17.4 Sustainable and impact investing in VC and PE

Sustainable and impact investing are reshaping VC and PE, focusing on both financial returns and positive societal outcomes. Investors now consider environmental, social, and governance factors, aligning capital with values and global sustainability goals.

This trend reflects a broader shift in the industry towards responsible investing. VC and PE firms are adapting strategies to address pressing challenges like climate change and social inequality while seeking profitable opportunities in emerging sustainable markets.

Sustainable Investing Strategies

ESG Integration and Mission-Aligned Investments

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  Venture Capital’s Next Unicorn? Impact | Bridgespan View original

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  Why the World Needs Both ESG and Impact Investing | Bridgespan View original

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  ESG investment for promoting net-zero carbon emissions - Asia Pathways View original

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  Venture Capital’s Next Unicorn? Impact | Bridgespan View original

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  Why the World Needs Both ESG and Impact Investing | Bridgespan View original

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Top images from around the web for ESG Integration and Mission-Aligned Investments

• 

  Venture Capital’s Next Unicorn? Impact | Bridgespan View original

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• 

  Why the World Needs Both ESG and Impact Investing | Bridgespan View original

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• 

  ESG investment for promoting net-zero carbon emissions - Asia Pathways View original

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• 

  Venture Capital’s Next Unicorn? Impact | Bridgespan View original

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  Why the World Needs Both ESG and Impact Investing | Bridgespan View original

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• ESG criteria incorporates environmental, social, and governance factors into investment decisions
  • Environmental factors include carbon emissions, water usage, and waste management
  • Social factors encompass labor practices, human rights, and community relations
  • Governance factors involve board diversity, executive compensation, and shareholder rights
• Mission-related investments align capital allocation with an organization's core values and objectives
  • Foundations often use this approach to support their philanthropic goals (Rockefeller Foundation)
  • Universities may invest endowments in line with institutional values (Harvard University)
• Blended finance combines public, private, and philanthropic capital to achieve sustainable development
  • Leverages public and philanthropic funds to attract private investment
  • Addresses market failures and reduces risk for private investors
  • Can catalyze investment in emerging markets and high-impact sectors (renewable energy projects)

Double Bottom Line Approach

• Double bottom line focuses on both financial returns and positive social or environmental impact
• Investors seek to generate measurable social or environmental benefits alongside financial gains
• Challenges traditional notion that profit maximization is the sole purpose of business
• Requires careful balance between financial performance and impact objectives
• Can lead to innovative business models addressing societal challenges (microfinance institutions)

Impact Investing Focus Areas

Environmental Sustainability and Circular Economy

• Green technology investments target solutions for environmental challenges
  • Renewable energy (solar, wind, geothermal)
  • Energy efficiency technologies (smart grids, LED lighting)
  • Clean transportation (electric vehicles, hydrogen fuel cells)
  • Sustainable agriculture (vertical farming, precision agriculture)
• Circular economy focuses on minimizing waste and maximizing resource efficiency
  • Promotes recycling, reuse, and regeneration of materials
  • Invests in companies developing innovative recycling technologies
  • Supports businesses adopting closed-loop production systems
  • Targets reduction of single-use plastics and promotion of biodegradable alternatives

Social Impact and Ethical Business Models

• Social entrepreneurship combines business principles with social mission
  • Addresses societal problems through innovative market-based solutions
  • Invests in enterprises tackling issues like poverty, education, and healthcare
  • Supports scalable models with potential for significant social impact (Grameen Bank)
• B-Corps represent a new class of for-profit entities with verified social and environmental performance
  • Meet rigorous standards of social and environmental performance, accountability, and transparency
  • Legally required to consider impact on all stakeholders, not just shareholders
  • Growing movement with over 3,500 certified B-Corps across 70 countries (Patagonia, Ben & Jerry's)
• Impact investors often target underserved markets and populations
  • Invest in affordable housing, accessible healthcare, and financial inclusion
  • Support minority-owned businesses and social enterprises in developing economies

Measuring and Aligning Impact

Impact Measurement Frameworks and Metrics

• Impact measurement quantifies and evaluates the social and environmental outcomes of investments
• Utilizes various methodologies and tools to assess impact
  • IRIS+ system provides standardized metrics for measuring impact across sectors
  • Global Impact Investing Rating System (GIIRS) assesses the social and environmental impact of companies and funds
  • Social Return on Investment (SROI) calculates the social value created relative to resources invested
• Challenges in impact measurement include:
  • Defining appropriate metrics for diverse impact goals
  • Attributing outcomes directly to specific investments
  • Balancing quantitative and qualitative impact data
• Best practices involve setting clear impact objectives and regularly tracking progress
• Investors increasingly demand rigorous impact reporting alongside financial performance

Alignment with Sustainable Development Goals (SDGs)

• SDGs provide a global framework for addressing pressing social and environmental challenges
• 17 interconnected goals adopted by United Nations member states in 2015
• Impact investors align their strategies with specific SDGs to contribute to global sustainability efforts
• Common SDG focus areas for impact investors include:
  • SDG 7: Affordable and Clean Energy
  • SDG 8: Decent Work and Economic Growth
  • SDG 13: Climate Action
  • SDG 3: Good Health and Well-being
• Aligning with SDGs helps investors:
  • Communicate impact objectives more clearly to stakeholders
  • Identify investment opportunities that address global priorities
  • Collaborate with other investors and organizations working towards similar goals
• Challenges include measuring and reporting contributions to SDGs consistently across different investments and sectors