Elevating Impact: Are all climate-tech investors impact investors? We don’t think so.

By Mohit Jindal and Ander Iruretagoyena

In recent years, an unprecedented number of funds have emerged in the climate and sustainability space. After a record $83.3B in new AUM in 2023; 2024 is expected to be even bigger. As an impact asset manager that has conducted over 2,200 calls with GPs since 2018, we wonder: Are all climate funds truly impactful? 

Aren’t all these funds helping mitigate emissions in some way through their portfolio companies? Yes, emissions are being avoided and some are even expanding into climate adaptation, but is that enough? Is there a line we need to draw to create a bare minimum threshold for a climate fund to be considered impactful? If so, where is that line?

Source: Sightline, CTVC

Defining Impact: Impact Engine’s Perspective

Let’s take a step back. At Impact Engine, we believe an impact fund must embody these three characteristics:

• Intentionality: The team’s authentic, long-term commitment to impact through their professional and personal track record.

• Strategy & Process: The fund has a clear plan, relevant expertise, and alignment across the team to integrate impact and financial goals effectively.

• Accountability & Measurement: Systems to define success, track impact, and maintain transparency, ensuring aligned incentives for achieving both returns and outcomes.

From Cleantech 1.0 to Climatetech 2.0: A Maturing Opportunity Set

The landscape of climate investments has come a long way since the early days of Cleantech 1.0. Between 2006 and 2011, fueled by rising energy costs and public campaigns like An Inconvenient Truth, investors poured $25B into clean energy solutions. However, nearly half of that capital was lost or impaired during the ensuing bubble collapse.

Today, the picture is vastly different. Falling cost curves have driven the widespread adoption of renewable technologies, and the investment community has evolved. While Cleantech 1.0 was largely dominated by generalist investors, the current wave includes a growing pool of specialists—investment professionals with battle scars in cleantech investing and some with a commitment to measurable impact. The opportunity for climate investments is also broader, allowing for more diversification by theme, industry, and business model.

How We Evaluate Impact in Climate Funds
With both an impact framework and the climate opportunity set in mind, we can now explore the nuances of what makes for a compelling impact climate fund.

At Impact Engine, we go beyond frameworks and reports. Here’s how we distinguish climate-aligned funds from impact climate funds:

• Intentionality: We assess the fund manager’s understanding of climate change’s key drivers. Are they aiming to measurably address critical challenges, or are they simply aligned with climate trends? We explore their motivations, the problems they are solving, and the measurable impact they intend to create.
  
  

• Strategy & Process: We evaluate whether their actions reflect their intentions:

• Sourcing: Are they focused on high-impact areas (e.g. major greenhouse gas emitting industries) or do they have a “checks the box” mentality?

• Diligence: Do they analyze and project GHG avoidance or reduction metrics, or do they rely on general claims about climate benefits?

• Management: Do they provide strategic support to ensure portfolio companies deliver on both financial and impact goals?
  
  

• Accountability & Measurement: We look at why and how they measure impact. Are they using robust systems to track GHG reductions, climate adaptation outcomes, and broader environmental or social impacts? Do these systems ensure transparency and aligned incentives?

Illustrating Impact in Action: Portfolio Examples

To bring our philosophy of intentionality, strategy, and accountability to life, here are some examples from our portfolio of fund investments:

Ara Partners, an industrial decarbonization buyout firm, is clear about their intention and strategy of investing in companies that can deliver or enable at least 60% or greater GHG emission reduction versus the market alternatives. It is a clear line in the sand and requires upfront diligence to gain conviction that a company can meet this goal. For example, its investment in Polar Performance Materials is helping scale the company’s proprietary High Performance Alumina (HPA) production method, which achieves more than 90% reduction in carbon intensity vs. conventional HPA sourced from China. HPA is relevant in the semiconductor industry, where more than 75% of overall carbon dioxide (CO2) emissions are created during the semiconductor manufacturing phase.

In growth equity, Carbon Direct Capital utilizes the resources and scientific expertise of Carbon Direct Inc., a sister company that offers science-backed carbon management services, including carbon measurement, emissions reduction, and high-quality carbon removal, to build robust life cycle assessments as part of deal assessment. Too often we have seen other funds accept assertions from companies about the effectiveness of their climate technology. We believe that Carbon Direct’s evaluation by climate scientists ensures that the fund invests in solutions that have the right scientific fundamentals to successfully scale and reduce CO2 emissions. Over the last two years, we have seen the team enhance their accountability beyond the pure focus on CO2 emissions abatement by tracking the impact of its work on wider racial and gender equity through their work in climate and environmental justice. 

At times, we also see signs of what not to do. We’ve seen a few fund managers, with no background in climate research, investing or operations, hesitate to measure impact or only do so if mandated from a regulatory perspective or for marketing purposes. This lack of intentionality is often evident. There have been instances when data is recorded, but the measurement systems don’t track data over a period of time to understand how congruous business key performance indicators (KPIs) are with impact KPIs. 

As we continue to invest in this space, we’re learning that intentionality and strategy manifest in different ways across fund managers, as does nomenclature. Some may reject the label of "impact investor" despite embodying the core traits of one, while others fully embrace the term. What’s clear is that the impact is never found in the label; it's a commitment to invest with a strategy that generates defined outcomes, and it is important for investors to deeply understand and evaluate the myriad of approaches that can be effective.

