Why definitions in climate impact matter

Climate will be many LPs' entry point to impact investing; they must know what they are buying.

A paper released this week seeks to guide investors on what makes a climate fund worthy of the “impact” label.

Building on its previous reports on the impact investing marketplace, consulting firm Tideline’s Truth in Climate Impact outlines what attributes a true climate impact strategy needs in order to distinguish itself from the growing number of “climate-integrated” strategies.

With climate becoming a widespread investor concern, there is more focus on measuring climate-related outputs among managers of all different stripes (for example, see this sovereign wealth fund-led initiative). In Tideline’s words: “If climate investors are claiming the ‘impact’ label, the question arises: what makes them any different from the broader universe of ‘responsible investors’ that are themselves growing in awareness of climate-related risks and opportunities?”

The answer is varying levels of intentionality, contribution (how the GP helps accelerate the impact) and active measurement. Contribution in particular (including the manager’s unique team background, network, experience and platform capabilities) is “a significant differentiator for impact investors from the broader set of institutional capital in the market”, the report notes.

Analysis about definitions and labels can often feel a little academic. If an LP understands a GP’s investment thesis – how it plans to deliver on its mandate, and what it will be measuring and reporting – does it really matter what it calls itself?

It does, says Tideline managing partner Ben Thornley: “For most investors, labeling plays the critical role in setting expectations, and investors pursuing ‘impact’ have very specific expectations in mind: the delivery of real, measurable, outsized social and environmental outcomes”.

“Without market integrity and transparency, impact-washing would be rife,” he adds.

In the impact investing universe, climate has become the dominant theme. Our list of the largest impact managers in private markets tells this story: at the last count, three of the five largest – TPG, Brookfield Asset Management and Goldman Sachs Asset Management – were there either fully or partially by grace of climate-focused strategies. To illustrate the point further, one of the more venerable names in the impact investment space – Leapfrog Investments – on Thursday unveiled its newly created climate platform.

Because of its dominance, climate will be many institutional investors’ first experience with impact investing. Climate impact investors are best positioned to “serve as a beacon for other impact investors”, writes Tideline. For this reason, anything that protects the integrity of it – and mitigates the risk of impact-washing – is worthwhile.