How impact investing is setting the agenda

Of all the ESG growth areas, one stands out: Impact investing is now a $715bn market, according to the Global Impact Investing Network, and is helping reframe the debate.

From left: EQT’s Rikke Kjær Nielsen, Bain Capital’s Cecilia Chao, Schroders Capital’s Amara Goeree, Allianz’s Matt Christensen and Kirkland & Ellis’s Ruth Knox

Of all the ESG growth areas, one stands out: impact investing is now a $715 billion market, according to the Global Impact Investing Network, and is helping reframe the debate. Here are six things we learned at affiliate title Private Equity International’s Impact Investor Global Summit in May:  

1Impact investing is reframing emerging markets PE

The summit’s opening panel on the progress toward the UN’s Sustainable Development Goals brought up a number of issues, but one that stood out was the opportunities within emerging markets. Andreas Nilsson, managing director and head of impact at Golding Capital Partners, highlighted the importance of emerging markets in offering great returns. According to the Impact Investing Institute, more pension funds are integrating emerging markets impact investments into diversified global investment portfolios. The institute also states opportunities within these markets are becoming more innovative and sophisticated, which is fueling an increasing need and opportunity to attract more institutional capital. 

2 Technology is at the forefront of impact investing

Investors are also looking toward technology, such as AI, health tech, agri tech and so on, as a sound investment due to its ability to not only generate sizable returns but make company processes more efficient. In a panel on opportunities in climate and tech impact, Ed Beckley, partner at TPG Capital, said: “What is happening at the moment is very exciting. The economy is being rearranged to be less carbon intensive. Technology is playing a big role in that.”

Technology also prevents further impact opportunities for investors, who are increasingly prioritizing the energy transition. For instance, the use of clean hydrogen as a replacement for fossil fuels is on the rise, with adoption likely to accelerate over the next few years. Max Gottschalk, founding partner at Vedra Partners, said: “Hydrogen seems to have become the common energy strategy to fuel large economies and it is growing at a fast pace. Hydrogen will play a crucial role in the energy transition.” Although it is not used commonly currently, Gottschalk argued that in two years’ time, hydrogen will be one of the main energy providers. 

Not to mention, carbon capture technology is in its infancy but with the right investment and strategy could become a primary solution to tackling climate change. Cameron McLain, co-founder and managing partner at Giant Ventures, described CCS as a “make or break area.” 

3 Data collection is a top priority

Panelists argued that robust data collection is a way to drive impact investing as it allows managers and investors to identify problem areas and ultimately come up with solutions. By tracking progress toward sustainability goals, firms can come up with an effective strategy to make investments that positively impact climate change. 

“Measuring, monitoring and tracking progress is the only way forward to avoid the greenwashing we’ve seen,” said Rikke Kjaer Nielsen, partner at EQT. Nielsen also emphasized the importance of global harmonization so there is only one standard of reporting. This would allow companies across the globe to have one common method of collection, making data more reliable and effective. 

4Regulations can help shape strategies

As impact investing has only really taken off in the last few years, regulations and frameworks surrounding the sector have taken time to come to a head. The recent Sustainable Finance Disclosure Regulation is being taken seriously by companies as it’s providing a solid framework when it comes to making the right investments. 

Amara Goeree, sustainability director, private equity, at Schroders Capital, said that even though regulations such as SFDR can be quite aggressive, they are a great tool to show a firm’s intentionality as they make it easier to set up an impact fund.  

Adding to that, EQT’s Nielsen argued that frameworks force data collection and transparency as companies need to prove they are meeting regulation requirements. As a result, companies are investing in platforms that ensure quality data gathering. 

5 Impact washing is a growing issue

The increased focused on sustainability can also have negative consequences; over the past few years, greenwashing has become a problem, not just within private equity but across all industries. Often, companies appear to be addressing climate-related issues at a surface level, citing ESG strategies and so on, yet if you dig a little deeper it becomes evident that this isn’t the case. Speaking during one of the morning sessions, Anita Bhatia, investment director, endowment team at the Guy’s and St Thomas’ Foundation, suggested LPs should encourage GPs to establish impact committees. This would not only minimize greenwashing but help investors to engage with managers on a regular basis and check if they are meeting their goals. 

6 Impact is being used to attract top talent

Speaking at the conference, Stephen Muers, chief executive officer at Big Society Capital, argued that impact is becoming a positive differentiator when it comes to attracting talent. “Impact is a great hook for hiring the best people,” he said. Employees these days are looking to work for companies that take issues such as ESG seriously, and incorporate sustainability from the top down, right through to their investments. 

This is especially important at a time when there is a labor shortage within the private sector. Muers’ argument is that if companies can prove they are tuned into making a positive impact, they will have more chance of coming out on top in the current war for talent.