Note: References to portfolio holdings are intended for illustrative purposes only, and inclusion in this material is not indicative of performance or other metrics. 

Elevating Impact: Impact Advisory Councils

By Ander Iruretagoyena and Priya Parrish

Welcome to our new series, "Elevating Impact.” As an investment firm committed to driving positive social and environmental change, we recognize that leaders in the field must be as intentional and focused about driving excellent impact as they are about driving excellent financial returns. Because we invest in both funds and companies, across early stage and late stage, and across three different impact themes, we are fortunate to see a very wide swath of examples of impact (inclusive of impact management and measurement, environmental-social-governance management, diversity-equity-inclusion, and more) efforts across the industry. We hope it will inspire and inform others in the industry to highlight and share them through this series.

Today, we will start by highlighting the concept and significance of Impact Advisory Councils (IACs). These councils, established by General Partners (GPs), play a pivotal role in shaping and guiding a firm's approach to impact. Typically comprised of experts, stakeholders, investment team members, and sometimes even portfolio company CEOs, the most important role of an IAC is to act as a sounding board on impact opportunities or challenges that could arise, such as in relation to: screening processes, due diligence, company metrics, deal terms, investor reporting, team member responsibilities, certifications, or market positioning. This could be in the context of a policy or program, or even a specific investment where there might be debate about how to approach impact or whether the potential impact meets the firm’s bar.

In addition to having a trusted body to turn to, the existence of an IAC can signal a firm’s commitment to continuous improvement in areas that are rapidly evolving, reinforcing to both investors and companies the importance placed on these issues. Furthermore, these councils provide LPs who are passionate about impact an opportunity to engage more deeply and build stronger relationships with the firm. 

While there is growing consensus in the industry that IACs are a beneficial addition to impact investing firms, there is no universal agreement on the optimal structure for these councils. As an impact investing firm with a network of over 990 different GPs, Impact Engine has observed a wide variety of council structures tailored to meet the unique needs and resources of each firm. Typically, these councils consist of 3-5 members, often composed of LPs, and generally convene 2-3 times per year, primarily through virtual meetings, with some opting to meet in person around their Annual General Meetings (AGMs). The agenda for these meetings usually includes a review of the portfolio and impact report, discussions on new investments, and special topics or projects. While IACs do not typically weigh in on governance issues (this falls under the purview of the Limited Partner Advisory Committee (LPAC)), some do weigh in on compensation matters related to impact, such as tying impact performance to carried interest. 

We currently serve on 12 IACs, and helped form 10 of them¹. While we don’t have a formal IAC ourselves, as a Public Benefit Corporation, our board of directors is legally bound to hold us accountable for both our financial performance and our impact performance. We also supplement the voices and accountability of our formal board with our Advisory Board, who we call upon regularly to weigh in on our plans and progress.

There are clearly many approaches that can be effective. The goal is to always be learning and looking outward for ways to improve, and to have others who can hold you accountable for that.

Spotlight: Lumos Capital Group’s IAC

Lumos Capital Group was founded in 2019 by Victor Hu and James Tieng as an independent investment manager focused on technology-enabled growth-stage companies in the human capital development sector that are bringing transformative products and services to improve the quality of and access to education and training, from early childhood education to workforce development. Lumos’ investment thesis is that the global status quo is unsustainable (most of the global workforce has less than a college degree, annual earnings of <USD20K, and is in danger of being left behind due to accelerating automation), that education is THE crucial lever for systemic change, and that purposefully investing in impactful private sector innovation will drive a more prosperous and inclusive future for everyone.

Lumos’ Impact Advisory Council meets virtually on a biannual basis, and consists of 4 LPs with deep experience in the sectoR (Strada, Steyn Family Office, American Student Assistance, Impact Engine) along with representatives of the investment team. There are three primary objectives for the IAC: 1) To provide an external feedback loop to hold the firm accountable on its impact commitment, 2) To help decide on which impact management and measurement practices to adopt, especially when LPs have different preferences; and 3) Create a trusted group where Lumos can have honest conversations about the numerous challenges of impact management.

Some of the recent topics discussed or considered at the Lumos IAC include:

• Decision to join Impact Capital Managers (ICM) (a member network of private capital fund managers investing with a focus on impact)
• Decision to implement the Impact Management Project’s five dimensions of impact framework throughout the investment process.
• Drafting a theory of change framework with three core pillars to understand market gaps and drive meaningful systemic change through the business models of the portfolio companies.
• Understanding the Sustainability Accounting Standards Board (SASB) and what is appropriate ESG management for a growth equity investor
• Review of individual portfolio companies & potential new investments’ impact merits and risks. For example, Lumos was looking at a software tool used in schools to prevent bullying and was struggling with how to balance that outcome with the privacy concerns it entailed.
• Discussion on how to increase the proportion of diverse founders at the top of the funnel.
• Discussion on how to codify impact into term sheets with companies.

¹As of the date of this article Impact Engine has allocated capital to 17 different managers; having a formal active role in 15 of them. In firms where an IAC may not exist we find other ways of helping shape the IMM of that firm through other bodies like an LPAC.