Sacrificing returns at the altar of impact? Think again…

Too often we hear from investors that they think they are sacrificing financial returns for environmental goals when choosing to support impact funds.

Nothing could be further from the truth in our view: on the contrary, sustainability acts as a driver for long term growth and provides a fertile environment for value creation. In fact, a study by McKinsey & Company found that a majority of C-suite leaders and investment professionals expect ESG programmes to create value over both the short term and the long term.1

Three underlying factors underpin high return expectations for impact funds: stronger and sustained growth, agility in adapting to change and resilience.

Fundamental growth trends

Sustainability is no longer a peripheral consideration but a core driver of long-term growth. As global awareness and calls to action around climate-related issues intensify, companies that address these needs and prioritise sustainable practices are positioned to capture opportunities in sectors poised for sustained growth. The global renewable energy market is projected to grow at a CAGR of 8.5% from 2024 to 2033, reaching a market size of $2.55 trillion by 2033.2  By investing in companies operating within the value chains of these markets, investors are not merely aligning with ethical standards but are also gaining exposure to high growth markets.

Capitalising on regulatory changes

Businesses that incorporate renewable energy solutions, efficient resource management and sustainable supply chains, ensure compliance with current regulations and are often better positioned to navigate future regulatory changes. Impact funds investing in such businesses can benefit from a forward-thinking strategy, as these companies are proactively aligned with evolving environmental policies and more adaptable to potential carbon pricing mechanisms, energy efficiency mandates and financial incentives. By supporting businesses that prioritise sustainability, these funds can position portfolios to anticipate and benefit from these regulatory shifts, turning compliance into a competitive advantage in a rapidly changing regulatory landscape.

Initiatives like the European Green Deal and generally supportive policy landscapes have made Europe a particularly attractive region for impact investing. In contrast, the U.S. has faced a more fragmented and politically influenced approach, currently creating more uncertainty for investors.

Resilient business models

Sustainable businesses tend to have more robust operational frameworks, making them less vulnerable to rising energy costs and supply chain disruptions, leading to more effective risk management and improved operational efficiencies. This in turn translates to stable financial performance, longevity in the market and long-term value creation for private equity sponsors. Impact funds also provide diversification and long-term risk mitigation, providing better downside protection than traditional investments as noted in a Global Impact Investing Network report.3

The notion that investors must choose between financial returns and environmental impact is a false dichotomy. As seen through the factors above we should not only expect a similar level of performance from impact funds but in fact, better returns driven by businesses with higher levels of growth from underlying market trends, a capacity for adaptation to change and better downside protection through resilience.

1.    The ESG premium: New perspectives on value and performance, McKinsey & Company, 2020
2.    Renewable Energy Market Size, Share, Competitive Landscape and Trend Analysis Report, by Type, by End Use : Global Opportunity Analysis and Industry Forecast, 2024-2033, Allied Market Research, 2024
3.    Impact Investing Decision-making: Insights on Financial Performance, Global Impact Investing Network, 2021