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.