Reality Hits - Optimism Stays

Blog by Elemér Eszter, President of Impact CEE

Whenever I read articles like Harvard Business School’s recent piece, Why ESG’s Past Returns May Not Predict Its Future, I find myself returning—mentally, and thankfully also physically—to our regular Monday meetings at Impact Ventures.

The HBS article highlights an important and uncomfortable finding. Between 2012 and 2023, institutional investors and asset managers shifted roughly $3 trillion toward ESG-oriented investments. ESG-tilted funds outperformed their underweight peers by 2.2% annually on average, but around 1.9 percentage points of that outperformance appears to have been driven by capital inflows rather than superior corporate fundamentals.

In other words, a significant part of the ESG success story was created by the sheer volume of money moving in the same direction.

This is where finance can sometimes begin to resemble theatre: enormous amounts of capital, powerful narratives, shifting preferences and decision-makers allocating money from a considerable distance from the underlying economic reality.

Then Monday comes.

At Impact Ventures, we sit down and look closely at the companies in our portfolio. These are businesses trying to generate measurable social or environmental impact while also building commercially viable, scalable companies.

The discussion is rarely abstract. We look at revenues, customers, product-market fit, cash runway, management challenges, financing rounds and strategic options. Some companies need to be helped through serious difficulties. Others surprise us with their progress. Occasionally, we prepare them for an exit.

That is when reality hits you—or gives you reason for optimism.

And, for me, that reality restores the balance.

It also brings me back to an observation made by Szabolcs Varga, Head of Gutmann Budapest: we should keep a very close eye on what impact investing actually becomes.

The relevant question is not whether ESG as a financial label succeeds or fails. The more interesting question is whether a functioning economic ecosystem can emerge around businesses that solve real social and environmental problems.

I increasingly think about that ecosystem in four layers:

Impact companies → VC/PE funds investing in those companies → LPs allocating capital to impact VC/PE funds → large corporates buying the products and services of impact companies, partnering with them, or ultimately acquiring them.

All four layers matter.

An impact startup without customers is not an impact economy. A VC fund without institutional LP capital cannot scale. Institutional investors without credible funds and investable companies have nowhere meaningful to allocate. And without large corporates adopting these innovations—or eventually acquiring the companies that create them—the solutions may never reach meaningful scale.

This four-layer system is still small. It does not work perfectly. In many places it barely works at all.

But it does work in some cases.

And that is precisely why impact investing matters.

At ImpactCEE, I increasingly see our role as understanding and researching this entire universe: not simply impact startups, and not simply impact funds, but the mechanisms through which capital, innovation and corporate demand can connect into a functioning regenerative economic system. ImpactCEE itself brings together investors, fund managers, corporates and other actors across Central and Eastern Europe around this agenda.

That is also why I am particularly looking forward to this year’s CEE4Impact Day.

One of our keynote speakers will be Arnaud Blandin, who will open an important part of the discussion with “The Rise of Regenerative Capitalism – Dream or Reality?” The conference will examine whether regenerative capitalism can become a defining economic model of the 21st century and how Europe might contribute to that transformation.

This question becomes especially interesting at the corporate level.

How do you turn a giant corporation—a container ship with enormous inertia—even a few degrees toward a more sustainable, and ultimately regenerative, direction?

It is easy to underestimate how difficult this is. Boards, management incentives, supply chains, capital expenditure, investor expectations and corporate culture all have to move together. This is not a PowerPoint exercise. It is organizational transformation.

Perhaps that was one of the problems with the ESG boom described in the HBS article. Financial markets identified something real—the need for a healthier relationship between capital, society and the environment—but then attempted to scale the narrative much faster than the underlying economic model itself could develop.

The promise became too easy.

The reality is not.

There is no fast success in impact investing.

There are difficult founders, failed hypotheses, financing gaps, board meetings, regulatory barriers, customer resistance and countless small adjustments. There is an enormous amount of detailed, sometimes exhausting work.

And then there are small successes.

A company finds product-market fit. A hospital adopts a new health solution. An industrial customer begins using a cleaner technology. A founder builds a stronger management team. A new institutional LP commits to an impact fund. A multinational acquires an impact company and takes its solution global.

These successes may look modest compared with trillions of dollars moving through public markets.

But they are real.

And when they happen, they are extraordinarily rewarding—because each one represents a small, functioning piece of a healthier economic model.

That, in my view, is where the real promise of impact investing lies.

Not in financial fashion.

Not in labels.

And certainly not in the promise of easy alpha.

But in the slow construction of an economy in which financial performance, innovation and the regeneration of human, social and natural capital can reinforce one another.

That is a much harder project.

And a much more interesting one.

Elemér Eszter, President of Impact CEE