Welcome back. The international aid system is going through arguably the biggest crisis in the eight decades that it has existed in its modern form.

President Donald Trump’s sudden demolition of the main US aid agency has dire implications for sick and hungry people across much of the developing world. And European nations including the UK, France, Germany, the Netherlands, Belgium and Sweden have all announced cuts to their foreign aid budgets.

All this looks like bad news for sustainable development. But as I highlight below, funds managed by investors focused on social and environmental impact have been growing strongly.

“There is going to be less philanthropic and aid capital available. And that’s going to result in both a need and an opportunity for commercial capital to fill the gap,” said Andy Kuper, chief executive of LeapFrog Investments, one of several leading impact investors I spoke to for today’s newsletter.

While this sector clearly cannot plug all the holes left by the slashing of international aid, it may at least be able to offset some of the effect on global development.

impact investing

How impact investors are responding as the US pulls back from international development

Little noticed last week, amid the turmoil of Trump’s second month in office, was the US repudiation of the UN’s Sustainable Development Goals. These 17 targets, agreed by all UN member states 10 years ago, included the elimination of hunger and the universal provision of water and sanitation, as well as climate action and gender equality.

“Put simply, globalist endeavours like . . . the SDGs lost at the ballot box,” US representative Edward Heartney told the UN General Assembly, adding that Washington now “rejects and denounces” the initiative.

But as the US government turns away from the sustainable development agenda, funds promoting it now account for a significant slice of the global investment sector. Funds pursuing social and environmental impact have grown their assets under management at an annual rate of 21 per cent over the past five years, and now manage more than $1.5tn, according to a report in October 2024 by the Global Impact Investing Network.

As Trump creates new clouds around the outlook for international development — notably through the destruction of the US Agency for International Development — leading impact investors are looking for ways to step up their activity.

“I think everybody felt it in a really visceral way when USAID was impacted,” said Margret Trilli, chief executive of US-based ImpactAssets, an impact investor with about $3bn under management. “Unanimously, everybody is having the same discussion, which is: how do we step up in this moment?”

Trilli said she anticipated an increase in allocations by wealthy individuals and family offices towards both impact investing and philanthropy, as they look to offset the impact of the cuts to USAID, which had a $40bn annual budget.

I heard a similar message from Stephanie Bilo, head of investment at Switzerland-headquartered ResponsAbility, one of Europe’s largest impact investors, with a focus on climate finance, food security and financial inclusion. “We do have some US investors who are frustrated with the current political environment and feel that now, more than ever, they want to invest according to their core values,” Bilo said.

Strategic shifts

Vineet Rai, founder of India-based impact investor Aavishkaar Capital, predicted a shift by the US and other governments towards providing debt and equity investments in place of grants. This, he argued, could create new opportunities for impact-focused asset managers — to invest either alongside development finance institutions, or on their behalf.

The US International Development Finance Corporation, he noted, was established during Trump’s first term, with a mandate to mobilise private investment in development projects overseas. It has authorised investment capacity of $60bn, and has not — at least not yet — been hit by the heavy cuts imposed on other government bodies. To lead it, Trump has nominated credit investor Benjamin Black, the son of Apollo Global Management co-founder Leon Black, who has argued for USAID funds to be diverted towards the DFC.

“My feeling is that the DFCs of the world will actually step up and have larger budgets, because that money goes and comes back,” Rai said. “Recycling of the money is going to be of paramount importance, from a political point of view.”

As pressure mounts on development finance institutions to make smarter use of their funds, a welcome expansion of “blended finance” — where concessional public capital galvanises private investment — could ensue, said Jacqueline Novogratz, founder of Acumen, which makes investments to tackle global poverty. She highlighted the World Bank Group’s recent commitment of $45mn in concessional capital to galvanise private investment in an Acumen initiative to deliver clean energy in Africa.

“It’s not a question of whether we have enough capital,” Novogratz said. “It’s a question of whether we have the moral imagination to rethink the way our system of capitalism can be extended.”

Just as the Trump shock is forcing European nations to reconsider their security strategy, it could drive African governments to focus on making better use of domestic financial resources, which are largely invested in western markets, said Tokunboh Ishmael, managing partner at Nigerian impact investment firm Alitheia Capital. “We can no longer rely on the global north to provide the funding,” she said. “We as Africans — governments, asset allocators — need to come to the table.”

Still, impact investors were careful to stress that their sector cannot fill many of the gaps left by cuts to aid budgets. “A refugee who’s just fled from a war zone and arrived in a refugee camp probably needs other services than help building a business,” said John Fischer, chief investment officer at Accion, which invests in businesses promoting financial inclusion. “Our model is a great tool, but it’s not the Swiss army knife for everything.”

Smart reads

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