IMPACT INVESTING IN PRIVATE MARKETS: THE FUTURE OF PURPOSE & PROFIT IN CAPITAL MARKETS

On June 23^rd, our Investment Manager Madeline Petrow had the pleasure of chairing a panel discussion at the Fourth Vienna Impact Investment Forum exploring the challenges and strategies of impact investing in private markets today.  The event was hosted by Advantage Family Office and she was joined on stage by Britta Lindhorst (HQ Capital, Managing Director), Vikram Raju (Morgan Stanley, Head of Climate Investing, Private Markets) and Ania Manczyk (Mercer, Principal, Private Equity and Sustainable Investments Specialist).

The engaging debate covered many key issues facing impact investing right now – from labelling and measurement to capital flows.  Read more below for the key highlights and takeaways from the discussion:

First things first – what is impact investing?

In its most simple form, impact investing is an investment strategy whereby investors look to generate intentional and measurable positive social or environmental impact in addition to financial gains. Unlike philanthropic activity, private markets can offer a long-term, financially sustainable approach to tackling some of the world’s most pressing issues. For instance, Q·Advisers portfolio company EVERY, is on a mission to disrupt the €200bn egg market offering a cruelty-free, animal-free egg protein that is bioidentical to traditional eggs. (You can read more about EVERY here). For commercial kitchens, if the animal-free egg is cheaper and offers the same performance, they will make the switch. It is that simple. Thus, EVERY has the potential to not only capture a huge market share, but also fundamentally improve the sustainability of our food supply chains by encouraging the transition away from resource intensive animal proteins to a more sustainable, cruelty-free alternative.

From backing companies championing more sustainable food systems to clean energy pioneers and everything in between, impact investing can offer viable solutions to some of the biggest challenges our globalized economy faces, while also functioning to deliver healthy financial returns. So, what are the main challenges facing impact investing today, and what strategies are being implemented to support its sustainable growth?

1. Lack of Standardization

You may have heard of Impact Investing, ESG (Environmental, Social & Governance) investing or even SRI (socially responsible investing) but do they all mean the same thing? Not quite. One of the biggest challenges that impact investing faces is a lack of universally agreed upon terms, definitions, measurement strategies or even reporting guidelines.  Specifically, it is important to note that ESG is more akin to a risk management framework accessing Environmental, Social and Governance principles and practices that guide a company’s decision making.  Impact investing on the other hand has the specific goal of creating tangible, measurable positive impact.  Therefore, it is important for impact investors to clearly define how they are defining impact and what KPIs they are using to measure this in order to truly understand if impact is being achieved.

2. Issues of Reporting and Difficulty  in Data Collection

Expanding on from issues of standardization, there are no universally agreed upon frameworks for impact measurement and reporting. The UN Sustainable Development Goals have become a commonly used framework to define impact goals and more recently in 2021, the European Union introduced the Sustainable Finance Disclosure Regulation, taking a significant step in standardization by requiring asset-management companies to report on their investments’ environmental, social, and governance risks. Despite this, there still remains ambiguity in the market.  Part of the difficulty in creating a universal framework is that impact metrics and KPIs vary depending on the company.  Some investors may choose to develop bespoke frameworks for each investment target which has the benefit of being able to capture both quantitative and qualitative data, but has the challenge of comparing this data to other investments.  On the other hand, standardized reporting practices may enable comparison, but present difficulties in adequately measuring relevant KPIs and providing a holistic overview of impact targets.  While there are still differing opinions and practices across the market, it is crucial that whatever the strategy, it is consistent and transparent to effectively monitor impact progress and goals.

3. Myth that we can´t create impact while achieving financial returns

Arguably the most interesting part of the discussion was surrounding the myth that impact investors must make a concession on financial return in order to achieve positive impact creation.  As champions of impact investing, most were quick to dispel this belief by offering examples of companies whereby positive impact is fundamentally related to improving their bottom line. Take the example of recycled PET in the fashion industry. Not only is using recycled PET a smarter choice for the environment, it is often cheaper than virgin plastics. Therefore, using recycled plastics is not just a decision driven by environmental factors, but also by profit margins. While there was skepticism about the availability and pool size of investment opportunities that have impact and profit so closely aligned, there was consensus that impact investing does not have to be a concession.  In fact, there was discussion about the moral responsibility of impact investors today to prove this very point, expressing concern that if investment and fund managers failed on impact or financial return, it would be doing a great disservice to a burgeoning investment strategy of impact investing.  The same idea of moral responsibility can be applied to those funds that have been accused of greenwashing – the practice of making something appear more environmentally friendly than it really is.

The future of Impact Investing 

Despite the market challenges of COVID, we saw continued robust interest in impact investing. In 2021, Pitchbook identified over 1,800 funds that were seeking social or environmental impact alongside financial return. The majority of funds were less than five years old, and 40% were launched in the past two years. Will impact investing be able to maintain its strong market interest as we enter a bearish market?

While we have identified several key challenges of impact investing – including issues of labeling, data collection, greenwashing and opportunity availability, we are confident that impact investment is no longer a niche or concessionary investment strategy, but will continue to be a key tool in sustainably and effectively tackling some of the world’s most pressing issues. We are excited to see how strategies develop, and new innovations in the market – such as linking performance fees to impact metrics – will support a financially sustainable market approach to creating lasting positive change.

Read about our own impact investments here.

The views that are expressed in this article are that of Q·Advisers, and not to be attributed to any single panel participant.