Why are impact investors still ignoring their diversity blind spots?

Impact investing challenges traditional investing by creating inclusive and sustainable solutions in jobs, education, food systems, health, housing and renewable energy. Yet, despite decades of advancement – and a 21% annual growth rate – it remains far from achieving its promise.

There are many reasons for this limited impact. Entrepreneurs point to insufficient funding and a mismatch between capital expectations and entrepreneurial needs. Investors believe there is a scarcity of truly scalable business models. Across the sector, people highlight the lack of patient capital to tackle massive social and environmental challenges.

While these explanations hold merit, they overlook a fundamental issue: the leadership and ownership of impact investing firms still reflect the inequitable systems they aim to dismantle. Although the data is scant, and tends to focus mostly on investing overall, the impact investing studies that I reviewed and that I highlight below demonstrate that there is a dearth of women-led and diversity-led impact funds, both in terms of owners and managers.   

Without deliberate efforts to diversify leadership and shift capital flows, the sector risks reinforcing systemic inequities

If impact investing remains predominantly led by a white male-dominated elite, it risks perpetuating exclusionary structures that leave women and marginalised communities with limited opportunities to lead, invest or benefit. Without deliberate efforts to diversify leadership and shift capital flows, the sector risks reinforcing rather than resolving systemic inequities.

Outperforming – yet underrepresented

Recent statistics reveal the stark realities of inequity within the broader investing field.

As of 2021, investment firms owned by women and/or people of colour managed only around 1.4% of US-based assets under management (AUM), totalling $1.19tn out of $82.24tn. Women also run far fewer funds than men. Among US portfolio management teams (where gender is reported and where team composition has been consistent over the past three years), just 1% are women-only teams, according to a recent Morningstar report. Three quarters of funds are apparently entirely run by men. Similarly, that report found that Black and Hispanic people were underrepresented on portfolio-management teams.

 And yet, to be clear, inclusion almost always leads to better performance. An International Finance Corporation study found that private equity and venture capital funds with gender-balanced senior investment teams generated 10%-20% higher returns compared with funds that have a majority of either male or female leaders. The study – which also analysed companies receiving private equity and venture capital funding – found that gender-diverse leadership teams at these portfolio companies outperformed their less-diverse peers by up to 25%.

Perhaps even more troubling, this lack of diversity is echoed within impact investing. Despite its rapid expansion – now a $1.571tn market managed by nearly 4,000 organisations worldwide – women-led impact funds remain few and far between. One in-depth study by Value for Women revealed that women account for just 11% of leadership roles in emerging market impact investing firms, even though, as the authors point out, gender-diverse leadership enhances the ability to assess, address and profit from a wide range of social and environmental issues.

Women-led impact funds remain few and far between

Another study also highlights this dearth of women-led venture capital firms – and notes that their investments have generated significantly higher revenue than their non-diverse led peers. Women-led VCs are not necessarily impact investors, but they are three times more likely to invest in women entrepreneurs, who currently only receive 2% of capital and are more likely to reinvest in their families and communities, making them key contributors to poverty reduction.

The lack of women-led funds also contributes to the low percentage of funds applying a gender lens (that is, investments that consider their impact on women and girls). According to a recent Phenix Capital impact report, funds that include Sustainable Development Goal 5 on gender equality represent just 16.6% of all impact funds in the Phenix database, suggesting gender-lens investing makes up only 4% of total global impact assets under management.  

• Read our Impact 101: What is gender-lens investing?

Towards an inclusive model: ten steps to take now 

All of these imbalances perpetuate systemic inequities, creating blind spots in addressing the challenges of poverty and injustice – issues that disproportionately affect women and people of colour.

To achieve its promise, impact investing must reflect the equity it seeks to create. Here are actionable steps to build a more inclusive model:

1. Fund gender-lens training programmes. Create rigorous training programmes to address gender and diversity biases across the impact investing value chain, equipping all stakeholders with the tools to identify and overcome these challenges.

2. Insist on balanced leadership. Insist that investees and funds work rapidly towards 50-50 ownership structures (50% female/marginalised people and 50% male), actively seeking diverse candidates and providing them with transitional support during their leadership entry periods.

3. Develop inclusive investment vehicles. Establish mechanisms that enable women and marginalised communities to invest in funds. Public sector and philanthropic capital can play a catalytic role here.

4. Establish substantive pools of co-funding for diversity-led funds. Encourage public and private funders to come together to co-fund and co-invest in impact-first funds with women-led and diversity-led teams.

5. Create opportunities on boards and in management. Actively promote women and individuals from excluded communities to leadership positions, ensuring they have meaningful influence.

6. Create supportive fellowships. Create fellowship programmes that provide mentorship and resources to diverse leaders in investing, management and entrepreneurship. For example, the Global Good Fund Fellowship offers a successful model.

7. Invest in evidence-based research. Continue to document and share findings that demonstrate how diverse leadership teams outperform non-diverse teams in both financial and social impact metrics.

8. Prioritise transparency and accountability. Work towards industry-wide adoption of agreed metrics for diversity reporting. Encourage funds to use and publish their annual results and allow for an open dialogue on key challenges to meeting targets.

9. Recognise inclusive funds. Learn from and highlight funds with majority ownership or leadership by women and marginalised groups. Showcase their success stories, and barriers they overcame, to inspire systemic change.

10. Strengthen inclusive policies and launch new policy initiatives. Promote policies across sectors that reinforce and foster diversity, equity and inclusion (DEI). Create public-private partnerships that replicate DEI models, such as social impact bonds. 

• Read more about NESsT in our Investor in Focus interview

Resisting the backlash against DEI

As someone who has spent nearly 30 years in the impact investing space, I have witnessed firsthand the transformative power of inclusive leadership. At NESsT, diversifying our board and leadership teams to include more women, people of colour and LGBTQIA+ individuals has directly enhanced our ability to create impact. We are excited about this journey so far, but we recognise we still have a way to go. I encourage readers to learn from us and other funds such as Acumen, Alpha Mundi, Calvert Impact Capital, Root Capital and the Raven Fund, which are taking bold steps to diversify.

The backlash against DEI is exactly what those who fear change desire. We cannot allow it to deter us

Addressing these gaps has become even more challenging as DEI initiatives fall out of favour in the corporate world. The backlash against DEI is exactly what those who fear change desire. We cannot allow it to deter us. Instead, we must call out exclusionary practices, demonstrate how inclusion solves problems, and celebrate every step towards progress.

To move the needle, impact investing must embrace its potential to lead by example. By democratising ownership and management of capital, fostering truly inclusive leadership and supporting diverse entrepreneurs, the sector can finally mirror the equitable world it strives to build. The question isn’t whether impact investing can drive systemic change; it’s whether we’re willing to change ourselves to make it happen.

• Nicole Etchart is the co-founder and a member of the board at NESsT. 

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