Impact vs. ESG Investing in Private Markets

Abstract

Impact investing aims to simultaneously deliver two objectives: (i) social and environmental benefits and (ii) financial returns for a desired investment risk level. This dual objective function differentiates impact investing from other forms of investing that integrate environmental, social or governance (ESG) aspects which consider financial returns as primary objective with ESG outcomes being secondary ambitions. Despite being one of the fastest growing asset classes, academic studies of impact investing remain rare, and an extensive analysis of impact investor characteristics is yet to be undertaken. Using a large dataset of over eight thousand private markets investment (PMI) firms around the world, we are able to differentiate between impact investors, ESG and conventional PMI firms. We unveil differences in their ownership structure, their asset class preferences, their sectoral focus and how these vary in different regions across the world. We find that impact investing firms to be younger than ESG investment firms and more labour intensive. Impact investing firms are more likely to be owned by governments, particularly in Europe. They invest over-proportionally in agriculture, cleantech and education sectors and under-proportionally in “sin” industries such as gambling or tobacco. On the African continent, impact investors invest over-proportionally in food & nutrition solutions compared to ESG investors, whereas in Asia, Australasia, Europe and the North America, agriculture and forestry are more prevalent as an investment theme. In North America, in contrast to the other regions, impact investors tend to focus most on cleantech and education which differentiates them significantly from impact investors.

Keywords: impact investment, private equity, sustainable finance

JEL Classification: G24, L26, L31, O35, Q01, Q56