Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
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Aligning Fees with Sustainability Goals – Impact Linked Carry
Impact Investing | Aug 23, 2023
Image: Unsplash/John Cameron
In the intricate dance of finance, impact investing is taking center stage, pushing for a harmonious blend of profit and purpose. Drawing insights from a recent PitchBook article, we delve into how limited partners are influencing the alignment of fund fees with sustainability goals.
The Rise of Impact Funds
- Environmental, social, and governance (ESG) factors have become a cornerstone for LP mandates.
- Recent reports, such as the 2022 PwC study, highlight an anticipated growth in ESG-related assets under management (AUM) to a staggering $33.9 trillion by 2026, up from $18.4 trillion in 2021. This surge underscores the increasing importance of sustainable investments in the global financial landscape.
- Despite a general slowdown in PE fundraising, impact-focused funds have shown remarkable resilience. Data from PitchBook reveals that 2022 saw impact funds amass nearly $22 billion across 21 global funds, setting a new benchmark for capital accumulation.
See: Alternative forms of capital will be key to develop sustainable economic systems
- Paula Langton, a renowned figure in fund placement at Campbell Lutyens, noted a surge in sustainability-focused activities. She emphasized the growing willingness of LPs to commit to newer, previously unheard-of entities, especially those centered around climate action.
Impact-Linked Carry
- Furthermore, LPs are now advocating for GPs to tether their carried interest to tangible goals, such as carbon emission reduction or enhancing gender and racial diversity within portfolio company boards.
- The concept of impact-linked carry isn't novel. It traces its origins back to the late 2000s when Aureos Capital in London introduced a base rate of carry with provisions for enhanced rates upon achieving impact targets.
- Fast forward to today, and industry giants like Apollo Global Management and EQT have adopted similar models, linking carried interest to the realization of an impact fund's mission.
Challenges and Authenticity
- However, the road to impact investing is not without its challenges. Luke Dixon, a key player at Dot Investing, highlighted potential pitfalls, such as GPs potentially prioritizing data collection over genuine impact. The onus of proving an investment's impact lies with the GPs, but LPs and consultants are investing heavily in ensuring authenticity and preventing practices like greenwashing.
See: Report: ESG Ratings and Data in Financial Services – Practitioners Perspective
- With the rapid growth of impact investing, regulatory bodies are stepping in. Proposals from the European Securities and Markets Authority suggest stringent criteria for funds using "impact" in their names, emphasizing measurable social or environmental impacts. The European Investment Fund pioneered the emphasis on genuine impact investments back in 2008. Today, the sector is witnessing exponential growth, with GPs bolstering their presence in this promising domain.
In Conclusion
- The landscape of impact investing is undergoing a transformative shift. As the sector matures, collaboration between LPs, GPs, and regulatory bodies will be pivotal in ensuring that impact investing not only promises but also delivers a sustainable future.
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