In the report
3. Financial investment fundamentals
The RFP was deliberately open when referring to financial return: it asked for a “Reasonable rate of financial return, adjusted for the relevant risk and asset classes.”
The purpose of this was to provide financial flexibility for ISPs and encourage innovative proposals that would prioritise impact on future generations. In addition, as partner foundations in the EIC, we each have different return expectations and investment criteria, for instance on liquidity. Being unspecific about return meant we could introduce a wider pool of investments to assess against our individual requirements.
Benchmarks are not fit for purpose in impact investing
In the financial markets as well as in charity investment committee meetings, performance against benchmark is a regular topic of discussion. It is the primary indicator of how an investment is performing in comparison to its peers or expected performance of that product. This means choosing an appropriate benchmark is incredibly important.
Public equities (shares in listed companies)
In the public equities space, the most used benchmark is the MSCI World Index, or a variation of it. However, in recent years, this index has had a large concentration represented by the Magnificent 7 companies. These companies represented over 20% of the index on 31 August 2026 and have been known to rise above that figure. Additionally, they represented 62% and 53% of S&P 500 returns in 2023 and 2024, respectively. So, if you weren’t invested in them, you were missing out.
Despite this, many of the Magnificent 7 companies (particularly Amazon and Tesla) do not qualify for responsible or sustainable funds and certainly don’t for impact funds. Further, Meta and Alphabet have dual-share class structures that heavily reduce shareholder voting power in favour of founders, making engagement a difficult task. This leaves ISPs with two significant questions: do we include the Magnificent 7 in our portfolio? And, if not, is the MSCI World an appropriate benchmark to use for the mandate?
Out of 31 applicants operating in public equities, 17 used the MSCI World as a benchmark, confirming that this remains standard practice. However, most of these held significant exposure to Magnificent 7 stocks. Disappointingly, we saw several applications with high allocations, one as high as 30%. Consequently, none of these applicants advanced to the shortlist.
Interestingly, four of the applicants chose to use this benchmark without investing in the Magnificent 7. Some of these were new funds without a track record, so a sceptic may say, ‘easier said than done’. Is it fair to compare sustainable and impact funds against the MSCI World? Probably not. However, there are few (or possibly no) suitable alternatives for public equities that prioritise social and environmental factors (or impact on future generations).
The next most common benchmark used was the Consumer Price Index (CPI) + x%. While CPI is an appropriate benchmark for foundations in the long-term, particularly to meet their need for regular income distributions, it doesn’t always correlate with performance in the equity markets. Some ISPs turned to small and mid-cap indexes (i.e. benchmarks tracking small- and medium-sized companies), but these are only appropriate if you are investing specifically in this subset of the market. Finally, we saw the ARC peer group referred to, which isn’t a benchmark but is increasingly used to compare amongst peers.
Public debt (bonds)
While working with a smaller sample size, there appeared to be more consistency with benchmarking in the public debt space. Most commonly, applicants used a Bloomberg Global Aggregate Index. Interestingly, this was consistent regardless of the impact level, implying that it might currently be less difficult to track against ‘global market’ returns in this asset class while maximising impact.
Private markets (unlisted companies and investments)
Outside of the highly liquid public markets, benchmarking is much less developed and financial return expectations vary significantly. Instead of using benchmarks, applicants tended to set targets using fixed targets of return, internal rate of return, multiple on invested capital, or other means of articulating their expected investment returns.
There were one or two signs of benchmarking, but these tended to be due to sector or geography specific factors. This could be considered more transparent when compared to public market proposals, many of whom benchmarked against indices that did not correlate to their investable universe, as discussed above.
Trade-offs need managing
In conclusion, we are no longer riding the ‘ESG boom’ of five years ago. Significant questions are being raised about financial return expectations for impact-focused products. We need to acknowledge that comparing impact products against mega-cap companies (i.e. the very largest companies) that have dominated global market growth is not a fair comparison. Either new benchmarks need to form, or values-based asset owners need to acknowledge the long-term nature of their investments and communicate more appropriate targets to ISPs for their impact allocation.
Liquidity is a key risk, but does it need to be?
The primary risk discussed during assessments was liquidity risk. The liquidity of applications ranged from daily to ten years.
There is a common argument made about the level of impact you can achieve in private markets compared to public markets, not least because equity is often through new issuances, rather than buying someone else’s shares of a public company. However, with private investments, investors give up a lot of liquidity, which makes asset owners uneasy.
We saw this through the application process, with only one solely private markets solution, Octopus Capital’s Affordable Housing Fund, making it onto the shortlist. This investment had a four-year lock-in and liquidity would then be available at the discretion of management.
Values-based asset owners are typically long-term investors, so perhaps we need to reflect deeply and challenge assumptions on whether we can and should commit to less liquid, potentially more impactful, investments. For a mandate seeking scalability in a winner, perhaps closed-end ten-year funds were not the right answer. However, given the focus on future generations, an argument could be made that liquidity should not have been a primary risk consideration.