The Current Approach to Scaling Impact Capital isn’t Working: Why Addressing the Polycrisis Requires More ‘Impact-Native’ Capital

Impact investing must scale if it hopes to address the interconnected social and environmental problems that comprise the global polycrisis. Yet as Tripp Baird at Builders Fund explains, a substantial amount of “impact” capital flows to large asset aggregator financial institutions whose impact and ESG-branded funds include investments in unaligned or actively counter-productive assets — e.g., sustainability funds that invest in mining companies — making it virtually impossible to effect lasting change. He argues that purpose-driven investors should choose “impact-native” investment firms, which provide a real alternative to the extractive and short-term focus of traditional capital markets.The inertia of traditional capital markets, which remain extractive and short-term focused, is a major barrier to solving the large-scale social and environmental problems that comprise the “polycrisis” that’s impacting communities around the world. It’s clearer than ever, as we witness the hollowing out of public sector funding in the U.S. and other countries, that private markets will be fundamental to addressing the critical, interconnected crises we face as a society.  Within that framework, only impact investing is fundamentally aligned with a systemically responsible worldview, grounded in the physical and scientific reality of a finite planet with finite resources shared by (soon to be) 9 billion people and countless other forms of life. If impact investing is to fulfill that promise, it must do more than simply shift a fraction of capital toward systemically responsible and thematically impactful investments. It must challenge the fundamental ways capital is allocated and measured.   The Rise of Large Asset Aggregators in Impact Yet over the past decade, there have been especially substantial capital flows to larger asset aggregator financial institutions that have introduced new or revamped impact and ESG-branded funds whose marketing often masks an underlying misalignment with actual impact goals or principles. Over the past five years, total “impact-branded” assets under management (AUM) have grown at a 14% compound annual growth rate, rising to nearly half a trillion dollars in 2023. Much of that is concentrated in a few larger asset managers, with the top five managing nearly $200 billion. More broadly, global “ESG-branded” assets grew to $30 trillion in 2022. While evidently successful in capital accumulation, these larger firms operate across a broad spectrum of strategies — public and private, across industries and geographies, and with a variety of thematic and methodological approaches. The vast majority of their economics and incentives are focused on accumulating more AUM. A few of their products may be aligned with impact/sustainability, yet many of their broader investments typically remain fundamentally at odds with impact or sustainability-driven goals.  In fact, marketing for products under the “ESG” or “impact” label frequently glosses over a small but critical disclosure: that only a portion of the underlying assets in these funds might actually be strategy-aligned, while the remaining could be invested in entirely unaligned or actively counter-productive assets — for instance, sustainability funds with large positions in mining companies. This coexistence can, at worst, directly undermine the activity of the impact strategy — nullifying the value of impact-oriented capital — while, at best, sending mixed signals to the market and undercutting the authenticity needed to drive change at a systems level. This dilution of focus makes it virtually impossible to effect lasting change. For example, a firm might simultaneously manage a thematic climate fund alongside multiple strategies investing in carbon-intensive industries or fossil fuels, as illustrated by the fact that in 2024, only 5% of U.S. foundations — including those that are self-identified impact investors — reported that they invest their endowments for environmental and social impact. This breakdown is a glaring example of misalignment and impact inefficiency, and it directly works against a vision of “capitalism serving as part of the solution.”  For that reason, investors seeking genuine impact alongside market-rate returns should align their capital with “impact-native” impact investment firms, which integrate transparent impact management and measurement practices as a driver of stakeholder value into every facet of their operations and investments — not just as a marketing or fund-raising exercise.   The Advantages of Impact Native Funds At Builders Fund, as with many other impact-native peer funds, we invest with a singular purpose: to build a better world by supporting companies whose business models inherently generate social and environmental benefits that scale concurrently with their financial returns. We’ve seen that deep, values-driven partnerships with mission-aligned founders and management teams can create outsized impact outcomes while also delivering expected financial returns through scale. Examples of these investments include Builders Fund portfolio companies like PosiGen Solar, which expands access to renewable energy while saving low- and moderate-income customers money and hiring from those same communities, and Traditional Medicinals, a leader in organic herbal teas and lozenges produced through regenerative, Fair Trade