What is impact, anyway? Growing demand for sustainability investment

'What I’ve seen is that innovation and impact has become another space in the portfolio of a potential client, said Khaled Said, managing partner at CapGen, a firm that specialises in managing assets for families. 'It tends to be an extension, so you’ve got private equity, private debt, real estate, venture, and now there’s impact venture.'

Host James Shaw, head of Withers tech arm, noted that this was helping to drive much-needed innovation in the sustainability sector. 'Considering the scale of the major challenges the world is facing, it’s essential that the sources of substantial private capital get behind the innovators and visionaries who have developed creative solutions with the potential to really move the needle.'

Profit or purpose?

A core question for all investors to consider is how they prioritise impact as against financial returns. According to Amy Blackwell, a social impact advisor, many families see impact innovation as a new avenue of wealth creation. 'I’m hearing estimates that the transition to green energy will deliver one and a half times the wealth creation of the industrial revolution, and I think families are seeing that as an opportunity for their generation to contribute to a legacy,' Amy said. 

Speaking from the venture side, former CEO at Nature Metrics Katie Critchlow (now NED at Earth Blox) noted that a lack of consensus among investors as to KPIs and reporting structures was burdensome to founders and their teams, who were left filling out assorted different ESG reports – at a cost to their core operation.

Having been set up to fund sustainable innovation, the Environmental Technologies Fund Partners  (ETF Partners) has more experience than most in this area and partner Lucy Rands agreed that the lack of consistency around what companies are measuring and what investors want to know was problematic. 

'Different firms do [impact assessment] very differently,' Lucy said. 'Some have huge emissions targets, where they need to pass a certain threshold for emissions avoided or equivalent – but we think that overlooks large parts of the market that are actually very impactful.' 

Paying external consultants for an impact analysis was one option, but because innovative companies were growing and changing so quickly, the costly report could be irrelevant within a year. Ultimately, ETF Partners had opted for a hybrid approach, identifying KPIs which each venture tracked, Lucy explained. 'To make it meaningful we have to do it case by case, looking at where that product is today, what the impact is today, where we want it to be and where we think that would have impact – with a committee of investors to help us define those thresholds.' Once the most insightful impact metrics for an investment have been identified, ETF Partners' incentive structure is linked to performance against them as well as financial results.

An emerging consensus

'Over time, Khaled Said expects industry reporting standards to emerge, just as they did for financial valuations: 'I think it's just part of the evolution of this area; everybody's got good intentions but having really clear industry standards makes everything a little easier.'

It’s also essential for investors to be clear in their own minds as to the results they want. Amy advised both family offices and venture capitalists to consider which form of value they would ultimately prioritise, and where they would make concessions if necessary. As one audience question highlighted, this can be challenging for a vehicle like a family office, where different generations may be working with a different bottom line.

Where there are differences of opinion, Withers’ experience suggests that advisors may be able to help bridge the gap. 'Families we work with feel a strong sense of responsibility around the capital they hold – both in terms of protecting it for future generations, and in relation to the wider world,' says Claire Harris, a partner in Withers’ private client and tax team who leads on family office work. 'Inevitably, there are heated debates at times but what we’ve found as a third party is that when you speak to individuals it’s usually possible to find common ground.'

Once private investors have made the decision to enter the impact space, they do find it rewarding despite the challenges. Lawrence Barclay described how MantaRay’s backer had not initially specified an impact focus, but became more passionate about it over time. 'As he’s realised this is ultimately what he’s interested in, we’re even seeing impact start to reshape his underlying business.'

While the metrics and the terminology used may continue to evolve, the enthusiasm for using private capital to solve the world’s problems is here to stay.