Impact Funds: 2020 Review

Progress behind the scenes from notable impact investors suggests 2021 will be a significant year for impact fund launches and fundraising

By David Gowenlock and Harry Humphreys, Impact Funds Advisory · December 17, 2020

Whilst coronavirus and its associated impact on society will be the lasting memory of 2020 for most people, much has happened this year in impact investing behind the scenes. This progress has in no small way been accelerated by the pandemic itself. Amidst the suffering COVID has brought, it has been a time of reflection for all of us to think about what we value, what we perceive as important, and what we want the future to look like for the ones we love.

Thankfully, progress is coming from all angles;

  • Consumers are driving change from their wallets – of those surveyed, 79% are now changing purchase preferences based on sustainability considerations. Led largely by growing environmental concerns, these changing preferences have seen the rise of brands such as Beyond Meat ($8.7bn market cap), Oatly (over $2bn valuation) and Bulb (over £400m valuation), with Deloitte’s recent research suggesting brand responsibility is the new basis of customer loyalty.
  • Multinational companies are adapting fast and making increasingly bold sustainability commitments: Unilever’s ‘Future Foods’ ambition for €1bn plant-based meat and dairy alternatives sales within the next 5-7 years, H&M’s target of being carbon positive by 2040. Even airlines are jumping on the bandwagon with United committing in October to reduce GHG emissions by 100% by 2050 without using carbon offsets (to reach this target the firm has started investing in a company using Carbon Engineering’s direct air capture technology)
  • Governments are no longer standing by and expecting private capital to address these issues. Bold moves this year such as Xi Jinping’s September announcement that China would achieve carbon neutrality before 2060, and Boris’s Johnson’s accelerated ban of petrol and diesel cars in the UK by 2030 have come as somewhat of a surprise, and send strong signals to the market.
  • Investors have stepped up to the table too – in December thirty of the world’s biggest asset managers formed the Net Zero Asset Managers initiative and set a goal of achieving net zero carbon emissions across their investment portfolios by 2050. With these firms collectively overseeing $9tn this move is expected to have huge implications for businesses globally.
  • Lastly Central Banks are adjusting their programmes. Whilst the Bank of England’s announcement that it would exclude firms most exposed to climate risk from its £20bn corporate bond purchase programme turned out to be an elaborate hoax from climate activists, other Central Banks have made more progress in addressing climate risks with the ECB announcing in November that Eurozone banks will be stress-tested on their ability to withstand climate change risks by 2022.

2020 Impact Fund Developments

Within the context of these market movements there were a number of notable impact fund launches and closes. In Private Equity notable funds include Bain Capital’s $800m Double Impact Fund II, Nordea Asset Management’s partnership with PE veteran and EQT co-founder Jan Stahlberg to launch Trill Impact, Astanor Ventures $325 million Global Impact Fund. These larger fund vehicles are supplemented by many others from experienced investors such as responsAbility and PG Impact Investments to smaller thematically focussed emerging managers such as Blue Horizon Ventures and ETF Partners. Additional capital is also flowing into the space as several private banks launch impact FoF vehicles to provide access to eager private wealth clients.

GIIN’s latest 2020 survey places the impact investing market at $715bn, but despite these successes, it has undoubtedly been a tough year for impact fund capital raising. As Private Equity News reported in November, Prequin data showed that global impact funds attracted just $14.6bn across 52 managers so far this year through 20th November, well off the pace from the $76.2bn raised across 92 such funds in 2019. However, many impact fund managers decided to delay capital raising until 2021 given investor uncertainty caused by COVID this year, and we are expecting a real surge in impact fund capital raising activity next year.

