Climate urgency, social responsibility and corporate accountability are increasingly at the forefront of people’s minds, and the investment landscape is rapidly changing.

A growing movement is proving that capital can go beyond generating profits – it can be a force for good. This is the core of impact investing: investments made with the intention to generate positive, measurable social or environmental impact alongside a financial return.

From philanthropy to financial strategy

Impact investing is often mistaken for philanthropy – but unlike donations and grants, there’s also a focus on financial returns.

This idea is not new. As early as the 1960s, socially responsible investing (SRI) took shape – focused on avoiding investments in industries such as tobacco or weapons and companies linked to the Vietnam War. This gained momentum in the 1970s and 1980s when there was divestment from companies operating in South Africa as part of a global effort against apartheid.

The 2000s saw a significant shift from this exclusionary approach to a more proactive one, with investors actively seeking positive outcomes. A turning point was in 2007 – it was then, at a meeting of finance, philanthropy and development leaders convened by the Rockefeller Foundation in Italy, that the term ‘impact investing’ was born. Around the same time, the UN launched its Principles for Responsible Investment (PRI), and the Global Impact Investing Network (GIIN) was formed – both geared towards guiding investors looking to generate impact with financial returns.

Today, impact investing is no longer a niche concept; it’s widely recognized as a fundamental financial strategy, attracting a diverse range of investors, including institutions, corporations, family offices, philanthropic foundations, venture capital (VC) and private equity (PE). The market has grown significantly, with GIIN’s latest report estimating $1.57tn in impact investing assets under management globally, reflecting a 21 percent compound annual growth rate (CAGR) since 2019.

Going beyond ESG investing

Impact investing is often confused with ESG investing, but there is a clear distinction. ESG investing integrates environmental, social and governance factors into existing frameworks with the express purpose of managing risk – something Nordic investors have been doing since the 1960s – while impact investing focuses on creating measurable social and environmental impact.

Other key differences between ESG and impact investing lie in the approach (avoiding harm versus actively contributing to solutions) and outcomes (the former may lead to positive change while the latter explicitly creates measurable impact).

The impact investing approach

All impact investments need to be guided by the following principles:

1. Intentionality – where investment choices are deliberate, seeking to generate positive social or environmental impact.
2. Measurability – where the impact is quantifiable, tracked and reported.
3. Financial returns – where investments generate profits.
4. Additionality – where positive outcomes that would not have happened without the investment are achieved.

Impact investing spans multiple strategies and asset classes, with investments often aligning with the Paris Agreement or UN Sustainable Development Goals (SDGs).

A clear distinction should also be made between impact-first investments, which prioritize social and environmental outcomes over financial returns, and impact-led investments, which seek to maximize both financial performance and impact.

Many PE and VC firms directly fund high-growth, impact-driven businesses. For example, Breakthrough Energy Ventures – co-founded by Bill Gates – invests in climate tech startups to accelerate reaching net-zero emissions by 2050.

Impact-led PE funds are dedicated to longer-term, slower-growth investments, where achieving sustainable growth with impact requires patient capital. The EQT Future Fund is an example of this. EQT sets portfolio-wide sustainability targets for the fund’s investments, and tailored impact KPIs for each business. The fund – supported by the Future Mission Board and dedicated impact advisors – identifies and incentivizes pivots from existing market offerings towards products or services with measurable positive impact, and/or scales impactful products and services for greater reach and depth of impact.

Impact investing can also be achieved through fixed-income debt instruments such as green bonds, social bonds, and sustainability-linked bonds, or impact-focused ETFs. Some examples include the World Bank’s Sustainable Development Bonds and Green Bonds, the African Development Bank’s “Fight Covid-19 Social Bond” to support pandemic response efforts, and Invesco’s Solar ETF, focused on the solar energy sector.

Blended finance is a powerful tool in impact investing because it mobilizes private capital by de-risking high-impact projects. One type is catalytic capital, an investment that takes on higher risk or lower returns, prioritizing positive impact. Examples include the MacArthur Foundation’s Catalytic Capital Consortium (C3) which provides first-loss capital for impact funds to attract investors, or the Global Climate Partnership Fund (GCPF) which uses public and philanthropic capital to de-risk renewable energy investments in emerging markets.

Measuring impact

Measurement is crucial because it ensures accountability, credibility, and produces key data to guide investors and shape policy. Without it, good intentions risk turning into empty promises.

As a result, the industry has developed standardized frameworks including GIIN’s widely used Impact Reporting & Investment Standards (IRIS+), the International Finance Corporation’s Operating Principles for Impact Management, and the Social Return on Investment (SROI).

Despite this, challenges remain. Without one universally accepted standard of measurement, comparison across investments is almost impossible. Proving causality – whether an investment directly led to a positive outcome – isn’t straightforward. Limited infrastructure in underdeveloped areas can make data collection costly and unreliable, not to mention the often considerable time lag between the investment and the impact. Finally, there’s the risk of ‘impact-washing’ – where firms exaggerate their contributions to appear to be doing more.

Therefore, the industry is working hard to align existing frameworks, create benchmarks, strengthen third-party verification and encourage regulation for standardization.

The future of impact investing

Impact investing is constantly evolving – rapidly responding to market needs and swiftly moving into the mainstream. This strategy proves that financial returns and positive impact are not mutually exclusive – it’s possible to have profit with purpose. With rising investor demand, increased regulatory support, and a global push towards sustainable development, the market is expected to experience exponential growth over the next 10 years. It has the potential to reshape global finance by directing purpose-driven capital toward a more sustainable future.