Growth in impact investing is outstripping all other forms of investment. Jo Russell reports on a strategy that balances profits and values.
Impact investing has its roots in 18th century America – with the Quaker movement, and the Methodist Church, with the maxim that investors “ought not to gain money at the expense of life or by losing our souls”. Today, it’s one of the fastest-growing segments in the investment world, AUM having grown at an impressive compound annual growth rate (CAGR) of 21% over the past six years, according to the GIIN (Global Impact Investing Network) 2025 report – comfortably besting total AUM CAGR of just 5% over the same period. Although the UK impact investing market, reported to be worth £76.8bn in 2024, represents less than 1% of the UK investment management market, it is currently growing at a faster rate than the wider market.
Not to be confused with philanthropy or ESG investing, impact investments are made into companies, organisations and funds with the intention of generating a measurable, beneficial social or environmental impact alongside a financial return. That intention is key.
“One of the challenges investors have is that the definition is still not well understood,” says Harriet Assem, head of sustainability at the BVCA. “As more people move into this space, the lines becomes more blurred. The key differentiator is that an impact investor will not only act to avoid harm, but will also look for benefits to stakeholders and, critically, to contribute towards a solution.”
Investors want better insight into the non-financial risk affecting cost of capital and evaluations
A broad church
Impact investing’s rapid rise is in part down to its connection with some of our greatest global issues. “It’s interesting to see impact moving from being about values to value,” says Elizabeth Boggs Davidsen, CEO of GSG Impact, a not-for-profit organisation that aims to lead the transformation of global financial systems, so that every investment, business and government spending decision takes into account impact, as well as risk and return. “Climate and social inequality, and supply chain exposure, are all now financially material,” she says. “Investors are starting to want better insight into the non-financial risk that is affecting cost of capital and evaluations.”
Private equity is leading the charge. According to the Impact Investing Institute in the UK, PE attracts the highest proportion of capital, at 45%, followed by real assets at 28% and private debt at 11%. Assem notes that there’s also growing activity within the VC community. “Impact investment tends to start within venture capital, as it’s a lot easier to evidence impact within a venture strategy and approach,” she says. “They are quite heavily engaged in greentech and life sciences, where it is easier to evidence and communicate the impact created. We are also now identifying large-cap members that have specific strategies labelled as impact products.”
The impact investing market encompasses a range of strategies and expectations. Big Issue Invest (BII) describes itself as being at “the hard end” of social impact investing. “Our objective is to maximise social impact while delivering a market return, rather than maximise return while delivering social impact,” explains BII director John Gilligan, an Oxford academic and co-author of the Corporate Finance Faculty’s ever-popular Private Equity Demystified book.
MD Sasha Afanasieva explains why BII was founded: “As a social enterprise, Big Issue struggled to find capital that was neither purely commercial, where impact was dismissed in a constant push for profit maximisation, nor philanthropic, which is quite restricted,” she says. “We are working out the trade-off between financial returns and impact, and how we can mitigate that in a way that puts the communities – the end customers – first.”
Alongside financial assistance, BII offers more-than-money support to make the companies it helps resilient to financial pressures. It supports both for-profit businesses (see ‘Going underground’ box) and, more commonly, charities and not-for-loss companies via a variety of funding models. Its growth impact fund provides securitised and non-securitised loans, as well as equity and quasi-equity investments, and then there’s also its social impact debt fund IV. On the latter, says Gilligan, “the headline news is that we have £20m we’d like to invest.”
Flourishing fundraising
Impact investment fundraising has fared well over the past 10 years, fed by and fuelling an ecosystem of investors. Smaller VC impact investors include MS+Partners, Circularity Capital, Triple Point and Lightrock. In the mid-market, Palatine and Bridges Fund Management are established players, while Apax and Bain Capital are notable larger funds.
Bridges, created in 2002, was one of the first fund managers in the world to launch an impact-driven investment fund, backing businesses whose products or services contribute to solving a social or environmental challenge. It is now on its fifth fund, which forms part of a platform approach sitting alongside the firm’s property funds and outcomes partnerships, the latter operating through a not-for-profit subsidiary.
We look for that lockstep between impact and commercial growth
Maggie Loo, head of client and strategy development at Bridges, believes this focus on impact gives the firm a competitive advantage over mainstream funds. “We stand out as a differentiated source of capital, and someone that management teams want to work with,” she says. “We can edge out competition because of our track record and our knowledge. We look for that lockstep between delivering impact and commercial growth, and management teams that are fully aligned with that vision.”
The firm is primarily an equity investor, with deal structuring described as “pretty vanilla” and funds typically 10 years. Less vanilla is the growing trend among institutional investors towards separately managed accounts (SMA).
“Most firms in our space manage co-mingled funds, made up of a number of investors,” says Loo. “As the private market sector has scaled, we have started to see institutional investors who might have more specific requirements. Being thoughtful about the impact you want to have with your capital leads you to be more bespoke about how you achieve it.”
Bridges can bring a blend of asset classes designed to deliver a specific type of impact. A portfolio of investments designed under the theme of creating better-quality homes, for example, might mix businesses that tackle fuel poverty with real estate businesses building accessible housing, says Loo. It could sit across multiple asset classes, while also satisfying an investor’s target rate of return. “It’s something we want to see more of,” she says. “We are a proponent of investors thinking about risk and return as well as impact – what their capital could be delivering.”
