Martha Brindle
The expectation of ‘non-concessionary returns’ has been central to the expansion of the impact equity sector. As such, periods of real-world underperformance can create significant tensions. Nowhere is this challenge more evident than in public equities: positive absolute returns notwithstanding, relative returns of the global impact equity segment have trailed the MSCI ACWI over the last 3-5 years, net of representative fees. Even with high performance dispersion between managers in an extremely varied space, these numbers should not be overlooked. We ask: how should investors view the results, and what are the implications for the future?
The active equity management industry now offers a wide variety of strategies for investors that seek to deliver positive non-financial outcomes alongside investment returns. The number of funds available has roughly doubled over the past two years: bfinance now tracks a roster of over 125 ‘impact’ active equity managers (many offering multiple strategies) in Q1 2025, up from over 65 managers (offering over 100 strategies) in Q1 2023.
Impact investing should not be confused with ‘Responsible Investing’ or Environmental, Social and Governance (ESG) integration, although strong ESG practices are often viewed as a pre-requisite within impact investment approaches. ESG integration is primarily concerned with risk related to how companies operate, whereas impact chiefly relates to what companies do – the positive environmental and social outcomes resulting from their products or services (particularly for an unmet need or underserved population). That being said, the distinctions between strategy types are not always clear-cut. One may find the same stock held by an asset manager in thematic ESG and impact funds, although the intentionality and thesis for the investment may (and should) be different. In addition, many strategies sit in a ‘grey area’: for example, we see funds that target specific (potentially impactful) themes such as water or biodiversity but lack key characteristics that an investor might expect to find in a true ‘impact’ strategy.
However one chooses to define the impact universe, the resulting group of strategies remains hugely diverse. Impact is not technically a ‘style’ but, rather, an approach that can be applied with different styles – Growth, Value or others. Many strategies exhibit high tracking error – one would likely question the impact credentials of a strategy that exhibited high similarity to the index! They also tend to be highly differentiated versus each other, and versus active non-impact strategies; indeed, this diversification can be one motivation for holding a satellite impact allocation.
One interesting driver of diversity within the impact fund landscape is the question of where managers ‘set the bar’ on impact. NVIDIA is a popular example of manager disagreement: some impact funds have held the stock due to potential work and economic efficiency gains for society; others avoid it, often citing lack of ‘additionality’ in a now widely available technology, and of course the complex questions surrounding the potential negative societal impacts of AI. Companies such as Mastercard and Microsoft are similarly divisive.
Objectives and benchmarks: the concession question
Importantly, the bulk of asset managers in the impact equity sector have not envisaged (or at least not openly anticipated) a trade-off between impact objectives and the achievement of financial returns over the long term, although there are exceptions to the rule. Our 2023 landscaping study of the equity impact manager universe showed broadly conventional targets for outperformance versus benchmarks, with a minority having no relative return target (chart below). Moreover, the use of mainstream market indices such as the MSCI World or MSCI ACWI as benchmarks helped to foster accessibility and offer comfort to investors exploring this space for the first time.
From an asset owner perspective, we see very limited appetite for sacrificing returns in pursuit of positive impact. Among bfinance clients, many impact-oriented investors seek traditional performance objectives; indeed, the lowest target we’ve seen in practice (to date) among institutional clients was a goal of ‘market-like’ returns (in line with the benchmark or better, net of fees). This strongly aligns with the findings of the GIIN’s State of the Market 2024 report across asset classes: only a small minority (11%) of investors in that study intentionally invest in impact for ‘below-market rate, closer to capital preservation-level’ returns (these could perhaps be described as philanthropic investments).
With this context in mind, the recent underperformance of many impact strategies demands careful consideration. Our latest Manager Intelligence and Market Trends report reveals impact as the worst-performing global equity manager peer group of the past three and five years. Despite positive absolute returns, we estimate that the median global impact equity strategy lagged the MSCI ACWI by 6.4% p.a. over the three years to March 2025, and by 3.8% p.a. over five years, net of representative fees. That being said, performance dispersion has been high: the interquartile range for impact equity manager performance over the past three years was 5.2%, versus 2.6% for Quality managers. As such, there are strong relative performers within the group.
Investors might well ask: is this underperformance temporary or likely to persist over the medium or longer term? At what point might perceptions of ‘concessionary’ returns affect stakeholder commitment to impact strategies? Might it be appropriate to consider a different or additional benchmark when reviewing results, given the highly differentiated nature of strategies? Are non-financial (impact) outcomes satisfactory, even where financial outcomes might have lagged? Finally, is the manager selection process sufficiently robust?
A performance ‘perfect storm’? Recent headwinds reviewed
The strategic question of whether a strategy that (by its nature) will exclude a large proportion of the available investment universe is able to avoid ‘concessionary’ returns over the long term is one that has long been debated by sustainable investment practitioners. Indeed, the early days of ‘ESG investing’ in the 2000s involved much discussion and research on this subject. One could perhaps apply the same challenge to more aggressive style-focused strategies (such as Deep Value or High Growth), note that in those cases, a focused universe is viewed as a source of alpha rather than an impairment.