supply chains. These businesses, and others like them, thrive financially because impact is baked into their cultures, purpose and operations: Their impact focus enables them to attract values-aligned talent, improve retention, engagement and performance, drive loyalty and repeat purchases, improve net promoter scores, and tap into more earned media — all while building more disruptive businesses based on the ongoing demand for solutions to major global challenges. In traditional capital markets, with their extractive focus and prioritization of short-term profit to shareholders, large asset aggregators dominate because of their scale and ability to raise significant funds quickly. However, when they apply that approach to impact-oriented funds, it often comes at the expense of focus and authenticity. Using “ESG” or “impact” as a marketing strategy to increase AUM while simply rebranding the 10% of the fund’s existing activities that may thematically fit in those buckets will invariably lead to the same operating behaviors and, in turn, the same extractive outcomes. This mismatch between investor intent and outcome fidelity is leading to inefficiencies that have real-world consequences in the effort to address disruptive environmental and social issues. In contrast, impact-native investment firms have a far higher likelihood of ensuring that investor mandates are translated into real impact outcomes.   The Imbalances in Impact Capital The flow of capital to larger asset aggregators has also led to imbalances in capital availability for businesses addressing social and environmental issues in a profitable, sustainable way. As capital managers at these firms raise larger amounts of capital in the pursuit of management fees, they face increasing pressure to quickly deploy the capital at scale — which naturally pushes them towards larger businesses: Underwriting fewer, larger investments allows managers to quickly return to the market to raise additional funds. Yet the overwhelming majority of American businesses generate less than $100 million in annual sales, while most private equity capital is focused up-market. This trend is reflected in the impact capital markets as well, with much of the deal volume (by number of deals) focused on venture-stage businesses, and most of the capital (by dollar amount) focused on larger buyouts and infrastructure investments across debt and equity (both public and private). The effect of this tunnel-vision has been systemic under-investment in purpose-driven business models that challenge the “traditional way” of doing business. By directing more capital flows to deals built around financial engineering, or to businesses with extractive business models focused on short-term profits, both impact and traditional capital markets are chronically excluding small to mid-sized challenger enterprises that aren’t candidates for venture capital and are too small to take the larger checks required by middle market private equity investors. And this is happening even though these companies have often built successful business models that can scale to provide both financial returns and social and environmental impact.  Investors are ill-served by this gap in the capital markets. Significant social and environmental challenges are causing historic disruption across all industries, and that creates incredible opportunities for systemically-responsible and purpose-driven companies to take market share from entrenched incumbents. Yet these incumbents are increasingly backed by large asset aggregators, which perpetuates their focus on maintaining the status quo: extractive and short-term profit seeking.   The Need for a New Approach Unfortunately, investors have limited avenues to take advantage of this underserved gap in the market. To effectively create value in this segment, fund managers must be willing to stay down-market (often forgoing income), and be equipped to help scale businesses through real operational engagement. To build a business in the lower end of the lower-middle market, fund managers need to support several priority areas in their portfolio companies, including efforts to up-level their teams, refine their operating processes and procedures, expand their access to working capital and follow-on investment as the business grows, and ensure their fidelity to the core business model of collinear financial growth and impact outcomes. In other words, they must help these businesses keep sight of what makes them successful: i.e., their embrace of purpose as a competitive advantage. Doing so requires closely engaged, operationally-immersed fund managers — an approach that is difficult, if not impossible, to replicate at the scale of large asset aggregators, or with the diffused investment approach of venture capital. Systemic change requires systemic commitment. Impact-native investment firms aren’t just investors, they are builders of purpose-driven ecosystems. By choosing authenticity over scale for scale’s sake, and by moving past the perception of safety in multinational brand names, we can catalyze more meaningful transformation across the capital markets and industry at the pace the polycrisis demands.   Tripp Baird is the founder and managing partner of the Builders Fund. Photo credit: United Soybean Board     You May Also Be Interested In:Beyond Microcredit: Why Tackling Poverty Requires More Than…Some Things Have to Die for Others to Live: Why Scaling Down…Why a Few More Women Coders Isn’t Enough to Close the…