How Private Equity is Essential for Impact Investing

Impact investing has become a major force in reshaping the financial landscape by combining traditional investment objectives with a strong focus on social and environmental impact. Unlike conventional investing, which emphasizes financial returns alone, impact investing is centered on delivering both measurable financial outcomes and societal benefits. This approach has seen a rise in popularity, particularly in sectors like healthcare, education, renewable energy, and sustainable agriculture, where businesses are integrating profit motives with long-term positive environmental and social change.

The worldwide impact investing market is currently valued at $1.571 trillion USD, a testament to the growing demand for investments that align with both financial returns and social responsibility. As more investors seek to create lasting value, the potential for impact investing to reshape industries is stronger than ever.

A critical player in advancing this dynamic is private equity (PE), which supports impact-driven businesses not only through capital investment but also by offering strategic guidance, operational expertise, and network access. This collaboration between PE and impact investing offers the perfect environment for companies looking to scale while maintaining a strong social mission.

Defining impact investing

Impact investing refers to investments made with the intention to generate positive and measurable social and environmental results, while also receiving returns on that investment. It aligns two areas of expertise: firstly, business growth and secondly, sustainability strategy and management.

There are three core principles that define impact investing:

1. The deliberate intention to contribute to impactful social and environmental causes
2. A commitment to measure that impact and ensure transparency of metrics
3. The aim to make a return on investment, in line with specific goals and investment strategies

Role of private equity in impact investing

For companies that are striving to make an impact and drive their mission forwards, investor resources are invaluable. Equity investors not only provide the necessary capital, but also the expertise that allow companies to grow and boost their impact – that means real scalability potential for small, results-driven businesses.

Private equity also plays a key role in impact investing due to its long investment horizons, which allow time for impactful outcomes to materialize. It fosters active ownership, enabling close engagement with portfolio managers. This can help to inspire drive strategic and operational changes, further shaping the future of impact investing.

Mechanisms through which private equity drives impact

Private equity firms with skilled associates can drive impact through a number of different mechanisms:

• Active governance: Ability to take a hands-on approach to company policies, strategies and social and environmental goals.
• Capital allocation: Ability to invest in sectors that otherwise would be underserved.
• Operational improvements: Ability to enhance efficiency, sustainability and fair labor practices. 
• Impact-driven strategies: Ability to target specific concerns such as green energy or inclusive finance.
• Scaling impact models: Ability to provide the capital and expertise required to scale a business.
• Responsible exits: Ability to partner with or sell to those with aligned goals, ensuring impactful policies and strategies exist post-exit.

Challenges and considerations

Despite these mechanisms, impact investing isn’t straightforward. With new strategies and goals, comes new potential challenges and considerations:

• Mission drift: Investors have to strike the right balance between making money and furthering their impact goals. 
• Impact-washing risk: Private equity firms should be careful not to overstate or misrepresent impact intentions and results.
• Measurement difficulties: It can be a complex and difficult process to standardize and compare impact data across investments.
• Talent and capability gaps: There can be a shortage of professionals who have expertise both in achieving growth and making a profit, alongside impact management.
• Regulatory uncertainties: Constantly evolving disclosure requirements and global standards can make regulation difficult to understand and navigate.

The role of leadership, talent, and diversity in impact investments

As impact-driven companies scale, the leadership and talent behind these businesses are critical to ensuring long-term success and sustainability. While private equity provides the capital and strategic guidance necessary for growth, it is the right leadership that ensures these companies stay true to their mission while navigating challenges.

Impact-driven businesses require leaders who can balance financial objectives with social and environmental goals. Whether it’s a CEO with experience in social enterprises or a CFO skilled in impact investing, hiring the right executives is crucial. Having the right leadership ensures these companies can scale efficiently, manage risks, and stay aligned with their core values and mission.

Diversity also plays a pivotal role in fostering innovation and driving success. Diverse teams bring a wide range of perspectives, which is essential when tackling complex global challenges. Research shows that diverse teams make better, more informed decisions, which is particularly important when aiming to achieve lasting social and environmental impact. Furthermore, companies that prioritize diversity tend to see improved financial performance, higher employee satisfaction, and stronger employee retention.

By building diverse, high-performing leadership teams, impact-driven businesses can create an innovative and inclusive culture that drives both financial and social success. Combining strong leadership with diversity allows companies to stay competitive, adaptive, and focused on their impact objectives.

To explore the current state of diversity, equity, and inclusion within the financial services industry, we invite you to dive deeper into our DE&I report. This analysis provides valuable insights into how financial institutions are progressing in building diverse leadership teams and creating more inclusive cultures. Understanding these trends is crucial for impact-driven businesses in financial services, as it highlights the link between strong DE&I practices and sustainable, long-term success in both financial and social outcomes.

Impact Investing vs. ESG: Understanding the difference

While both Impact Investing and ESG (Environmental, Social, and Governance) investing focus on positive outcomes for society and the environment, there are key differences between the two.

• Impact Investing is primarily focused on making investments that intentionally create measurable social or environmental impact alongside financial returns. Impact investors actively seek businesses or projects where they can make a tangible difference. This approach involves investing in companies, organizations, or funds that directly aim to address specific issues, such as clean energy, affordable healthcare, or education, and generate social or environmental outcomes. The impact is a core component of the investment thesis, and investors measure the results over time.
• ESG Investing, on the other hand, refers to the integration of environmental, social, and governance factors into investment decision-making, with the goal of managing risks and identifying opportunities that align with long-term sustainability. ESG criteria are often used as a screening tool to assess whether a company is managing risks related to environmental impact, social issues (like labor practices or diversity), and governance standards (such as executive compensation and transparency). While ESG investing may lead to positive social or environmental outcomes, its primary focus is often on risk mitigation and maximizing long-term financial performance.

While Impact Investing is focused on achieving specific, measurable social or environmental goals alongside financial returns, ESG Investing is about assessing and managing the broader risks related to environmental, social, and governance factors that could affect financial performance.

The future of impact investing

The fusion of private equity and impact investing has immense potential to drive sustainable growth in industries that prioritize social and environmental change. As more investors seek to align their portfolios with their values, the demand for businesses capable of achieving both financial returns and social impact will only continue to rise.

Private equity will play a pivotal role in supporting these companies. By providing financial resources, strategic expertise, and operational support, PE firms enable impact-driven businesses to scale successfully. This partnership not only helps companies grow but also ensures that they can create meaningful, lasting change in society.

A key part of the future of impact investing will be finding innovative solutions for the world’s most pressing issues—such as climate change, poverty alleviation, and access to healthcare—while ensuring financial returns. Private equity firms that focus on these sectors will continue to see increased investment and growth, as investors increasingly recognize that social good and financial performance can go hand in hand.

Partnering with Selby Jennings for impact investing talent

As the demand for top talent in the financial services and impact investing sectors continues to rise, businesses must partner with experts who specialize in hiring the right professionals. At Selby Jennings, we are experts in sourcing talent for financial services firms, including those focused on private equity, investment banking, and asset management, as well as impact-driven businesses. Whether you're seeking a CEO with experience in financial growth and social impact, a CFO who understands the complexities of impact investing, or specialists in private equity, our expertise ensures we connect you with the leadership your company needs to succeed in both financial performance and creating lasting social change. Request a call back today to discuss our business solution services and how we can help you attract and retain top talent that will drive your company’s success.