Exploring the Differences Between ESG and Impact Investing

In the second episode of our podcast, Zero One Hundred Conferences ESG and Impact Talks, we sat down with Machtelt Groothuis, Founder & Partner at Rubio Impact Ventures, to have an in-depth discussion on the differences between environmental, social, and governance (ESG) investing and true impact investing.  

Listen to the full podcast episode here!

As an entrepreneurial impact investor with over 20 years of experience at firms like McKinsey & Co. and AlpInvest Partners, Groothuis has a unique perspective on how to drive positive change through investment. “If you really look for impact, you look for companies that have measurable, scalable and potentially systemic impact, and at the same time a scalable and profitable business model," she explained.  

Defining ESG vs. Impact

So what exactly is the difference between ESG and impact investing? As Groothuis put it, “ESG means do no harm. Where impact companies have impact at the core of their business model, for me, ESG focused companies could basically do any activity as long as they do it in an acceptable, socially morally acceptable way."

To illustrate the contrast, she used an oil company like Shell as an example – while they may score highly on ESG metrics around governance and environmental efforts like reducing emissions, at the end of the day they are still an oil company. “That is a really big difference, whether you're producing solar energy, for example, or you're producing carbon based energy," said Groothuis.

ESG investing, she believes, will not fundamentally solve the world's problems. "With ESG, we're not going to save the world. Right. Because there's very limited innovation, companies will continue to do what they do, but only in a slightly better way.” True impact requires rethinking business models from the ground up.

Overcoming Early Skepticism 

When Rubio Impact Ventures launched their first fund in 2014, impact investing was still in its early days. “There were many people who did not believe that impact and returns could be combined successfully,” recalled Groothuis. Investors tended to separate financial returns and philanthropy into two distinct “buckets.”

However, she has seen the market mature tremendously in the past decade.  “We've seen more and more money flowing to this area. We've seen more and more startups, successful companies, and we've seen a lot of acquisitions. So one of the surprises was that when we started a fund, people said, okay, so assuming you find these companies and assuming they grow, who are you going to sell them to?" said Groothuis. 

It turns out mainstream corporations have significant appetite for acquiring purpose-driven brands, proving there is a path to profitable exits. For example, Unilever has explicitly stated their interest in buying “purpose brands” that align with their corporate focus.

Rigorously Tracking Impact 

At Rubio Impact Ventures, assessing and validating impact is central to every investment decision. “Once we decide to invest, [we] develop a set of impact targets that should be linked very closely to the business,” explained Groothuis. An independent impact advisory board vets the impact models, and their carried interest is tied not only to financial returns, but to meeting impact key performance indicators (KPIs) as well.

After each investment, they work closely with portfolio companies to help articulate their impact story and integrate tracking impact metrics into their regular reporting cadences, just like financials. Their Limited Partners receive integrated quarterly updates on both progress towards impact goals and financial results.  

Groothuis believes this framework is essential to maintaining high impact standards as the market evolves. “ESG and impact, yeah, they're used so widely and for so many different things that if you're investing in a company or in a fund, it's extremely important to look what's actually being done in practice," she said.

Impact and Buyout Private Equity

While excited about the continued growth of venture capital's role in impact investing, Groothuis is skeptical about the potential for similar evolution in private equity. "I actually think it's almost impossible to do impact in private equity because the companies exist, they do what they do. You can maybe tweak that a little bit, but it's really almost impossible to innovate so greatly that you really have an impact," she asserted.

The issue comes down to incentives, time horizons, and risk tolerance. "If you want to basically flip and sell a company within three or four years, it's difficult to change things in any big way," Groothuis explained. And fundamentally altering business models can destroy value in the short term – not a palatable option for PE investors.

She has tried to convince private equity colleagues that more is possible, but sees two main roadblocks. "I think the biggest problem is in the model. And yes, also in the drive of the people in the sector," she said. "It's not generally people who take the time to take a step back and say, look, what kind of impact do I have on the world, and can I make this much better?"

The Future of Impact Investing

While impact investing still represents a small slice of the overall venture capital and private equity markets, Groothuis is optimistic about the future growth. She sees tremendous potential for venture capital to foster scalable solutions to global problems while generating standout financial returns – if investors rigorously assess impact in every decision. We look forward to seeing Rubio Impact Ventures lead the way towards this vision.

Listen to the full podcast episode here!

Stay tunned for our next Zero One Hundred Conferences ESG and Impact talks on February 22nd. Our guest will be Natasha Franks, Head of Client Reporting at Alpha Associates.


Other news you might be also interested in

We’re Hiring: Head of Sales & Business Development (fully remote)

Join the Zero One Hundred Conference Team

We’re Hiring: Sales Executive (fully remote)

Join the Zero One Hundred Conference Team

We’re Hiring: Investor relations & Conference Producer (fully remote)

Join the Zero One Hundred Conference Team