Impact investment funds – seeking measurable positive environmental and social impact alongside a financial return – have proliferated across many asset classes including public equity, private equity, real estate, infrastructure, natural capital and more. There are numerous tailwinds, ranging from supportive ‘mega trends’ such as climate change and resource scarcity to inter-generational shifts in mindset. It has therefore become increasingly essential for investors to understand the sector and form a clear view.

New impact private equity funds are now appearing on a weekly basis. Investors can find substantial groups of strategies targeting different capital stages (venture, growth, buyout) and geographies. Most seek to deliver a diverse range of impact objectives but many are concentrating on a specific theme, such as climate. A wide variety of fund types are now available, including impact-focused fund of funds.

Manager due diligence is challenging. Investors must essentially perform a separate additional layer of analysis and the immaturity of the sector, combined with widespread ‘impact washing’, can make it difficult to determine desirable standards. It is important to look beyond checklists and consider whether managers’ approaches to impact are consistent and coherent overall. Impact can be driven (and undermined!) by managers’ actions at deal level, fund level and firm level.

In determining what constitutes a suitably credible impact strategy in this asset class, it is helpful to have a strong awareness of asset managers’ practices. This paper presented a selection of ‘best practice signals’ and ‘potential red flags’ that represent the behaviour of leaders and laggards during recent manager research. None of these indicators represents a silver bullet but, together, they can help investors to form strong-yet-pragmatic expectations.

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