Recent research indicates that private equity firms are generating meaningful financial gains through sustainability initiatives by incorporating environmental, social, and governance (ESG) factors into the operational management of portfolio companies. This research seems to contrast with evidence that impact funds – those with the specific intent to generate positive social or environmental change alongside financial returns – have not outperformed traditional peers and may not behave as differently as their label implies. This contrast raises important questions for values-focused investors, especially individuals, trying to decide how to allocate capital to drive positive change. If investors look beyond labels and evaluate what a fund actually does, however, the answer becomes clearer.
Private Equity Firms That Integrate Sustainability Can Generate Positive Outcomes
The Boston Consulting Group’s Sustainability in Private Markets report shows that private market general partners (GPs) are increasingly treating ESG as a driver of value creation. The GPs who participated in their study estimated that they achieved operating earnings increases of 4%–7% attributable to sustainability initiatives such as energy efficiency and employee safety. In a 2026 paper, Stanford’s Long-Term Investing Initiative and British Columbia Investment Management Corporation (SLTI/BCI) presented case studies demonstrating how three of BCI’s portfolio companies used ESG to improve operations and increase shareholder equity. While these reports may reflect GPs and investors already committed to ESG integration, they show that investors can pursue their values without sacrificing financial returns.
Some Impact Funds Fall Short in Delivering Meaningful Change
There is some evidence that impact funds underperform traditional funds in financial returns. For example, the paper, “Impact Investing,” showed that venture capital and growth equity impact funds delivered materially lower returns than comparable traditional funds. However, the paper relies on data from older vintage years (1995–2014). A more recent PitchBook report showed that the gap has narrowed but still exists. Finally, another study, “The Risk and Return of Impact Investing Funds,” found that impact funds have performed on par with traditional funds on a risk-adjusted basis. However, they underperformed on an absolute basis.
More surprising than the financial outcomes of impact funds are the findings in a Harvard Business School (HBS) paper, “What Do Impact Investors Do Differently?” The authors observed that impact investors co-invested with traditional funds in about 60% of their investments, suggesting that their capital may sometimes only serve as a substitute for other forms of traditional capital. However, they also observed clear differences in the stage of investment across new sectors and a greater willingness among impact investors to invest during periods of economic uncertainty. An inference from this study is that impact investors’ abilities to source differentiated investment opportunities vary, and that intention does not assure outcome.
How Institutional Investors Evaluate Managers
While some traditional private equity firms have demonstrated they can make positive impacts, it is unlikely that all managers do so consistently. Similarly, evidence that impact funds as a group drive significant change is not yet clear. However, many impact managers do pursue “additionality” – outcomes that would not have occurred without their capital or involvement – as the research highlights. These managers tend to focus on emerging markets and sectors such as energy and financial services, where impact initiatives can scale meaningfully.
Since relying on labels can result in missed opportunities or being trapped in funds that do not deliver expected results, investors need a framework to set clear objectives and a strategy to select funds aligned with those objectives.
Institutions typically state their objectives in one of three ways: exclusion, integration, and impact. Exclusion avoids specified sectors. Integration embeds ESG across all aspects of a manager’s processes while prioritizing financial returns. Impact targets intentional social or environmental outcomes and may accept trade-off returns. An institution’s ability to pursue impact, including concessionary funds that accept lower returns, is often constrained by policies and other mandates that require it to pursue only market-return investments and by the relatively small size of the impact fund market compared with private markets overall.
After defining objectives, institutions utilize their staff of investment professionals and other resources to execute their strategy. They request and analyze ESG data from fund managers, negotiate ESG reporting and covenants, and actively work with general partners and management teams when they hold significant economic positions in a fund or portfolio asset. They may even seek to align incentive structures with ESG outcomes. Many institutions can assess whether impact is integrated across a manager’s sourcing, diligence, and ownership, whether results are documented, and whether managers adhere to stated processes.
A Practical Framework for Individuals
Since individual investors typically do not have the same level of access to fund managers, they cannot conduct the same level of diligence. However, they can follow the same principles and ask many of the same questions, either directly or through their advisors. Individuals should start by establishing objectives, then apply a consistent diligence process to select funds that provide transparent disclosure of their sustainability initiatives and outcomes.
Clarify the Objective
As with institutions, individuals should first clarify what they are looking for in their private market portfolios using the same three objective types: exclusion, integration, or impact. Individuals have greater flexibility than many financial institutions, however, and may more consistently align their objectives with those of foundations and large family offices. Those institutions are often willing to allocate a greater share of their portfolios to Impact funds, including concessionary funds.
Determine How Sustainability Contributes to Fund Outcomes
Understanding a manager’s focus on impact should start broadly by asking whether it spans the full investment lifecycle, from sourcing to exit, and whether they use specialized staff or consultants to guide their investment professionals. Investors can dig a bit deeper by asking about specific focus areas, such as employee safety or energy transition, and how outcomes are measured and reported. Case studies that show when a manager’s diligence led to passing on an investment opportunity due to ESG or impact reasons are particularly helpful. As illustrated in the BCI case studies, providing details about the impact levers a manager pulled – and their outcomes – can add depth to what may otherwise be a data-driven analysis.
Avoid Funds That Do Not Produce Measurable Impact
As with traditional managers, the key to identifying impact managers who generate additional, measurable outcomes is to understand their intent, processes, and results. To address the question of “additionality”, investors can ask how the manager’s focus differs from that of traditional funds and who would finance their portfolio companies if impact capital were unavailable. Importantly, while good intentions are a starting point, asking for case studies that demonstrate the manager’s capabilities to help management teams in emerging economies or nascent industries, or to transform business practices, can help distinguish capability from aspiration.
Getting Past Labels
As the number of impact funds has expanded, and more traditional fund managers have adopted sustainable investing practices, investors have more opportunities to align private investments with their values. However, identifying suitable funds requires moving beyond labels to evaluate objectives, processes, and outcomes.
Institutional investors often begin with tools such as the Institutional Limited Partners Association’s (ILPA) “Due Diligence Questionnaire” to assess a manager’s focus and processes. Individual investors can use the same questionnaire in their fund evaluations by asking a selected subset of those questions or looking for relevant responses in other information provided by the fund manager.
By setting objectives and conducting ESG due diligence, investors can identify fund managers aligned with their values and capable of delivering intended outcomes. In many cases, this process can also clarify whether they need to accept lower investment returns to invest in a values‑focused manner – or whether manager selection can eliminate that perceived cost.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.
