Impact Portfolio Tracking for Private Equities

Not to be confused with charity or social enterprises, “impact investing” directs capital to enterprises that generate social or environmental benefits as well as a financial return.

The Global Impact Investing Network (GIIN) defines impact investing by four core characteristics: intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement. These characteristics ensure that investments intentionally contribute to measurable social or environmental outcomes alongside financial returns.

Examples of businesses that would be a great investment with social or environmental benefits could include:

• An ethical chocolate start-up dedicated to creating a product entirely free from the slave trade at every stage of the supply chain. 
• A skincare range whose products are in every way sustainable, and have a strategy which surrounds building up the local community. 
• An eye-care clinic that, for every pair of glasses sold, donates a pair of lenses to schools in developing countries with children who need help to see.

No, impact investing and ESG (Environmental, Social, Governance), while they are related to one another, are different concepts. ESG serves as a set of guiding criteria to evaluate risks and operational performance in investment decisions. In contrast, impact investing is when private equity funds are focused on generating specific, beneficial impacts in addition to financial returns.

In private equity, impact is defined by the tangible social or environmental benefits generated by an investment, which are intentional and measurable and contribute to addressing global challenges.

In private equity, impact investing targets companies that not only promise financial returns but also demonstrate potential for significant social or environmental impacts. Private equity investors may actively engage with these companies to enhance their impact outcomes alongside financial performance.

While impact investing and venture capital can target emerging businesses, impact investing is when investors specifically seek companies with the potential for both financial and non-financial returns. In contrast, traditional venture capital focuses primarily on financial growth and returns.

Investors choose impact investing to align their portfolios with their values, aiming to contribute to societal and environmental improvements while seeking financial returns. Impact investing can be worth it for investors wishing to achieve financial return and positive impact.

Pros include:

• Contributing to positive social or environmental change
• Tapping into emerging markets and innovations
• Potentially achieving competitive financial returns

Cons involve the potential for higher due diligence costs, lower immediate returns compared to traditional investments, and challenges in measuring impact using traditional frameworks.

Private equity and venture capital managers are well-placed to drive change in business. By working closely with management and supporting a business with capital, expertise and networks, investors have demonstrated that they can drive improved growth and profitability for companies of every size and stage across a very wide range of sectors and geographies. 

As an influx of funds surges into impact investment, private equity investors who adopt impact management and measurement strategies are more likely to see better success in their financial, social, and environmental outcomes.