Private credit impact funds are set for a revival in popularity in 2025, following a period of declining investor interest in environmental, social and governance (ESG) and impact investing.

According to the annual ESG Attitudes Tracker by the Association of Investment Companies (AIC), the number of private investors who say they consider ESG dropped for a third year in a row to 48 per cent in 2024. This compares to 66 per cent in 2021, 60 per cent in 2022 and 53 per cent in 2023.

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Kathryn Saklatvala, head of investment content at bfinance, said that she has noticed a softening of investor focus on ESG and impact through 2023 and 2024. She believes that this was in reaction to the effect that 2022 had on their portfolios.

“It was a very significant year in terms of seeing losses, and I think there was a bit of a pivot of attention,” she said. “While things like the net zero agenda have remained strong, some impact intentions have been placed on the back burner.”

However, bfinance’s data suggests that there will be a slight increase in the number of investors who are planning to allocate to that space in the year ahead.

“Its mainly an issue of prioritisation,” Saklatvala added. “Certainly in the last three to six months, we have seen an increase again in searches for impact funds.”

A November survey by L&G found that impact and sustainable mandates will account for 45 per cent of private markets portfolios in two years’ time, up from 37 per cent today. This suggests that investors are ready to refocus on ESG and impact investing as the macro-economic environment stabilises, and asset managers are preparing to meet this demand.

Alternative Credit Investor is aware of one private credit impact fund which is currently in the fundraising stage. Meanwhile, Blue Earth Capital recently raised $113m (£88.94m) at the first closing of its first evergreen, semi-liquid impact private credit fund. And the British Business Bank (BBB) has launched a new funding programme aimed at increasing funding to social impact sector lenders in the UK.

“Both supply and demand have increased,” said Nadia Nikolova, lead portfolio manager, development finance at Allianz Global Investors.

“On the supply side, the rise in impact private equity raising since 2020 means there is a critical mass of investments which require credit.

“On the demand side, we have started seeing specific investor allocations for impact and with private credit having been a well performing asset class so far; impact private credit emerged in 2024 and we expect it to grow in 2025.”

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Antoine Maspetiol, head of private debt at Eiffel Investment, agreed that as investors look at the private debt portion of their portfolios, impact solutions are becoming more appealing – but only if they can match non-impact yields.

“Impact remains attractive as long as it is combined with financial performance,” said Maspetiol.

“So yes we anticipate that successful credit impact funds will continue to be attractive in 2025.”