The investment case for impact in private equity

Nadina Stodiek, Co-Head of Impact Management, Schroders

There are some well-worn myths and outdated assumptions related to impact investing.
Arguably the most obvious and commonly referenced of these is that investing for impact – that is, making investments into companies or assets that seek to make a positive, measurable social or environmental contribution, alongside a financial return – requires the investor to forfeit performance in favour of purpose.

Put another way, it is widely assumed that impact investing necessarily involves accepting lower returns, as investments do not have value creation as their sole driving aim.

The elephant in the room
In a major new study, Schroders and Oxford University’s Business School have provided extensive evidence not only to challenge this view, but that highlights the potential for ‘impact’ to be a source of alpha and so a driver of positive returns.

Paul Lamacraft, Senior Investment Director, Schroders

The paper is based on data drawn from more than 250 publicly listed companies that have been approved through Schroders' proprietary Impact Framework, which leverages the pioneering 25-year track record of impact asset manager BlueOrchard, and spans more than a decade of performance.

Key takeaways from the research are that impact portfolios delivered strong and competitive absolute and risk-adjusted returns, relative to broader, unconstrained portfolios – and that they also exhibited lower volatility and smaller drawdowns, and so reduced downside risk and demonstrated greater stability during market downturns.

The study also found evidence that companies with higher revenue alignment to impact-oriented products and services (impact materiality) generated superior financial returns, suggesting that impact itself can be a driver of financial performance, and a source of alpha.

Catherine Macaulay, Co-Head of Impact Management, Schroders

Growth in private equity impact
Impact investing has been a growing phenomenon in private markets – and private equity in particular.

According to the Global Impact Investing Network’s (GIIN) Sizing the Impact Investing Market 2024 report, there is currently close to $1.6 trillion in impact investing assets under management (AUM) globally, being managed by more than 3,900 organisations.

And according to the GIIN State of the Market 2024 report, based on its annual impact investor survey, 43% of all impact AUM is allocated to private equity specifically, making this by far the largest single asset class for impact investing. A substantial 73% of survey respondents have at least some of their impact AUM in private equity.

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