Sustainable investing Impact funds: the innovative investment with added value

The world of impact funds, what sets them apart from other investments and how to recognise them.

Impact funds are regarded as a particularly environmentally friendly investment. However, experts also know about the attractive economic value of this financial product, the potential of which is still often underestimated.  

According to the "Nachhaltigkeit in Deutschland" study, conducted by YouGov in Germany in 2023, a third of the respondents saw "environment and sustainability" as the most important challenge among all the political topics in Germany. But even investors for whom sustainability is not the top priority are increasingly dealing with this segment – at the latest since the growing popularity of renewable energy as an asset class. Fossil fuels, nuclear energy and imported gas have lost social significance – which is why sustainable financial products are enjoying a boost.  But the terms 'sustainability' and 'green investment' are not protected and can therefore be used in any way. To describe investments as sustainable, it is often enough for some asset managers to exclude certain industries, such as the weapons or tobacco industry. Other providers promote their products with big and green goals, but the actual impact can usually not be assessed by investors.   With impact funds, you have the opportunity to invest in attractive assets and at the same time avoid false sustainability promises such as greenwashing. This is because, based on their reputation, impact funds impress with sustainability and transparency.  But how “good” and sustainable are impact funds really? What are the advantages and disadvantages? And which are "the" impact funds worth investing in? In this article, we put the trend of impact funds through its paces with the nine most important questions. 

An impact fund is a sustainable investment opportunity that aims to achieve both financial returns and environmental, economic and social impacts. To this end, the fund assets are invested in projects and companies that have been proven to bring about sustainable changes. 

Two different terms are hidden in the term impact fund. The second part “funds” refers to the financial instrument of the investment fund: this is where investors’ money is accumulated and invested in certain pre-determined assets. These include, for example, equities, real estate, fixed-income securities, commodities or a mix of different investment assets. 

Unlike, for example, equity funds, the first term "impact" does not say anything about the specific asset in which investments are made. The term indicates which objective the investment is intended to achieve, namely a positive impact on the environment, society or the economy. 

This means that the term “impact” is not only part of a supposedly green marketing strategy. Rather, it is about concrete impact objectives that are not only to be achieved, but also to be made measurable and verifiable. 

This aspect of transparency and measurability is also the greatest challenge in impact investing, which at the same time significantly differentiates impact funds from other sustainable investments. 

In addition to exclusion criteria, such as the categorical exclusion of fossil fuels, positive objectives are also defined in an impact fund. If an impact fund invests in renewable energies such as solar or wind power, the goal can be to generate a certain amount of green electricity per year, which is then measured and documented.

Impact funds are not only about the impact objectives already mentioned, but also about a holistic, sustainable approach: your own positive impact must not have a negative impact on other areas. Although a dam can produce electricity with almost zero emissions, it does not have a holistic, sustainable impact if it also endangers the biodiversity around the dam.  

For such cases, the DNSH review ("Do No Significant Harm"), which forms part of the EU’s sustainable finance taxonomy, is used. This taxonomy also defines six environmental objectives to serve as a mission statement for impact funds¹:

1. Active climate change mitigation 
2. Adapting to the prevailing climate change 
3. Sustainable use of water and protection of marine resources 
4. Transition to a circular economy 
5. Pollution prevention and control 
6. Protection and restoration of biodiversity and ecosystems 

In order to not lose sight of the big picture, here is an overview of the most important distinguishing features of impact funds and other common green financial products.

The difference between these two categories of investment is also their commonality. Whereas impact funds refer to a specific form of investment that directly focuses on sustainability, sustainable investment in general can be described as a wide variety of investment opportunities with one or more sustainable characteristics, but which are usually vague in terms of the actual impact. 

Impact funds therefore generally fall into the broad category of sustainable investments or sustainable investment funds, but keep to particularly strict criteria for the definition of sustainability, as shown in the comparisons below. 

When distinguishing between impact funds and ESG funds, investors need to take a closer look. Both types of investment are based on the sustainability criteria of environment, social and governance. This means that both types of investment include various sustainability aspects in their orientation.  