Listed equities Impact Investing is still a niche strategy resigned to actively managed portfolios. However, impact’s older and larger cousin, ESG, is now a truly mainstream strategy which saw strong performance and inflows following the market selloff in March. According to Morgan Stanley, investors poured a record $36bn into sustainability funds in October, with ESG exchange traded funds attracting $9.6bn compared with a 12-month average of $5.2bn. In the US alone, as US SIF’s latest biennial report shows, US-domiciled assets under management deployed with an ESG investment strategy increased by 42% over the last two years, to $17tn in 2020, up from $12tn in 2018. This figure now represents 33% of all US assets under professional management – ESG is rapidly become the new normal. Despite concerns from some sceptics, latest MSCI research published this month showed that a price bubble is not forming. The firm found that outperformance of ESG was mainly driven by companies’ earnings growth and better dividend yields and price/earnings ratios were not inflated.

Evolution of impact funds

1) Regulation and reporting

Following the accelerated trend towards ESG strategies, investors in private capital strategies are now also facing growing regulation and reporting requirements such as the four-pillar framework of the Task Force on Climate-related Financial Disclosures (TCFD). Those who are signatories of the PRI standards are facing stricter regulation and reporting requirements after 28 were delisted in September for not meeting the organisation’s minimum requirements.

2) Impact management

The GIIN’s annual survey revealed an interesting insight on impact measurement – in the first 2010 edition of the Annual Survey, 85% of respondents used their own proprietary impact measurement and management (IMM) systems and one decade later, 89% are using external systems, tools and frameworks. The most commonly used IMM resources are the SDGs (73%), the IRIS Catalog of Metrics (46%), IRIS+ Core Metrics Sets (36%), and the Impact Management Project’s five dimensions of impact convention (32%).

3) Diversity and Inclusion

Black Lives Matter has shone a spotlight on diversity in investment management and the broader financial sector and firms are now scrambling to address this systemic problem, some with rhetoric, some with action.

Pressure and guidelines are starting to emerge from industry bodies. The Institutional Limited Partners Association built on the Diversity and Inclusion criteria in the organisation’s industry standard private equity DDQ with a broader D+I roadmap. A more recent ‘Diversity in Action’ initiative requires participating organisations to commit six concrete steps toward addressing potential shortfalls in this area.

Whilst these nudges from industry organisations help guide larger firms how to include diversity in their existing processes, some funds are taking the lead in their efforts to address this problem. Teams such as Impact X are tackling diversity head on by investing specifically in underrepresented founders, whilst others such as Ada Ventures seek to remove bias from the investment process and actively encourage cold applications (over half of the fund’s 2020 deal flow came in “cold” – without a so called ‘warm introduction’ which is typically unhelpful for diversity).

Fund allocators would be wise to pay attention – research by Goldman Sachs has found that women and mixed gender US fund teams have outperformed all male portfolio management teams so far this year.

Areas of interest to LPs

In our work with Impact Funds, ClearlySo’s institutional distribution team speaks with many European LPs allocating to alternative strategies including venture capital, private equity, and sustainable infrastructure.

Whilst many LPs are generalists and simply seek to allocate to high performing teams with strong track records, more and more are building investment strategies around thematic areas. Some key areas of LP interest in 2020 identified by ClearlySo include:

1) Environment, climate change and renewables

Environmental degradation is the number one area of interest in our LP network – spanning climate change, biodiversity loss and water (availability and pollution).

Solutions in this area span asset classes and geographies. For those looking to address climate change, renewables infrastructure may present the most stable exposure through real assets. Some investors seeking more catalytic impact and a higher risk/return profile than yielding infrastructure assets are turning to emerging direct air capture innovations. However with a long commercialisation pathway for these technologies a balanced approach can be found in nature-based solutions (NbS) such as sustainable forestry and restoration projects – often funded by carbon credits.

The huge investment opportunity in the coming years to help tackle climate change whilst generating financial returns has not been lost on LPs with a recent Octopus Energy report calculating an expected $742.5bn of renewable energy investment in the next 10 years alone, with institutional allocations to renewables expected to increase from 4.2% in 2020, to 8.3% in 2025.

