In the third part of our four-part series on future-proofing institutional investment, we explore how growing calls to invest the UK’s biggest capital pools to address pressing societal needs can align with institutions meeting their own financial commitments and member goals.
In the UK, momentum to deploy institutional capital pools to help address society’s biggest challenges is growing. The final report of the Social Impact Investment Advisory Group, convened by the Government in 2025, has placed institutional investors such as pension funds and insurers central to the framework it recommends for addressing national challenges like child poverty, clean energy, and affordable housing.
The government’s recent ‘Fit for the Future’ consultation signals a clear direction of travel for Local Government Pension Scheme (LGPS) funds to increase their commitment to local investment. Meanwhile, an amendment to the UK Pensions Schemes Bill currently going through Parliament seeks to clarify fiduciary duty, giving trustees greater confidence to consider long-term factors, such as members’ living standards and the world into which they will retire.
A similar signal is coming from the insurance sector. Reforms to the UK’s prudential framework – now known as Solvency UK – were designed to give insurers greater flexibility to invest in long-term, productive assets that contribute to the economy. Insurers have already pledged to invest £100 billion to the UK economy over the next decade.
Given the trillions held in institutional asset pools in the UK alone, harnessing them to invest for better housing, a more skilled workforce or more sustainable cities is a compelling prospect. But a major question for institutional investors themselves is: How might such impact investment translate into returns for their own members and customers? Can institutional investors deliver on national needs – while still meeting their own liabilities and commitments?
Meeting financial expectations
Impact investing is less established than traditional ‘finance-first’ investment approaches. But the performance results being delivered by portfolios that put impact on an equal footing with financial return are starting to look compelling.
A recent study by Schroders and Oxford University’s Said Business School showed that eight out of 10 randomly selected impact portfolios exceeded the returns of the MSCI All Country World Index IMI survivors index from 2010 to 2023, with several outperforming considerably. What’s more, the impact portfolios demonstrated stronger absolute and risk-adjusted performance, lower market sensitivity, and greater resilience in downturns.
The Schroders/SAID study principally attributed the strong risk-adjusted performance of impact portfolios to the fact that companies with higher revenue alignment to measurable impact themes tend to generate superior financial returns.
This conclusion is reinforced elsewhere. Benevolent Disruption: The Fortune in Solving Humankind’s Biggest Problems, a study in the venture capital space by VenCap and a group of academics, concluded that that solving the world’s biggest problems is one of the most consistent drivers of outsized financial returns. Companies addressing entrenched structural societal challenges – such as financial exclusion, climate risk, knowledge access, and security – delivered 51% higher returns than traditional venture investments, based on analysis of 500 funds and 14,000 companies.
Of particular interest to institutional investors seeking to build resilience into performance is the study’s observation that such companies are counter-cyclical. That is, they tend to outperform during market and economic downturns when systemic failures surface and demand for real solutions intensifies.
A growing investment spectrum
When it comes to delivering performance, another big attraction of impact investment is the growing array of instruments and asset classes that can be used to target financial returns as well as specific social and environmental impacts.
Beyond mainstream public markets, vehicles deploying private equity, private credit and real estate are enabling investors to participate in impact-led projects, ranging from place-based impact investing to child-lens investing to the energy transition. Such assets offer extensive opportunities to capture both real (i.e. inflation-adjusted) growth and ongoing income yield to help meet long-term liabilities.
The rise of blended finance and catalytic finance is also allowing institutions to carefully calibrate their impact investments against their risk budget. A range of mechanisms, from market-rate impact investments to debt with flexible terms to subordinated debt and structures with first-loss guarantees, are allowing institutions to participate at scale in compelling impact opportunities whose risk profile might otherwise make them prohibitive.
Aligning institutional capital with long-term outcomes
There’s a growing political expectation that institutional investors will play a role in addressing pressing social and environmental challenges. The key question for institutions, however, is how this will fit into their long-term commitments.
Increasingly, the evidence suggests that this need not be a trade-off. Many of the investments associated with impact – from housing to the energy transition – are also long-term, income-generating investments that align with institutional time horizons. Investing for social and environmental outcomes can reinforce – rather than distract from – long-term portfolio resilience.
Next time: How investors can move from principles to practice.