While the number of funds dedicated to impact investing is increasing, the same is not true for the adviser network. Loo states that the firm generally works with mainstream advisers (the likes of KPMG, BDO), as the few impact-specific advisers that do exist tend to be small and focus on niche areas.
If the big firms set up a social advisory business, that would really move the dial
Gilligan agrees that the paucity of advisers is an issue. “At the very social end of the world, people are dispersed across the country and not networked into where the money is. There isn’t the level of infrastructure because the market is smaller, meaning there isn’t a large group of advisers channelling transactions to the right place. It’s quite hard compared to mainstream private equity,” he says.
“There are people benignly interested in what we do, but ultimately we need a market structure that supports itself and doesn’t wholly rely on the goodwill of others,” he adds. “If we could get the big firms to set up an advisory business in the social world, that would really move the dial.”
Going underground
When social enterprise Village Underground took over a derelict art deco cinema in London’s Dalston and turned it into a music venue, Big Issue Invest (BII) helped pay for the restoration of the building. Then the pandemic hit.
With no revenue coming in and the business faltering, BII invested £2.5m and took a minority share in both Village Underground and another live performance venue it owns, EartH Hackney. The funding supported further refurbishment of the buildings and the training of young people to provide them with opportunities to enter the music industry.
“The young people these venues support might have been excluded from school or come from marginalised groups. We bring them in with the hook of music, but they learn promotion, marketing, booking venues, handling cash, all sorts of business skills. That is hugely impactful and transformative,” says BII director John Gilligan.
Impact is measured and forms part of the investment conditions. “There are some quite fierce impact covenants,” he adds. “If they don’t deliver measured numbers of people through the programme with results, the CEO takes a pay cut. If that happens for two years, we can block all capital expenditure.”
Alongside impact success, BII’s support has turned the social enterprise from one that was losing £0.5m at the end of the pandemic into a profitable business. Although it sits in a standard 10 plus 2 fund, Gilligan believes BII “will probably hold onto it longer than that because of the pandemic. But we are not overly concerned about how the exit comes.”
Apples and oranges?
A key part of GSG’s strategy is to get some consensus on the measurement, management and reporting of impact. “The more rigour around impact reporting and measurement, the more confidence is created in the market,” says Boggs Davidsen. “Without transparency or safeguards, investors stay on the sidelines.”
Assem agrees: “Having standardisation will enable comparability and increase understanding, and subsequently enable more flow of capital into the market.”
But comparing health benefits against environmental outcomes, for example, is not a straightforward task. Recognition of this fact prompted the creation of the Impact Management Project – a non-profit forum of more than 2,000 organisations designed to build global consensus on how to measure, manage and report impacts on people and the natural environment. The project has produced a publicly available tool that highlights five dimensions that any impact investor should manage and report on: who is experiencing the change; what change; how much change; your contribution; and the level of impact risk.
It’s a step in the right direction, says Loo. “It will depend on your objectives, but it at least tries to create more standardisation, by asking the same questions. We then have our own process of assessing how a company fits into answering these questions, based on information available.”
Impact with a small ‘i’
BGF, the most active growth capital investor in the UK and Ireland, established a charitable foundation in 2021. “BGF invests in SMEs that have a great idea, an established businessmodel but want capital and support to scale from where they are,” says Alistair Brew, head of investment operations at BGF and a trustee of the BGF Foundation. “I increasingly found that the read across to the charity space was really strong, with mid-sized charities trying to scale and have more impact but facing many of the same operational challenges.”
This led to the creation of BGF Foundation, which now supports 10 charities. “It’s a similar ethos to how we partner with companies, in that you trust the team to spend the funding wisely but work with them to enhance their operating models,” he says. The charities must meet certain criteria, including maximum revenue of £3m, and be involved in helping young people across education, healthcare and employment. “It’s impact with a small ‘i’: providing support in operational or financial areas to help charities become more sustainable.”
BGF Foundation COO Charlotte Moses Rains (pictured) says they provide multi-year funding with deep hands-on skills-based support. “Often funders are more interested in funding an end outcome,” she adds, “but we take it back a stage to help them develop their core capabilities.”
Oxfordshire Youth is one beneficiary. The charity, which provides wellbeing, employment, and resilience support for young people, some of whom are homeless, was given funding alongside pro bono assistance with financial forecasting, knowledge management, and operating systems. “This year we have covered the costs of a fractional CFO, one day a week for three months, helping them transform their systems and governance,” says Moses Rains. “Now they are much more financially resilient, are better able to understand their core financial capabilities, and have been able to access further funding.”
Where next?
According to Boggs Davidsen, the ultimate goal for impact investing is an impact economy, where all investment, business, consumption, and government decisions are taken with impact at their core. The overlap between politics and impact is already clear, given pressure to deliver better public services, strengthen economies and deal with climate change.
“It has been interesting to see how politics is enabling – almost encouraging – impact investing today,” she says. “The UK is a fascinating example of where impact investing is going. The government recently opened an Office for the Impact Economy. That sends a really powerful signal, showing that it views impact as part of national competitiveness.”
Boggs Davidsen hopes that GSG Impact’s flagship initiative to build an Impact Economy Index will play its part. The index is the first global benchmark that compares how countries are progressing in their efforts to embed impact into economic systems.
“It’s an opportunity to measure, compare, and rank the enabling environments for impact investing at government level,” she says. “We see so many examples of what good looks like across the globe and our network. Being able to put it together into an index that hopefully drives change is exciting.”
