Advisory Partners

The FT Moral Money Forum is supported by its advisory partners, Vontobel and White & Case. They help to fund the reports.

The partners share their business perspectives on the forum advisory board. They discuss topics that the forum should cover but the final decision rests with the editorial director. The reports are written and edited by Financial Times journalists and are editorially independent.

Our partners feature in the following pages. Partners’ views stand alone. They are separate from each other, the FT and the FT Moral Money Forum.

Embracing the potential of impact investing in public markets

By Christel Rendu de Lint

Impact investing originated with philanthropists and then ethical investors who were primarily focused on “doing good”. But to truly effect change and attract the required amount of investment, impact investing needs to broaden its scale and genuinely appeal to as wide an investor set as possible. This can and will be best achieved whenever ethical outcomes do not come at the expense of financial performance, but in addition to it. At Vontobel, we refer to this as investing for a double dividend. The investment universe also needs to expand from private assets in select sectors to include global listed equities to allow for scale.

As the investor base expands, credible and universally accepted metrics are required to maintain the integrity of impact investing. As a member of the Global Impact Investing Network since 2020, Vontobel has actively contributed to the working group that sets strict global guidelines for this approach in public equities. This is critical since impact investing still lacks full uniformity in both terminology and data. The importance of reliable data cannot be overstated as it ensures that investments deliver measurable real-world results. As a fiduciary, we believe in transparency and regularly publish impact reports that detail our full methodology, assumptions and any limitations of our framework.

Regulation is not a panacea

There is a widespread perception that investing into businesses making a positive impact can only be profitable if supported by a change in regulation or policy. This rationale is widely held for good reason: businesses striving for positive impact often repair what public services are not in a position to adequately address or provide a novel service focusing on a yet unserved societal need. In the absence of policy support, these businesses would often face too high an entry barrier, in terms of costs or size of the initially addressable market, making it difficult to compete with “traditional” businesses and thus to get the new service off the ground. However, once the conditions for a new market are established — or a path for market substitution is clearly communicated to investors — the influence of regulation and policy diminishes. In some cases, it can even generate an adverse effect by stimulating supply beyond demand, weighing on profitability. Many segments of renewable energy faced similar challenges over the past 18 months.

This dynamic becomes particularly relevant in the context of changing political landscapes. Some investors are concerned that a halt, or even a reversal, of previous climate friendly government policies will have a detrimental influence on the future returns of impact investments. While this may be true for some investments, there are mature segments of the market where the convergence of production costs and scale have already occurred, making them less dependent on policy support or economic conditions.

The climate transition: leveraging a long-term structural shift

Impact investors typically have a deep-rooted commitment to the secular shift of the economy towards a more sustainable future as laid out in the globally ratified objectives of the Paris Agreement, the Kunming-Montreal Global Biodiversity Framework, and the UN’s Sustainable Development Goals. As governments and private entities adopt targets set by these global accords, demand for advanced infrastructure is poised to accelerate, especially for decarbonisation and sustainable urban planning. This sets the stage for fertile investment opportunities in impact strategies.

A groundswell of support has already created a healthy foundation to capitalise on these opportunities. Investments in low-carbon energy transition technologies surged 17 per cent to a new annual record of $1.77tn in 2023. Global energy transition investments also outpaced fossil-fuel supply investments by nearly $700bn that year. However, capital directed towards a more resource-efficient energy transition still needs to increase significantly. It is estimated that the global annual investment to achieve net zero climate targets by 2050 represents an approximate $200tn accumulated opportunity — the equivalent of about 2 per cent of annual global GDP. This forecasted investment level suggests substantial inflows into the target universe of impact strategies.

Many clean solutions are attractive and cost competitive investments, regardless of policy support, incentives, or subsidies. Both established and disruptive companies that leverage climate change can provide innovative and scalable technologies that address major global issues, such as depletion of resources or rising pollution. These companies have the potential to outperform their peers and gain market share, particularly if they possess robust balance sheets and superior long-term profitability.

Targeting a double dividend

At its core, impact investing is about targeting a double dividend. Given the estimated needs for transition and green financing, we believe that the success of impact investing in public markets is critical to achieve the necessary scale. To ensure a growing adoption of impact strategies, it is imperative that investment managers deliver measurable impact and at least equivalent performance through the cycle compared to “traditional” strategies.

For investors, the critical consideration becomes the tradeoffs they are willing to accept between short-term deviations from market performance in exchange for long-term gains. This willingness could expand the appeal to a wider range of investors, thereby strengthening the positive impact on both the environment and society.

