Investing beyond the bottom line

Climate change. Social inclusion. The Covid-19 pandemic. These pressing and varied global issues have highlighted various problems, from food and water security to inequality and healthcare and education access. And more investors want to use their capital to address these and many other societal and environmental challenges.

This focus is what’s driving the increased interest in impact investing. Traditionally, impact has been associated with specialised impact equity investing. More recently, interest has picked up in a lesser-known area of impact investing: impact private credit (also known as impact private debt).

Both prioritise providing funding to companies focused on delivering measurable environmental or social benefits through their product or services, as well as financial gains.

Impact investing takes investors beyond an environmental, social and governance (ESG) approach. The latter – becoming an increasingly standard part of the investment process – measures companies’ performance against a range of metrics outside of financial factors that may still have a material impact on financial returns. Impact investing goes further by making financial returns only one factor in measuring a company’s performance.

Fund managers channel investment only to those companies whose business models deliver positive and measurable change to society and the environment, as well as financial returns. And while ESG has gained most traction as a framework for change among listed companies, impact investing has the potential for a wider reach – to businesses outside public markets.

Impact investing has gained traction over the past two decades – galvanised by investor desire to respond to crises besetting the global economy and society. Impact investing assets under management have reached USD 1.5 trillion.¹ Private equity is often associated most closely with impact investing – and there’s been significant growth of impact private equity funds since the Covid-19 pandemic due to greater recognition of the challenges facing society highlighted by the outbreak. But private credit is also attracting more attention (see Exhibit 1 and 2). By working with asset managers that lend to companies or projects committed to realising value for the environment and society, as well as profits, investors can begin to shape an investment strategy in line with their values – and financial goals.

Structuring techniques such as blended finance² are also starting to gain traction with asset owners to mobilise large-scale capital into impact projects in emerging markets or technologies.

Impact private credit can support the development of a range of different small to mid-cap companies based in developed markets providing intentionally a solution which addresses one of our key societal challenge. For example, companies providing low-carbon services or circular economy solutions to different industries, or affordable and specialised healthcare or education services to populations who would otherwise not have had access. Impact private credit can support the growth of these borrowers through the next phase of their development, scale their businesses through for instance further internationalization of their footprint, new distribution channels opening, and bolt-on acquisitions financing.

In some cases, they might be unable to get adequate funding from other sources. That might be because they’re an early-stage business looking for growth capital or because banks and other traditional finance providers generally stick to lending to companies focused on more traditional business segments.

But borrowers can also include companies seeking to raise credit for the first time to fund specific impact-related goals.

Requiring borrowers to provide regular financial reporting and comply with certain financial tests (i.e. financial covenants) is one of the common ways lenders monitor and influence the financial performance of borrowers. Lenders can take a similar approach when providing funding for environmental or social issues. This means incorporating impact reporting requirements and impact covenants into credit documents to safeguard the use of funding and to incentivise the acceleration of impact generation.

A tool to incentivise impact delivery are impact-linked margin ratchets, where we may work with company management to identify specific impact key performance indicators (KPIs) and targets – like the number of individuals with new access to health services or carbon emissions avoided by the company’s customers (due the company’s products or services). Outperformance by the borrowing company on the agreed KPIs can then lead to a reduction in the loan interest margin.

Private credit offers several strengths over both private equity and public debt – for both the investor and the company receiving the funding:

For the investor:

• Help in achieving both impact and financial goals through lending to small to mid-cap and robust businesses providing solutions supporting sustainable, social and climate-friendly initiatives
• The chance to increase investments in businesses as they grow, benefiting from potential upside
• Diversification benefits: given their illiquid nature, private credit investments tend to have a lower correlation with public capital markets and lower return volatility in turbulent markets
• Higher recovery rates than public markets during downturns⁴, while fewer lenders help ease the complexity of debt restructuring

For the company:

• Credit solutions tailored to the needs of the company and an investment approach adaptable through the stages of a company’s growth
• No dilution of shareholdings and no handover of control of the business, a potentially attractive option, particularly for founder-led firms
• Flexibility in funding structures relative to public markets, enabling funding to be tailored to suit the short- to medium-term goals of the business and helping to enhance returns for shareholders
• Partnership with a long-term investor ensuring confidentiality and certainty of execution
• Collaboration with an investor with aligned impact objectives and expertise, to accompany the company on its impact journey

To maximise the possibility for positive change, investors need a robust impact methodology to ensure impact as well as returns are achieved. Allianz Global Investors’ impact framework integrates impact across the lifecycle of an investment via a four-step approach⁵:

1. Establishing impact objectives: to ensure that the investment strategy targets key societal challenges in line with the United Nations Sustainable Development Goals (UN SDGs).⁶
2. Assessing impact significance and contribution: applying our impact scoring system to inform our investment selection and decision-making.
3. Identifying key performance indicators and engaging with investees: measuring and reporting against meaningful impact KPIs to demonstrate impact delivery, alongside active engagement with investees over the investment lifecycle to support impact generation.
4. Continuously testing, learning and market-building: to strengthen our approach and impact generation.

As more investors look to invest beyond the bottom line, impact private credit is likely to emerge as an increasingly integral tool to effecting positive environmental and social change.

¹ Hand et al. (2024). Sizing the Impact Investing Market 2024. The Global Impact Investing Network (GIIN). New York.
² Blended finance combines private and public capital to fund large scalable structures.
³ Source: Impact Report on Private Debt, June 2025, Phenix Capital.
⁴ Understanding Private Credit, Goldman Sachs Asset Management, 20 October 2022.
⁵ For further detail, see: “Managing and measuring impact in private markets” by AllianzGI’s Diane Mak.
⁶ United Nations Sustainable Development Goals are seventeen interlinked objectives designed to serve as a shared blueprint for peace and prosperity for people and the planet.