustainability claims, with some screeching U-turns by some well known names, including BlackRock and Wells Fargo. Meanwhile, corporations such as Walmart, Apple, American Airlines, Meta, Ford and Coca-Cola have pulled or substantially rephrased publicly available information on their sustainability plans.

So where does all this leave impact strategies in private markets today? Here are some observations on what's happening on the ground.

The picture among LPs is mixed. The shift in sentiment – at least publicly - among some US LPs has been marked, while European investors remain steadfast. "The politicisation of ESG and impact investing globally has created headwinds, with some investors stepping back," says Josh Haacker, Chief Investment Officer at Climate Investment. "But impact investing is far from dead. In fact, we're seeing European LPs deepen their commitments. It's a tale of divergence, not decline."

Others, however, report continued support across the board, even among US investors.

"We have investors from all around the world, including Asia, the US and South America," says Nino Tronchetti Provera, Founder and Managing Partner at Ambienta.

“I cannot name a single one of our investors that has moved an inch on their willingness to invest in our industry. So we're not seeing any pullback. That said, I recently met with a couple of US pension funds who told me they'd like to invest but are restricted by political bans. They weren't investing before, so this doesn't represent a shift — just a continuation of the status quo.”

Urs Bitterling, Impact Partner and Chief Sustainability Officer at Cubera Private Equity, agrees. "I think we need to keep calm," he says.

"There is a lot of media noise about the backlash, but if you look at flows, there's actually no backlash. Rather, very large asset owners are holding the course, recommitting and not because of any political motivation. They are doing this because they believe their stakeholders will ultimately benefit from this in 30 years."

European GPs are largely staying the course… In the public markets realm, we've seen some European companies, such as Shell, BP and Nestle row back on climate and sustainability goals. Yet European private markets fund managers are staying true to their impact strategies.

"In my work, I observe that GPs – particularly those with a strong foundation in Europe – are maintaining their commitment to impact strategies," says Thomas Brand, Director at Value for Good.

“For many, these strategies are core to their investment theses, centred on long-term societal trends. They are sticking with environmental and social impact strategies, and that makes sense because if they moved away now, even if they returned in five or six years, how would they be perceived? They do need to consider how they raise capital in the US and here, we are seeing some reframing and repackaging. But the picture in Europe is relatively stable.”

…but they have to tread carefully with different investors. "Three years ago, if you could demonstrate sustainability or impact, it really attracted LP attention and allocations," says the managing partner of an impact fund. "When we started our fundraising back then, our sustainability focus was a large element of our marketing. Now we are now out with our second fund and our placement agent is very careful in how we position our ESG strategy and what we have done so far. Some LPs want to see impact KPIs linked to carry, for example, but others don't want to see that at all."

When we started our fundraising [three years ago], our sustainability focus was a large element of our marketing. Now we are now out with our second fund and our placement agent is very careful in how we position our ESG strategy and what we have done so far.

Manager of an impact fund

Deal completions are challenging today. "We all know we are not going to make it to the Paris Agreement goals," says Joana Castro, Head of Climate Impact at Unigestion. "It's important to say that what we have done so far hasn't been enough. Yet the bar for climate investments is very high at the moment. Due diligence takes longer, there is high uncertainty on deal closings for most climate investors these days, and a lot of transactions come through that don't achieve funding capital. Yet we need to keep supporting climate investments because we are falling behind where we should be." She adds, though, that the bar needs to remain high to ensure top quartile returns.

However, the shifts are helping to bring some parties together. "The reaction to the noise surrounding the ESG backlash has been telling," said Gwen Colin, ESG Director at Vauban Infrastructure Partners. "We've seen global investors entering the European market with a clear message: keep up the good work, don't overcomplicate it, and above all, stay the course—stability is key for your credibility. While some major US competitors have stepped back from their ESG commitments, Europe is emerging stronger in sustainability. A more rational, pragmatic approach is taking shape—one that focuses on material impact and fosters cooperation and collaboration to deliver structural and sustainable solutions."

The reaction to the noise surrounding the ESG backlash has been telling. We've seen global investors entering the European market with a clear message: keep up the good work, don't overcomplicate it, and above all, stay the course—stability is key for your credibility

Gwen Colin, ESG Director at Vauban Infrastructure Partners

They are also focusing the conversation firmly on financial returns… "What's changed is how we talk about the work," says Haacker. "We're focused on solutions that deliver clear commercial value—lower costs, greater reliability, safer operations—while also cutting emissions. These are investments that stand on their own merits. The language may shift, but the mission continues."

"Sometimes, people think that green companies live on the moon," says Tronchetti Provera. "That's just a fake concept. They are real, solid, normal companies that have an environmental edge, and that edge is exactly why they're outpacing their peers. We are continuing to improve returns even through the turbulence of the pandemic, the war in Ukraine, and beyond. Why? Because we invest in companies that others will want to own at the end of our investment. You can either lead on environmental issues or wait for them to hit you. We've decided to lead and it's paying off."

…and on risk factors. "The investible universe in impact is smaller than in traditional investing," says Gregorio Marini Clarelli, Alternatives Director at PFC Family Office. "That means you can't diversify as much and so the risk-return profile is less efficient. We have to face it, as asset managers, it is difficult to invest here because the risk of adverse selection is high. The good news is that there are increasing numbers of impact fund managers and actually, businesses with a unique business proposition that contribute to a solution should grow faster than the market. They also have more reason to exist in 30 years than a company that doesn't."

Vikram Raju, Managing Director at Morgan Stanley Investment Management agrees. "If you look at the kind of climate investments we, and many of our peers, are targeting, it's obvious that these strategies are focused on fundamental growth stories," he says. “The companies we target are ones that even a hard-nosed climate sceptic would be happy to own because they offer value to customers – they save them money, time, materials. We can call it climate investing, but it's also true to call it resource efficiency, energy security or supply chain resilience.”

He points to Instagrid, an investment in Morgan Stanley's 1GT fund as an example. "You have big diesel generators on construction sites," says Raju. "They're noisy, they belch out black smoke and they're heavy – it takes four people to carry them up to various floors. Instagrid replaces these with something that looks like a suitcase and has a set of neat batteries with powerful electronics so they're light. It's a simple solution." This, he adds, brings down cost on construction sites, lowers noise levels, is cheaper and reduces injuries. The product could also be used at outdoor festivals, film sets, hot dog stands and so on. "It's a great growth story," says Raju. "And there is obvious carbon emissions avoidance for every diesel generator Instagrid replaces."