The writer is president and CEO of Regenerative Social Finance
Once heralded as a risk framework that would align mainstream finance with real-world outcomes, environmental, social and governance analysis instead became unevenly applied, widely misunderstood and politically contested.
Accusing ESG fund managers of shirking their duty to maximise shareholder wealth, the government is now limiting asset holders’ ability to consider environmental or social factors in investment decisions.
ESG got it right in acknowledging that environmental, social and governance factors can create real financial risks and opportunities. But when it came to actually shifting capital towards solutions that generate positive outcomes for people and planet, it fell short.
If we want to build a society that optimises for everyone’s wellbeing, we need a deeper shift in how money functions.
Sharpening the tools
ESG is a risk framework helping investors understand how environmental, social and governance factors may affect financial performance. It asks: what risks are we exposed to? What should we avoid?
Impact investing, in contrast, is a form of investment aligning financial and impact goals. It asks: what do we want our capital to actively support and create?
Impact investing is often treated as a concessionary strategy for investors willing to sacrifice financial returns in pursuit of social and environmental gains. That assumption overlooks how investing in resilient communities, businesses and ecosystems can mitigate risk, while also supporting long-term financial performance.
Climate volatility is already affecting supply chains, insurance markets and infrastructure costs. Soil degradation threatens long-term resilience of global agriculture. These forces are not abstract ethical concerns. They are structural economic realities.
ESG attempted to bring greater awareness of these dynamics into mainstream finance, but it did not direct capital towards solutions at the scale required.
ESG attempted to bring greater awareness of these dynamics into mainstream finance, but it did not direct capital towards solutions at the scale required
That’s a task it was never designed to do. For ESG’s supporters, those often-overstated ambitions sometimes created the impression of impact without fully delivering it. For its detractors, they made ESG an easy target.
Whether we use ESG or not, the economy still depends on strong communities and resilient ecosystems. So how can we move from awareness to action?
Connecting investors
At South by Southwest, the annual technology, media and culture conference in Austin, Texas, I joined Lubna Elia of Boston Impact Initiative and Amir Kirkwood of Justice Climate Fund to discuss this topic.
We highlighted investment approaches which can generate positive impact alongside long-term economic resilience. It is important to connect investors to the real-world effects of their investments. We need to maintain rigorous due diligence and underwriting standards. And bringing greater transparency to the full range of impacts that investments generate is paramount.
Examples of this approach include “impact loans”, funded by individual and institutional impact investors. These can finance businesses such as Diaspora Co, a woman- and immigrant-led spice company raising incomes for regenerative farmers in south Asia.
Another initiative, the Justice Climate Fund, leverages grant funding to unlock shovel-ready clean energy projects in under-resourced communities, that had been stalled due to federal rollbacks in clean energy.
Boston Impact Initiative’s recent fund close raised $22mn from 245 individual investors, and will support social entrepreneurs generating wealth and promoting environmental stewardship in communities of colour.
Just as important as what we finance as a community is how we finance, leaning into deep relationships with both borrowers and investors. Those relationships — and the trust they foster — can make finance feel human, empower us to be flexible and mitigate risk in a way that many lenders overlook.
This regenerative finance approach can be used to finance many changemakers, channelling hundreds of millions of dollars from private wealth investors into impact projects.
Building back together
ESG acknowledged that financial returns can’t be isolated from environmental and social systems. Now, it’s time to move from acknowledgment to action.
For many private investors, the defining challenge of the next decade will be stewardship: deciding how their wealth can generate long-term financial returns while strengthening the systems those returns depend on.
Those wrestling with that challenge should start by examining their current investments and whether they align with the family’s values. From this starting point, advisers can be engaged, impact-oriented strategies explored, with capital allocated more intentionally.
ESG acknowledged that financial returns can’t be isolated from environmental and social systems. Now, it’s time to move from acknowledgment to action
Industries can be sought out with a proven “triple bottom line” of people, planet and profit, like renewable energy and regenerative agriculture. Partners for impact funds should conduct rigorous due diligence on social, financial and economic outcomes.
We regularly hear from our borrowers that conventional banks won’t finance their work, saying that their financial needs aren’t large enough, their business models too unfamiliar, or their work “too complex”.
Impact-first lenders are often more willing to unpack that complexity and unlock new forms of value creation. And private investors make that work possible.
ESG asked the right questions, but it did not go far enough. Together, let’s move from asking those questions to acting on the answers.
Jasper van Brakel, president and CEO, Regenerative Social Finance, San Francisco, US