The big difference between the two is the objective, measurability and transparency of the sustainability measures implemented. Although ESG funds are based on the criteria of the same name, they do not have to set specific objectives for their achievement, such as the generation of a certain amount of green electricity.

Staying with this example, ESG funds, to be able to be designated as such, do not measure the production of green electricity or transparently pass on the achieved values to their investors.  

Impact funds go one step further and pursue the specific goal of improving the situation. They therefore focus more on the practical implementation of their sustainability goals and also provide a concrete insight into the actual impact that is being made.

In order to differentiate these two investments from one another, we will once again mention the ESG criteria. As the name suggests, social investments primarily focus on the aspect of social sustainability. This means that these investments focus on the S in ESG, so that the sustainability achieved in the environment and company tends to fade into the background. 

Providers who focus on social investments and invest the fund assets in social projects therefore primarily pursue ideological goals – profit is not the focus here, and investors should not expect excessive returns. 

Another type of investment that also sets itself social impact objectives is social impact funds. However, the focus here is again on “impact” and thus offers investors the advantage of the transparent and measurable impact of their investment. We will discuss this type of impact fund in more detail in a moment.

Environmental funds are among those known as thematic funds. Like many impact funds, they focus on investment items that are intended to have a positive impact on the environment. These include, for example, projects for reforestation or tangible assets such as solar parks. 

However, since the term is not protected, such funds are not obliged to define their objectives or to make the actual impact on the environment verifiable or transparent. For this reason, the term “environmental fund” is often used in the growing sustainable financial market to the disadvantage of investors to sell supposedly green or green-washed products.

The answer to this question clarifies a fundamental aspect of this investment. There is no such thing as one, specific form of impact fund. This type of fund does not form a separate asset class, such as real estate, equity or bond funds. 

In the hierarchy, they correspond to the investment fund level and every possible form is conceivable as an impact fund, provided that it meets the criteria already presented.  

With the financial instrument ELTIF (European Long-Term Investment Fund) established since 2025, the EU aims to promote long-term European investments that flow directly into the real economy. 
To this end, funds from retail investors who have not been able to invest in infrastructure projects to date are used. 

In turn, social impact investing is an entity in itself. Here, capital is brokered between start-ups and investors, with the corresponding amounts usually in the six-digit range. Here, too, there are various investment opportunities, from direct investments and crowdfunding to investment funds, which in this case are referred to as social impact funds. 

An equity impact fund is also theoretically possible if the companies supported by it have a demonstrably positive impact. However, there are difficulties in verifiability and also in terms of impact, as investments are not made directly in the companies, but only in their market shares, which are traded and resold. As a result, the fund assets would not be directly received by the company being supported. 

First things first: when investing in impact funds, you get a double return on your investment – on the one hand, the profit that your investment makes, and on the other, the certainty that you have made a positive contribution to sustainability at an environmental, social or economic level. No other financial investment has this combination to this extent.  

In terms of financial returns, there is no general value that can be applied to all impact funds. However, it can be said that they are by no means inferior to traditional financial products in this respect. On the contrary. Many investors see great opportunities in impact funds: 

• on the one hand, there is the observable change towards a more sustainable lifestyle and more sustainable consumption.
• On the other hand, investments in environmentally acceptable infrastructure are urgently needed, which can make investments of this kind particularly lucrative. 

Here, too, a distinction must first be made between the possible types of impact funds. The security of the investment also depends on the type of fund and its design. Whereas a tangible asset impact fund is comparatively low-risk, the risk increases significantly in an impact fund that invests primarily in equities. 

These differences are due to the fact that tangible assets such as wind farms have their own value and are not dependent on stock market speculation. With renewable energy funds, your capital investement is comparatively low-risk, as the demand for (sustainable) electricity has remained historically stable and is currently still increasing. 

In addition, power purchase agreements also play an important role in this area as they enable long-term cash flow due to their long maturities and have a low risk of default. A broad diversification of assets (for example investments in solar, wind or hydropower), such as in klimaVest, can also minimise risk by distributing capital across different investment products and locations. 

