LPs seek ‘intentionality’ in impact funds – New Private Markets summit

In May 2023, around 300 impact specialists gathered in London for affiliate title New Private Markets’ Impact Investor Global Summit. Over the course of two days, some 75 speakers discussed the latest developments in private markets impact investing, ranging from impact-washing, regulation, measurement and verification to how impact capital can most effectively target themes such as financial inclusion, healthcare inequalities and climate. A number of these speakers had first-hand experience of allocating to impact funds and offered their insights into the priorities and challenges for institutions active in the space. Here are three takes.

What LPs want in an impact fund

Managers ought not focus on comprehensive impact assessment frameworks when pitching impact strategies to investors, but should concentrate on demonstrating additionality and intentionality, according to a panel of allocators at this year’s Impact Investor Global Summit.

“Understanding the [impact] theme and additionality” of a manager was the key issue when considering an investment opportunity, said Willem Huidekoper, head of non-listed equities at IMAS Foundation. “You invest sometimes in a ‘black box.’ Not all funds have [an] already-seen portfolio.” As a result, understanding a manager’s target portfolio and how it aligns with the impact goals of the investor is the first thing GPs should show when pitching to an LP, he said. Additionality refers to whether a positive external outcome, such as increased financial inclusion, would have happened without an investor’s involvement.

One of three foundations set up by IKEA founder Ingvar Kamprad, IMAS Foundation prioritizes long-term returns over any particular sustainability mission, but has been investing behind sustainability-driven trends. For example, it began to favor investing in renewables over fossil fuels “eight or nine years ago.” Huidekoper said the foundation does not have a designated allocation for impact investing, as to do so would venture into territory already occupied by sister institution IKEA Foundation, which has a mandate to address poverty and climate change. IMAS has approximately €12 billion-€13 billion in assets, Huidekoper said, 40 percent of which is allocated to private markets.

“We work with managers who have extremely well-developed impact frameworks”

Carlotta Saporito
JPMorgan Private Bank

When asked what one should look for from an impact fund, the notion of additionality was a “focus” for Marieke van Kamp, head of private markets at NN Group, a Dutch insurance company with €198 billion under management, according to New Private Markets data.

NN Group does not have a specific impact allocation, van Kamp confirmed, but considers it a “lens” through which to view all investment opportunities. The group plans to invest €6 billion in climate solutions by 2030 across real estate, infrastructure, private equity and green bonds.

Meanwhile, Carlotta Saporito, head of impact investing at JPMorgan Private Bank, stressed that impact investment opportunities are assessed in the same way as any other: through analysis of a team’s track record. Only then is there an “additional layer of impact.” At that point, she said the “first question is intentionality. Do you have an intentional desire to achieve positive environmental and social outcomes through investment activity?”

While intentionality is paramount, Saporito suggested that a fully developed impact measurement and reporting framework is not necessarily a must-have. “I think that’s where we’re more flexible. We work with managers who have extremely well-developed impact frameworks. But we also work with managers who have a long track record in actually making investments that do have a history of generating great impact, but have never reported on it… in climate tech we definitely see that, but also in education we’ve seen it a lot, and… in financial inclusion.”

Have conviction

Yasemin Saltuk Lamy, a managing director and head of asset allocation and capital solutions at British International Investment, urged GPs not to second-guess investors’ desires in a bid to raise capital. “To me it really stands out when someone comes with a proposal that says: ‘Here is the opportunity, this is the pipeline, this is my track record and here’s why my team and I are the right people to deliver this for you.’ And I think it takes a little bit of confidence to stand behind what you think as a manager is the right strategy and not be swayed by the wind of fundraising.”

BII is the UK government’s development finance institution and a long-time direct investor and private fund LP. Like other DFIs, it plays a role in building and supporting the ecosystem of fund managers in emerging economies. It has also pledged to channel 30 percent of its new commitments to climate finance and 25 percent to gender finance.