Sustainability under the microscope: legal considerations for impact investors

By Alex Chauvin, Lavanya Raghavan, Robert Nield and Janina Moutia-Bloom

In a choppy private fundraising environment, asset allocators to private markets face difficult choices. Does one stick to the path well-trodden by allocating capital to existing managers running classic fund strategies, or back emerging managers launching newer strategies with less rigorously tested theses? The tendency to minimise risk, has, however, not been enough to stymie the recent proliferation of impact funds in the market. Impact funds come in all shapes and guises, from maiden single-country focused sustainable forestry funds to buyout behemoth-sponsored global energy transition funds.

As asset allocators to private markets increasingly consider impact criteria in their own portfolio of fund investments, their discussions with sponsors are getting more detailed, and so are their contractual provisions in the fund documentation. A decade ago, investors seeking detailed criteria linked to tangible impact outcomes tended to be development finance institutions backing emerging managers, often in emerging markets. Larger, conventional institutional investors in private markets would have settled for the fund manager simply confirming that it had seen a copy of the investor’s policies and commitments around sustainability and corporate social responsibility, or, at a push, that the fund manager was a signatory (or would otherwise have regard) to the UN Principles for Responsible Investment.  

The market has come a long way from the nebulous commitments of managers to monitor ESG improvements in their portfolio investments. Impact funds are demonstrating that creating and/or contributing to positive social or environmental outcomes through portfolio investments is not at odds with aspiring to, and achieving, financial returns commensurate with more traditional private funds. Of course, in an industry that has been reluctant for decades to move away from the traditional “two and twenty” model, it is hardly surprising that only a small minority of managers are willing to embed impact-linked metrics on calculation of carried interest or performance-based fees. 

More frequently, we see fund managers retaining dedicated impact specialists (usually engaged by the manager centrally and deployed across all relevant fund products) to provide investors with additional comfort regarding the approach to investment diligence and ongoing operation. Special governance measures are also increasingly being introduced such as a dedicated ESG subcommittee of the investor advisory committee that will have relevant matters for consideration and approval referred to them. In part, this is attributable to the lack of uniform standards and metrics for assessing impact outcomes. 

To begin with, there is no definition of impact investing that has been universally adopted by private market sponsors or investors. For example, a strategy that focuses on investments in technology venture capital companies in emerging markets would not traditionally have been viewed as an obvious proposition through an ESG lens, but from a wider impact perspective, shows tremendous potential for sector disruption. Such disruption could lead to a positive social or environmental impact through, for example, financial inclusion, or the development of blockchain solutions which could deliver more sustainable infrastructure. Strategies would also need to take account of potentially negative social or environmental impact such as distributed ledger technology facilitating financial crime, or blockchain validation processes requiring excessive energy consumption and electronic hazardous waste. 

The importance of impact investing is not only rising in the context of primary investments (when the fund is open to new investors) but has recently also permeated the burgeoning secondaries market, comprising transfers of existing fund interests, fund restructurings and other transactions aimed at providing liquidity to investors. In traditional secondary transactions, investors acquire fund interests from existing investors, to gain exposure to identified companies held by a given fund. Because of the stage of the fund’s life in which secondaries investors enter the fray, there is often no room for such investors to negotiate forward-looking side letters (being bilateral agreements between the fund and the investor covering a range of issues on which the investor seeks more specific contractual comfort, from ESG to economic entitlements). 

Therefore, more emphasis is placed on the due diligence of the actual assets that have been acquired by the fund and, for the impact-minded investor, making sure the strategy meets certain key performance indicators. This can help mitigate the risk of investors being accused of greenwashing, or being faced with regulatory enforcement risk in view of the anticipated substantial evolution (particularly in Europe) of sustainable finance disclosure rules, such as the relevant regulatory technical standards and published guidance with respect to the EU’s Sustainable Finance Disclosure Regulation (SFDR). Despite expected changes to the SFDR regime, national authorities indicate that they will ramp up enforcement in its present form, in connection with existing practices. 

Secondaries investors are increasingly scrutinising existing or contemplated impact investing strategies, with several of the larger investors having recently launched dedicated secondaries impact teams that focus on delivering market rate returns.  Impact investors’ emphasis on market rate returns has been seen in the purchase and sale agreements for these secondary fund interests exposed to portfolio companies engaged in delivering impact outcomes.  Such agreements usually include a purchase price that reflects a discount to the fund’s reported valuation, as agreed between the seller (the existing investor) and the buyer.  Of note, the discount for impact investing portfolios tends to be steeper than traditional buyout fund interests (in the order of 30 to 50 per cent), given the higher risk associated with these strategies. The pricing itself is an indication that impact investors are seeking to derive a financial return in addition to promoting systemic change.