No longer a niche option, investments that aim to shape a better future for people and the planet are moving into the mainstream — and creating financial returns. The growing amount of capital going toward projects focused on environmental, social, and governance (ESG) impact reflects current global challenges and related business opportunities that can help shape a more resilient, inclusive economy.
“From the investor perspective, you can find and invest thematically or consistently with your values. But not in a way that sacrifices returns,” says J.D. Dell, Managing Director and Partner at Big Path Capital. “There’s intentionality around what company team members or fund managers are doing and the framework they’re using. It’s not a tradeoff. It’s not disguised as philanthropy. It’s not a handout. This is investing.”
With growing attention and capital, the impact investing landscape is expanding to create new opportunities for investors and advance a more inclusive and resilient economy. “More people are interested and willing to make equity capital commitments to impact- and ESG-related investments that are brought by great entrepreneurs or fund management teams,” Dell said. “This is creating the opportunity for outsized, game-changing returns that also scale the environmental or social impact.”
Environmental Impact: Federal Funding Helps Drive Climate Tech
Climate and tech are bright spots for funding, in part due to the Inflation Reduction Act and Bipartisan Infrastructure Law, which include funding for climate-focused projects as well as areas such as transportation, broadband, and conservation.
“Climate is overwhelmingly the largest single sector seeing investment growth. That’s really a 180-degree difference from when the term ‘impact investing’ was coined when there wasn’t as much of an understanding of who customers should be and what should be backed,” Dell said. “Then, there was no additional capital down the road.”
He said things are different now with public financing under the Biden Administration and greater activity in the climate tech market. “That has brought private equity to the table at growth and later stages, which is important,” Dell said. “Equity capital is what drives things, shouldering most of the risk for those other financing options to really work.”
On the equity side, a growing number of private capital firms are offering ESG-related opportunities. “That means businesses that are incubated early, where a lot of this work started, are going to have options as they continue to grow, as opposed to selling to non-mission aligned investors.”
A ripple effect of the growing attention on climate tech is generating interest in energy and power, Dell said. “People believe there are going to be new and better ways of creating energy,” he said. “AI, data centers, and other types of supercomputing take a lot of electricity, which will drive a huge demand increase.”
All of these trends reflect the realities of climate change and the need for long-term solutions, Dell said. “They’re looking at the next technologies that are going to flourish if we’re going to make a dent in what’s happening and meet some of the (climate) targets,” he said.
Social Impact: Expanding Access to Capital and Education
Investors continue to see the value of diverse management teams and expanded opportunities for access to capital despite anti-ESG rhetoric and policy development. “At Big Path, we believe that you can maximize investment returns and maximize impact. It’s not a tradeoff,” Dell said. “We believe there is investment alpha to be generated by backing diverse managers, and for those managers to back entrepreneurs.”
It’s a matter of creating opportunities and access to capital while also investing for returns, Dell said. “The expertise and skill is far more broad-based among gender, ethnic, and racially diverse teams, but equal opportunity and access to capital is not,” he said. “These diverse teams approach the world differently and have very different networks than the usual suspects. So, to analogize, if you’re fishing in a different hole from everybody else, you’re going to catch some great fish. We believe that, and we’ve seen it play out. It’s not about handouts; it’s about providing opportunities for people who are definitely qualified but don’t have the backing, network, or history.”
Legal challenges that put diversity, equity, and inclusion funds in the spotlight have some investors reworking their strategies while maintaining goals of broader access to capital, he said. “Institutional investors are still interested in those areas, as they believe diverse teams can lead to better outcomes,” Dell said.
He also sees more investor attention on education technology, workforce development, and other aspects of human capital needed for innovation and economic growth. This includes investment in broadband companies that are helping to connect more people to the internet and wifi. “There’s still work to do for 50% of our country that doesn’t have access to high-speed internet,” Dell said, noting that the Infrastructure Act includes matching funds for these types of projects.
Technology also holds promise for broadening access to education that, in turn, drives innovation and economic growth. “AI, used in an appropriate and ethical manner, is going to speed up the opportunity and ability to teach individuals at a much more efficient rate than we’ve seen,” Dell said. “This is a game-changing opportunity in what has been a fragmented, inefficient, and lowly penetrated market.”
Investments that connect organizations and school districts with technological tools and programming can develop an educational framework for a more resilient, dynamic economy. “Financial capital is going to follow human capital,” Dell said. “Capitalizing on ideas is what matters.”