Though confirming that BII is “definitely 100 percent mission driven,” Saltuk Lamy noted that designated impact allocations have their place in the investing landscape. “It’s quite natural for an institution to start with an allocation and learn to grow a framework that can then apply to everything you do.”

How LPs can overcome benchmark ‘constraints’

LPs are being hampered in their impact investment efforts by financial benchmarks that do not take externalities into account, according to former Korea Investment Corporation CIO Scott Kalb. A “key issue that asset allocators face… are the constraints imposed by their benchmarks,” he said in a keynote address at the Impact Investor Global Summit 2023. “The primary way that [LP boards] communicate their expectations for returns and risk to the CIO and the investment team of the organization is through the setting of traditional financial benchmarks.”

Benchmarks allow allocators to analyze the performance of an asset relative to its peers and are a key part of LP decision-making. An investment team’s performance is often assessed on its ability to overdeliver according to a particular benchmark, and teams may be financially incentivized on this basis. Benchmarks are also used to communicate expectations to external asset managers, Kalb said.

“What happens to historical data? Do you have to then recalculate these externalities? Going back historically, how do you compare performance?”

Scott Kalb, former Korea Investment Corporation CIO 

Kalb worked at the Korean sovereign wealth fund from 2009 to 2012 and held positions as CIO and deputy CEO. He is also the founder-director of the Responsible Asset Allocator Initiative (RAAI) at New America, a think tank based in Washington, DC. The RAAI developed an index that rated approximately 200 sovereign wealth funds and government pension funds on their responsible investing practice, according to its website.

While benchmarks can be effective at measuring “idiosyncratic risk” – meaning the differences in an asset’s performance compared to others in the same sector or region – Kalb explained that “the problem is… externalities” and systemic risks such as climate change or negative social impact. For example, carbon emissions are not incorporated into traditional financial benchmarks, even though there is a growing regulatory trend towards carbon taxes. The result is that impact-positive investment opportunities can underperform according to these benchmarks, deterring CIOs from investing in them.

Giving impact greater weight

LPs are implementing a range of measures to give impact greater weight in allocation decisions, according to Kalb. One is “widening their tracking error limits,” which define how far an LP can deviate from the benchmark and therefore how much risk they can take.

Others are changing the benchmark they use. A number of indexes are being developed that seek to include externalities and systemic risk as part of financial accounting. Though those developments show “a lot of promise,” Kalb noted there are still questions to answer: “What happens to historical data? Do you have to then recalculate these externalities? Going back historically, how do you compare performance?”

A more extreme option is moving away from a benchmarking system altogether, and towards an absolute return target: “One of the reasons why you see a lot of asset allocators gravitating towards using absolute return-type benchmark targets is because… you can actually do more there,” Kalb said. “You’re less constrained and you can take different kinds of risk as long as you hit your overall returns.”

Article 9 helps, says PGGM, but isn’t mandatory

Article 9 funds tend to be more developed in their approach to impact and data, according to senior investment manager Maurice Klaver. Snehal Shah reports.

Dutch pension investor PGGM, which had assets worth €229 billion as of June 30, has mixed views on how useful the EU’s Sustainable Finance Disclosure Regulation (SFDR) is for private equity. Being Article 9 could help an impact fund secure a slice of PGGM’s 5 percent impact allocation, senior investment manager Maurice Klaver told delegates at the Impact Investor Global Summit in May. This is “because they’re more developed in the way they think about impact and how they get the data to prove it, both on the positive side and negative impact. But it isn’t a hard requirement for us.”

But Klaver’s priority is gathering ESG data across PGGM’s entire private equity portfolio. “The ESG Data Convergence Initiative was helpful, but then the SFDR came along and now we need to follow up on 16 KPIs for 5,000 portfolio companies with 100 managers. It’s a nightmare,” said Klaver. “I’m not sure it’s really helping [investors] do more sustainable investments.”