What LPs want in an impact fund: additionality and intentionality

Managers ought not focus on comprehensive impact assessment frameworks when pitching impact strategies to investors, but should concentrate on demonstrating additionality and intentionality, according to a panel of allocators at last week’s Impact Investor Global Summit.

“Understanding the [impact] theme and additionality” of a manager was the key issue when considering an investment opportunity, said Willem Huidekoper, head of non-listed equities at IMAS Foundation. “You invest sometimes in a ‘black box’. Not all funds have [an] already-seen portfolio.” As a result, understanding a manager’s target portfolio and how it aligns with the impact goals of the investor is the first thing GPs should show when pitching to an LP, he said. Additionality refers to whether a positive external outcome, such as increased financial inclusion, would have happened without the investors’ involvement.

One of three foundations set up by IKEA founder Ingvar Kamprad, IMAS foundation prioritises long term returns over any particular sustainability mission, but has been investing behind sustainability-driven trends. For example, it began to favour investing in renewables over fossil fuels “eight or nine years ago”. Huidekoper said that the foundation does not have a designated allocation for impact investing, as to do so would venture into territory already occupied by sister institution IKEA foundation, which has a mandate to address poverty and climate change. IMAS has approximately €12 billion-€13 billion in assets, Huidekoper said, 40 percent of which is allocated to private markets.

The notion of additionality was also a “focus” for Marieke van Kamp, head of private markets at Dutch insurance company NN Group, an insurer with €198 billion under management according to NPM’s database, when asked what she looks for from an impact fund.

NN Group also does not have a specific impact allocation, van Kamp confirmed, but considers it a “lens” through which to view all investment opportunities. The group plans to invest €6 billion in climate solutions by 2030 across real estate, infrastructure, private equity and green bonds. Recent commitments include a €300 million investment in Rivage’s Article 9 climate infrastructure fund, and a €500 million commitment to CBRE to develop low-carbon affordable housing in the Netherlands.

Carlotta Saporito, head of global impact investing at JPMorgan Private Bank, stressed that, first and foremost, impact investment opportunities are assessed in the same way as any other: through analysis of a team’s track record. Only then is there an “additional layer of impact”. At that point, she said that the “first question is intentionality. Do you actually have an intentional desire to achieve positive environmental and social outcomes through investment activity?”

While intentionality is paramount, Saporito suggested that a fully developed impact measurement and reporting framework is not necessarily a must-have. “I think that’s where we’re more flexible,” she explained. “We work with managers who have extremely well-developed impact frameworks. But we also work with managers who have a long track record in actually making investments that do have a history of generating great impact, but have never reported on it… in climate tech we definitely see that, but also in education we’ve seen it a lot and in, some cases, financial inclusion.”

Evolving frameworks

Saporito joined JP Morgan’s wealth management group last year to run a dedicated impact investment programme alongisde the bank’s other products: “we thought it was important to have that discretionary capital designated to impact, because we wanted to be intentional about where the money was going,” she said.

Yasemin Saltuk Lamy, deputy chief investment officer at British International Investment, urged GPs not to second-guess investors’ desires in a bid to raise capital. “To me it really stands out when someone comes with a proposal that says: ‘Here is the opportunity, this is the pipeline, this is my track record and here’s why my team and I are the right people to deliver this for you.’ And I think it takes a little bit of confidence to stand behind what you think as a manager is the right strategy and not be swayed by the wind of fundraising.”

BII is the UK Government’s development finance institution and a long-time direct investor and private fund LP; in 2021 it invested and committed $2.5 billion. Like other DFIs, it plays a role in building and supporting the ecosystem of fund managers in emerging economies. It has also pledged to channel 30 percent of its new commitments to climate finance and 25 percent to gender finance.

Though confirming that BII is “definitely 100 percent mission driven”, Saltuk Lamy noted that designated impact allocations have their place in the investing landscape. “It’s quite natural for an institution to start with an allocation and learn to grow a framework that can then apply to everything you do,” she explained.