Despite all this, it must be borne in mind that every investment involves a certain amount of risk – even in a financial product, no matter how stable. For example, a long-lasting recession can reduce overall economic output, which in turn can put pressure on electricity prices and even a tangible asset impact fund would be affected by this. 

As this type of sustainable investment has not yet existed for a long period of time, the shortage on the provider side is primarily one of its biggest disadvantages. And with good reason. To date, only a few providers have succeeded in developing a sustainable financial product with a demonstrable and volume-relevant impact that is at the same time low-risk and promises a solid return. 

The long term of such investments may also be a disadvantage for investors. Many of the tangible assets financed with capital are needed over a long period of time and the cash flow must therefore be secured by the fund’s assets. Therefore, a minimum duration of several years is recommended for most impact funds. 

However, investor protection must also be guaranteed. It is important to avoid investors ending up in an emergency situation and then not being able to access the capital tied up for the long term. To maintain the balance here, an investment is usually subject to certain conditions.

For example, potential klimaVest investors must have an investment volume of at least 10,000 euros and have already invested ten times this amount in the past. In addition, investment advice (digitally or at your bank advisor’s premises) is provided to ensure investors make an informed investment decision. 

Not to be forgotten are the costs incurred by investors investing in impact funds. These include, on the one hand, the typical initial charges and management costs, which must also be planned for conventional open-end and actively managed funds. On the other hand, impact funds often have higher running costs, which are incurred for the operation and maintenance of wind farms or solar parks, for example. 

However, these costs also go hand in hand with the guarantee of effective sustainability, as impact funds directly affect the real economy, for example, by funding sustainable electricity generation. This enables them to make the economy more sustainable in the long term, to which investors can make a significant contribution by bearing higher costs.

A promise of sustainability is all good and well. However, if you want to make a positive contribution with your capital, then you will surely want to be able to understand how exactly your money is used to achieve sustainability. 

(1) The investment

The first step is to invest – as an impact investor, you can either invest directly in a concrete project or company (direct investment), or you can contact an intermediary, i.e. a bank or a fund whose manager manages your investment for you. 

In the first case, you will receive your return on investment directly from the project or company; in the case of a managed investment, you will receive your net return from the relevant intermediary. 

(2) How sustainable impacts are implemented

It is now up to the respective company or fund company to use the invested capital to achieve the corresponding positive impact and also to demonstrate this impact. Depending on the product, this process can take different forms – in the environmental segment, for example, by investing in renewable energy. The invested capital is then used to build new wind farms or photovoltaic systems. 

Renewable energy even has a special legal position, as it enjoys feed-in priority: every kilowatt-hour produced as a result of impact investing in renewable energy displaces the corresponding amount of conventionally produced electricity from the grid. 

In order to demonstrate the positive effect of this, the CO₂ emissions measure can be used in the case of renewable energy. This is because the aim here is primarily to avoid harmful greenhouse gases in power generation. An approximate limit of 100 grammes of CO₂ per kilowatt-hour generated applies, which must not be exceeded for an impact fund.

(3) Emission offsets 

However, as greenhouse gases are also generated in the production of renewable electricity, these emissions must be added to the equation. By investing in renewable energy, an average of 882 grammes of CO₂ per kilowatt-hour can be avoided, which is an actual emission of around 72 grammes of CO₂ per kilowatt-hour. To compare: the combustion of fossil fuels in Germany generated an average of 471 grammes of CO₂ per kilowatt-hour2 in 2018.  

In addition to this positive CO₂ balance, the “do no significant harm” principle also applies here. This principle is intended to ensure that, in addition to the positive impact of the investment, no other harm, such as unsustainable water consumption, environmental pollution or forced labour, is caused. If the positive impact of the investment is ensured in this way, it fulfils its function as an impact fund. With the help of your investment capital, it thus contributes transparently and measurably to neutralising CO₂ emissions in electricity generation and at the same time generates a solid return.