Karl Richter / Jan 2026
Image: Shutterstock
To align private capital with policy priorities requires us, firstly, to understand the different strategies investors use when they claim to be impact investors or to integrate Environmental, Social, and Governance (ESG) factors within decision-making. The terms “impact”, “environmental”, “social”, and “governance”, all imply goals beyond financial objectives alone. In other words, positive contributions towards people and planet — this can be true, but not always.
The way investors pursue these supra-financial goals depends upon the constraints and freedoms in their mandates.
Institutional investors — typically those large funds that manage your pension savings or the capital of insurance companies — have a mandate to achieve competitive market-rate financial returns. You would be disappointed if they did not! Imagine if your pension fund could not afford to pay you a decent income in retirement, or if your insurance company could not pay out against an insurance claim when you needed it.
In other words, these investors are constrained by financial goals that have little flexibility — and rightly so. Within this context, when they consider supra-financial factors, they must evaluate primarily how these external factors are likely to affect the financial performance of their funds. This is known as “outside-in” analysis. For example, whether the companies they invest in might be exposed to increased flooding or fire risk due to climate change, or whether those companies have poor employment conditions that might result in low productivity because of labour strikes, or if consumers might boycott a company’s products because they do not want to be associated with human rights abuses.
This is not the same as considering how those investments make meaningful contributions towards people and planet — for example, whether companies pollute and therefore aggravate climate change in the first place, or whether they explicitly promote gender balance in the workforce, or pay a fair wage.
Assessing these broader effects requires analysis beyond the boundaries of the company being invested in. It demands an understanding of how the operations of that company affect society or the environment at large — this is known as “inside-out” analysis. Such analysis is familiar to development finance institutions (DFIs), social banks, and philanthropists because their core mandates require them to prioritise supra-financial factors. However, these broader “inside-out” effects will simply not be prioritised if they are not intrinsically part of the investor’s mandate.
It is tempting to prescribe regulations that require “inside-out” disclosure. But if the mandate does not seek the sincere insights associated with this analysis, then organisations will be tempted to take shortcuts or to be vague — or even worse — they may have perverse incentives to take rational actions that obscure the true picture.
Investors with longer time horizons will probably include some supra-financial objectives as part of their goals, particularly about issues that are likely to drive commercial value over the longer term. This is not new, even 19th century industrialists realised this — workforces are more productive if labour conditions are not abysmal, employees that live in good homes are less likely to take sick leave, and so on. Funding these issues equates to good business over time because the commercial benefits can be realised, even if only far in the future. But beyond that, supra-financial issues may not be considered if the connection to the business is unclear or if the costs are borne by others — the latter is what economists refer to as externalities.
In recent years, some investors increasingly choose to identify as “impact investors”. They use this label to signal that they do consider a broader set of supra-financial goals in their mandate. They want their investment capital to create positive results for people and planet beyond the self-interest of 19th century industrialists — indeed, they argue that there is no theoretical conflict between achieving financial returns (doing well) whilst also achieving positive supra-financial results (doing good). This can be true, but not always, and not for all investors.
The key point of this short essay is simply the following — that supra-financial goals and financial goals are compatible with each other, but the degree to which investors combine them is constrained by their mandates. This dilemma can be resolved, but it needs the fundamental alignment of mandates that cannot be achieved with disclosure requirements alone.
European regulations use the term “double materiality” when requiring organisations to disclose material effects both “outside-in” and “inside-out”. This is helpful to structure how reporting must be done — but it does not align the motivations within mandates for why it is important in the first place.
It is imperative that policy makers look beyond the compliance requirements imposed upon investors — and the voluntary labels they assign themselves — to understand how both “outside-in” and “inside-out” concerns can be embedded naturally and fundamentally within all mandates.
Ultimately, markets are imperfect societal constructs. “Inside-out” factors — especially negative impacts on people and planet more broadly — are not always reflected in the price of goods and services, nor investment returns. However, when materially relevant externalities are correctly priced in the first place, then these “inside-out” issues automatically become “outside-in” concerns for all investors, especially those that have mandates to maximise financial returns.
Creating a level playing field like this, which prices externalities so that all investor mandates are naturally aligned, could unleash the competitive nature of commercial markets so that all capital contributes meaningfully towards sustainability goals.
