Research

“Finance is mathematics—you optimize for one dimension,” observed a fund manager at the recent Women’s Venture Capital Summit Europe 2025. “In nature, it’s biology: you build ecosystems where everyone benefits.” This distinction captures the central tension facing impact investors today: can you deliver both financial returns and positive change, or must you choose?

The conference revealed an industry grappling with this question as political winds shift and LPs demand both measurable impact and competitive returns. The conversation was refreshingly honest about the challenges and surprisingly optimistic about the solutions.

The political backlash against ESG investing has created what one manager called a “chilling effect,” particularly from US LPs. Fund managers reported shifting their fundraising strategies geographically, focusing on “Australia, Canada, Northern Europe” where impact messaging still resonates. Some avoid meetings with US LPs entirely, viewing the political risk as too high.

But this retreat has created an opportunity for European capital. Several LPs discussed doubling down on ESG factors as a competitive advantage, particularly sovereign and government-linked funds that see sustainability as a strategic priority rather than a political liability. “We really do care about ESG factors and we’re making that an even bigger part of our focus,” one institutional investor noted.

The measurement challenge remains acute. Impact-linked carry—tying fund economics to environmental or social outcomes—generates intense debate. While theoretically appealing, practical implementation proves complex. How do you set meaningful targets? What timeline makes sense? How do you verify impact claims?

The conference discussions revealed sophisticated thinking about these challenges. Early-stage funds struggle with impact measurement because companies are still finding their business models. Growth-stage companies can commit to more specific outcomes, but they may reframe the metrics, if not achieved. The timing mismatch between fund lifecycles and long-term impact creates additional complexity.

Climate technology offers the clearest path forward if it can be aligned with strong market demand, argued climate investors. “If they are successful financially, they are also successful from an impact perspective,” one climate investor explained. The causality runs in both directions: solving climate problems creates valuable businesses, and valuable businesses scale climate solutions.

Healthcare presents similar alignment opportunities. Companies developing treatments for neglected diseases or improving healthcare access in underserved populations can measure both patient outcomes and financial performance. The key is ensuring that business model success requires impact delivery.

The returns question remains central. Impact investors face constant pressure to prove they haven’t sacrificed financial performance for social outcomes. The data remains limited as the new wave of impact-focused funds is still in its early stages, but preliminary evidence suggests that competitive returns are achievable, speakers argued.

One fund manager pushed back against the false dichotomy: “Great founders who are mission-driven have a clear purpose, and this is exactly why they can overcome the greatest challenges they’re facing.” Mission-driven entrepreneurs may actually generate superior returns because they attract better talent, maintain focus during difficult periods, and build products customers truly need.

The diversity angle adds another dimension. Funds with diverse leadership teams and portfolios argue they generate better returns through broader deal flow, different risk perspectives, and access to underserved markets. And there are data to prove it: Harvard Business School research spanning two decades found that VC firms increasing their proportion of female partners by 10% saw 1.5% higher annual fund returns and 9.7% more profitable exits. This performance advantage stems from broader deal flow, different risk perspectives, and access to underserved markets—ethnically diverse founding teams achieve 30% higher returns, according to Kauffman Fellows research, yet receive only 20% of venture capital.

However, measuring the impact of diversity requires long-term data that most funds lack.

European investors see regulatory advantage in their ESG sophistication. While US funds are retreating from impact commitments, especially around climate, European funds can leverage their experience with sustainability frameworks, diversity reporting, and stakeholder capitalism. This becomes competitive differentiation rather than a compliance burden.

The measurement infrastructure is improving rapidly. New platforms track portfolio company metrics across environmental, social, and governance dimensions. Machine learning tools analyze unstructured data to assess impact claims. Standardized frameworks enable benchmarking across funds and portfolios.

LPs are becoming more sophisticated about impact measurement. Rather than accepting vague commitments, they want specific metrics, regular reporting, and third-party verification. They’re also learning to ask better questions about the relationship between impact and returns.

The path forward requires abandoning the false choice between returns and impact. As one fund manager concluded: “When you’re solving key problems for the world, you have to build incredible solutions which create great businesses.” The best impact investments don’t sacrifice returns for impact—they deliver both because the market rewards solutions to important problems.

This ecosystem approach to impact investing may represent the maturation of sustainable finance. Rather than optimizing single dimensions, successful funds build portfolios where financial success and positive impact reinforce each other. The mathematics-versus-biology metaphor captures this evolution: from single-variable optimization to complex system design.

The political backlash against ESG may actually accelerate this maturation by forcing impact investors to prove their investment thesis rather than relying on political tailwinds. European venture capital, with its regulatory sophistication and long-term orientation, is well-positioned to lead this evolution.