Whatever view one takes on this point, we should at the very least acknowledge that recent poor results can, in large part, be attributed to quite a specific combination of problematic circumstances.
- The ‘Magnificent Seven’ era has challenged active equity managers.
A period of increasing global index concentration has proven challenging for active managers more widely, with the largest index constituents disproportionately driving returns (FAANGs, then Magnificent 7). Indeed, the median active global equity manager (not impact) has lagged the MSCI World by 1.5% p.a. over the past three years, net of representative management fees. Over 2023-24, The ‘Mag7’ accounted for a staggering 63% of the S&P 500’s 24% price return over 2023, and 55% of the index’s 23% return over 2024 according to JPMorgan. With the US dominating global markets, this effect flowed through to benchmarks of global equity managers.
While the vast majority of active managers have struggled in these circumstances, impact equity managers have been particularly negatively affected due to very low average exposure to the relevant mega cap stocks. When we look at the impact equity manager peer group discussed above, we find that the average exposure to the Magnificent 7 peaked in December 2024 at just 3.4%; indeed, the majority of funds in this group held no ‘Mag7’ stocks whatsoever. By contrast, these stocks represented 24% of the MSCI World index in December 2024, and 21% of the MSCI ACWI.
- Energy ‘underweights’ have affected ESG (and impact) strategies.
Since impact strategies typically apply ‘do no harm’ principles that are commonly found in ESG funds, energy sector exposure tends to be minimal and carbon-intensive producers are typically avoided. In 2022, Energy was not only the strongest GICS sector performer within the MSCI World (+46% in USD terms); it was also the only positive sector performer. Structural sector tilts or exclusions work both ways, however: when Energy does underperform, we should expect impact (and ESG) strategies to benefit. - US underweights have affected impact strategies.
‘US exceptionalism’ has been an important theme driving market returns over the past three and five years. Significantly, global equity impact strategies tend to be underweight US stocks: in our analysis of the aforementioned impact equity manager peer group, the median portfolio exposure to the US was 59% at the end of March 2025, compared with 64% for global all cap core strategies (based on eVestment data), 64% for the MSCI ACWI and 71% for the MSCI World.
With strategies under pressure, watch out for discipline
Short track records are potentially highly problematic for the still-nascent impact equity sector. When strategies hit critical three- and five-year track record thresholds, relative return numbers matter more than ever. And, unlike other active equity managers (including many ESG strategies) with longer track records, recently-established impact funds cannot typically point to more appealing seven- and ten-year performance numbers.
We have now observed several instances of impact franchise closures and portfolio manager changes, driven by a combination of poor returns, investor outflows (or weaker-than-expected inflows), and the lack of a significant forward-looking asset pipeline. The pressure can also lead to perverse incentives: managers may be tempted to pivot into momentum market darlings with questionable impact credentials in order to chase performance, or take excessive risks in more volatile, early-stage transformative solutions businesses in the hope of regaining ground.
Pressure can also have positive consequences, of course. In some cases, we have seen impact equity managers enhancing their risk management efforts (minimising correlated risks across portfolio holdings, increasing diversification, paying stricter attention to valuation discipline) in order to provide a margin of safety. As with any process change, these adjustments need time to ‘bed down’ to be proven in practice.
More broadly, if further consolidation or closures do occur, this could eliminate a number of fund managers who have entered the space as a trend du jour but lack deep long-term commitment to an impact investment philosophy. The same, perhaps, can be said of asset managers who have softened their ESG or impact investment approaches in order to address a changed U.S. political climate. Regulator-imposed penalties – with a spate of high profile fines in recent years affecting managers – provide further disincentive for asset managers who may be ‘impact-washing’ or ‘green-washing’ their strategies. Arguably, periods of difficulty may help to separate the committed impact players from those chasing a transient fundraising opportunity.
The recent ‘perfect storm’ of impact manager underperformance has been driven by a number of challenging headwinds and, as a result, should not be viewed as a predictor of the future.
This is particularly true where a broad public market index is used as a benchmark for what are often highly differentiated, niche portfolios: the question is not just whether such a benchmark is ‘fair’ but whether investors and stakeholders are willing and able to tolerate potential divergence. Investors should confront head on the potential for prolonged periods of below-market returns in impact investment and consider how such scenarios are to be handled. Performance dispersion in the impact equity sector has already been high to date.
Looking forward, investors should consider the extent to which performance pressures could affect fund viability, strategy discipline, and high-level commitment to impact investment philosophies. From a practical standpoint, this underscores the importance of robust manager selection and careful ongoing manager monitoring.
By Martha Brindle, Senior Director, Equity