We explore these areas in more detail in a recent blog post and our Sustainable Energy & Renewables webinar featuring Octopus Renewables, Impax AM and ETF Partners.

2) Healthcare

The pandemic has simultaneously stretched public health systems and highlighted the need for increased spending on innovations promising to reduce the cost of care or increase treatment efficacy.

In addition to aging populations, antimicrobial resistance (AMR) is presented as one of the world’s most rapidly emerging public health threats. The need for an accelerated response has been echoed by global leaders across many sectors – from the medical community, to pharma and the insurance sector. A report for UK Government found AMR could lead to the loss of 10 million lives a year and cost $100tn in economic output.

Thankfully, growing interest in health-tech investments has seen increased focus in this area by both early-stage entrepreneurs and large bio-techs. Recent breakthroughs such as Google Deepmind’s AlphaFold making a gigantic leap in solving protein structures (some claiming ‘It will change everything’), gene editing developments using CRISPR-Cas9 and simple telehealth solutions demonstrate how technological investments can address some of these issues.

For a more comprehensive overview of health-tech investment solutions see ClearlySo’s recent interviews with Wellington partners Life Sciences, Luminous Ventures and Joyance Partners and a detailed webinar Impact Funds & Innovations in the Health Sector featuring MVM Partners, Octopus Investments, Albion Capital and Paul Hastings.

3) Food-tech innovations

Food is considered the largest industry in the world (the World Bank estimates 10% of global GDP). This industry is projected to grow at a strong 8.4% CAGR, and it importantly is non-cyclical – a key consideration when equity markets have been experiencing extreme turbulence.

Demand for food is set to grow by 50% by 2050 from 2012 levels due to population growth, urbanisation, and per-capita increases in income. Meanwhile the natural resource base upon which agriculture depends will become increasingly stressed (globally, 33% of the world’s farmland is moderately to highly degraded).

Agriculture is ripe for disruption, a recent McKinsey study found agriculture to be the least digitalised industry of all and a more sustainable food system is urgently needed since around 35-40% of global greenhouse gas emissions can be attributed to the food system.

There lies great opportunity in leveraging new technologies for efficient, sustainable food production to meet these challenges as we explored on a recent Future of Food webinar with Rabobank, Blue Horizon Ventures, the GFI and the ex-Chief Scientific Adviser for the UK’s Department for Environment, Food and Rural Affairs.

Closing Thoughts

COVID has clearly exposed the fragilities and inequalities within our society. Despite the heroic efforts of many, it has exposed the capacities of our healthcare systems to manage current and future public health crises, the inflexibility of our education systems to continue educating our children and upskilling our work force, the endemic inequalities in our labour markets which have now been exacerbated further by lockdowns around the world; and the relentless damage we have been doing to the environment for decades, which has only briefly been alleviated by the ‘breath of fresh air’ which the planet took during this fleeting economic shutdown – but which will shortly be back in full swing.

However, despite the challenges this year has presented, it has also given us the opportunity to fundamentally reset our economies and the way we invest capital. In fact, for many institutional investors, the damage caused by COVID, and the impending climate emergency has brought into sharp relief the need to consider ESG externalities when considering all investment decisions to mitigate future risks.

The old adage “never let a good crisis go to waste”, has certainly been taken up by asset managers around the world. As stated above, a third of all managed public market AuM in the US are now invested through ESG or sustainable strategy products. And at our last count, 11 of the 25 largest global Private Equity asset managers already have ‘impact’ or ‘sustainable’ products in the market, with a further 9 announcing strategy or product launches in 2020.

Whilst impact and green washing remains a concern to many asset owners dipping their toes into impact for the first time – for more insights see our webinar ‘how to identify and call out impact washing’ – COVID has undoubtedly accelerated the shift towards ESG, sustainable, and impact investment strategies for all investor groups. We believe that 2021 will be the first year we can confidently say that impact investing is no longer a trend, it is the new normal.