By Ben Thornley

Tideline recently hosted a Compass Series event on Climate Investing with True Impact. The panel featured some of the world’s largest and most innovative investors in climate for a discussion on the difference between thematic investments in climate-related market sectors versus true impact investments that deliver measurable environmental outcomes alongside financial returns. If you missed the virtual event, you can watch the recording here.

In my opening remarks, I introduced the many frameworks and initiatives currently available to investors when considering climate-related impact themes and investments. These include:

General commitments to achieve carbon reduction goals, such as those established by the Paris Agreement or advocated for by groups like the Net Zero Asset Owners Alliance

Disclosure and reporting requirements from non-profit and standards organizations such as the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) for materiality mapping, the Task Force on Climate-related Financial Disclosures(TCFD) for disclosing climate risks and opportunities, and the EU Sustainable Finance Taxonomy for defining thresholds for what counts as a sustainable investment

Tools for aligning with net-zero goals such as the Science Based Targets initiative (SBTi), the Net Zero Investment Framework from the Institutional Investors Group on Climate Change (IIGCC), the Transition Pathway Initiative (TPI), and the Partnership for Carbon Accounting Financials (PCAF)

Each of these tools and frameworks plays a different but important role in the fight for climate action. Put together, they offer a comprehensive way for investors to go beyond making thematic investments into climate solutions towards making climate-focused impact investments that feature the capacity for measuring and managing both positive and negative impacts. Another helpful resource is work from Willis Towers Watson on climate impact reporting – as distinct from climate risk reporting.

The panelists went on to share their recommended best practices for climate investing and offered insights into how organizations can approach climate finance from an impact investing perspective. Here are six key takeaways from the conversation:

1. Additionality matters: All panelists agreed that additionality matters when integrating impact into the investment process. In explaining her firm’s approach to tracking the impact performance of an investment strategy, Brookfield’s Natalie Adomait said that the concept of additionality allows them to measure the impact of their investments in green businesses, rather than just reporting on the metrics of the businesses’ growth. Similarly, Amy Duffuor of the Prime Impact Fund said that additionality is an important investment criterion, noting that instead of investing in hot deals, they invest in rounds to help businesses become self-sustaining and to deliver a larger long-term climate impact.

2. Growing interest from LPs in climate impact investing: There is a growing interest among LPs in climate impact investing, said Jeremy Smith of Rede Partners. He explained that of more than 150 LPs they interviewed last year, 65-70% cited climate as one of the primary themes they are looking to explore. He also added that, for many LPs, impact is not seen as an investment strategy, but rather as a reporting policy.

3. More GPs embracing impact investing: As more GPs transition to an impact investing approach, Smith explained that there are four important points to consider: fund intention (how is the fund set up and what is it trying to achieve?), fund strategy (what is the strategy and how will the strategy lead to the desired outcomes?), resourcing (how is the GP set up to execute on the strategy?), and delivering the alignment (which targets, KPIs or thresholds is the GP following?).

4. Catalytic capital is critical: Catalytic capital plays an essential role in de-risking early-stage climate technologies, said Duffuor. She said Prime Impact Fund is planning to create an investment vehicle that has both catalytic capital and more full-cycle capital with the goal of achieving maximum large-scale climate impact.

5. Robust impact management systems are needed: When it comes to reporting on impact metrics and management, Adomait said that managing an impact fund requires having a robust impact management system. She explained that when setting carbon reduction targets, Brookfield wanted to make sure that these targets can be linked back to the objectives of the Paris Agreement to ensure that they have a meaningful impact. Brookfield worked with Tideline to develop its impact management system.

6. SDGs emerging as a global agenda-setting framework: In addressing whether the SDGs are a key driver in the climate field, Allison Spector of Nuveen said that the SDGs emerged as a global agenda-setting framework. She highlighted that initiatives such as the TCFD, SFDR, or the Net Zero Asset Owners Alliance translate some of the high-level goals of the SDGs into language, risk disclosure frameworks, and investable opportunities that resonate with investors and managers, and therefore, they have helped to make the SDGs actionable.

Please contact us at [email protected] for updates on the Compass Series.