Targeted investment solutions
Responsible investing and ESG are mainstream concepts in the world of finance but they are still in their formative years as allocation strategies, due in large part to an ongoing lack of standards and measurement methodologies.
Targeted impact investing solutions – professionally managed portfolios that offer flexibility, scale, and diversification – are beginning to gain traction and could help change the narrative.
Why sustainability-focused solutions?
Investors across private markets are sharpening their focus on sustainable and impact-focused investment solutions as they seek to meet their goals. As our recent LP survey showed, nearly three-quarters (72%) of respondents plan to increase their allocations to sustainable and/or impact strategies over the next two years. And this isn’t a “nice to have.” A 2021 PwC survey shows that GPs are truly seeing the value in these types of solutions and have a positive outlook on performance, with two-thirds (66%) ranking value creation among their top drivers of responsible investing.¹
1 PwC Private Equity Responsible Investment Survey, 2021.
HarbourVest team members Natasha Buckley, Carolina Espinal, and Ian Lane shared their thoughts on the increasing appetite from LPs for ESG solutions in the 2021 PEI Responsible Investing supplement.
HarbourVest Partners sponsored this content for Private Equity International. See additional disclosure at the end of this report.
Consumer preferences are changing, placing more emphasis on companies who they believe act responsibly
of consumers are changing their buying preferences based on sustainability
of companies believe sustainability initiatives increase customer loyalty
of consumers are willing to reject products or services for ethical reasons
Sources: (Top two statistics) Bain & Company, ESG Investing in Global Private Equity, 2021; (bottom statistic) McKinsey, Global Private Markets Review, 2021
A complex landscape
Impact-focused investors are facing a constellation of challenges today. The lack of sophisticated standards around areas such as product labelling, performance, and measurement makes diligence difficult and is partly responsible for the rise in cynicism in how ESG strategies are viewed, particularly alongside headlines on “greenwashing” in the investment industry. Regulatory bodies around the world are working to produce better guidance and product labelling, but without cohesion and clarity, emerging regulation will just add to the uncertainty.
Timing is everything
One of the encouraging takeaways from our 2021 LP Survey is the confidence investors have in private markets being the asset class of choice as they pursue their impact investing goals.
On another positive note, investor interest and demand for new impact investing alternatives is fortuitously colliding with a strong trend of product innovation across private markets, as managers like HarbourVest search for new ways to provide more concentrated exposure to impact-oriented opportunities.
Focused solutions
Anticipating this demand, we launched two sustainability-focused solutions: (i) an infrastructure investment strategy which includes investment themes related to energy transition and social community infrastructure, and (ii) a stewardship strategy which mines our co-investment deal flow to create a concentrated portfolio of impactful investment themes, corresponding to health, education, environmental and sustainability, community, and inclusive finance.
"We’ve seen a strong run-up in LP demand for ESG and impact-focused approaches to private markets. In most cases, this demand is anchored in a belief that investments that take ESG factors into account will perform better over time."
Bryce Klempner Managing Director
Infrastructure and real assets
In 2022, we launched an open-ended infrastructure strategy to meet the rising demand for low-risk infrastructure investments that provide inflation linkage, ongoing yield, and diversification benefits. The strategy invests in long-duration core and core plus infrastructure assets in OECD markets, including regulated utilities, transportation, communications infrastructure and power assets.
As the world moves toward a low-carbon economy, renewable energy and energy transition are two infrastructure sub-sectors fueling a more sustainability-focused opportunity set. This transition will require significant investments in new generation, transmission, and distribution infrastructure, which private markets investors like HarbourVest are well positioned to support.
There is also a significant opportunity to make targeted investments in certain legacy-type fossil fuel assets that are enabling the transition to a cleaner platform, with a clear thesis and path towards delivering on decarbonization goals. Our strategy composition reflects this transition theme.
In 2021, we strengthened our infrastructure-focused research capabilities by becoming an Investor Member of the Global ESG Benchmark for Real Assets (GRESB). Infrastructure and real assets have their own distinct characteristics and ESG considerations and require specialized research to make informed investment decisions. Through GRESB we can access portfolio analysis tools and data to more accurately evaluate the environmental and social impact of participating infrastructure projects. We will also participate in the GRESB fund assessment process for our infrastructure focused strategy, supporting meaningful, relevant disclosure to our investors.
Mobilizing for the energy transition
UN SDG 7, sub-target 7.2: By 2030, increase substantially the share of renewable energy in the global energy mix
Call to action: Total renewable energy consumption increased by a quarter between 2010 and 2019, but the share of renewables in total final energy consumption was only 17.7% in 2019.
Source: The Sustainable Development Goals Report 2022
As the UN’s 2021 Theme Report on Energy Transition stated, an energy revolution is urgently needed to slash emissions, with the energy sector today accounting for 73% of human-caused greenhouse gas emissions. Priority recommendations from the report include rapidly scaling up deployment of available energy transition solutions and the phasing out of coal by OECD countries by 2030.²
Similarly, GFANZ, the Glasgow Financial Alliance for Net Zero, has also recommended four key approaches to supporting a whole-economy net zero transition for financial participants through their 2022 consultation report. These include financing or enabling the development and scaling of climate solutions, and financing or enabling the accelerated phaseout of high-emitting physical assets.³
2 UN Theme Report on Energy Transition, Towards the Achievement of SDG 7 and Net-Zero Emissions, 2021
3 Consultation Report, GFANZ Recommendation and Guidance on Financial Institution Net-Zero Transition Plans, 2022
Two holdings that align with our growth focus and energy transition theme
Impact themes and direct co-investments
In 2022, we expanded our Stewardship strategy to meet the rising demand for targeted yet flexible impact investing solutions. This solution aims to create portfolios of companies from our direct co-investment deal flow that we believe have a positive impact and meet our pre-defined performance criteria.
How it works
The Stewardship strategy is essentially an additional filter on our global direct co-investment deal flow. The large volume of deals we see each year allows us to identify opportunities and build customized sustainability and impact solutions.
The Stewardship strategy’s investment opportunities are subject to the same rigorous due diligence process and return objectives as all HarbourVest direct co-investments. The selection process is supported by the application of the five dimensions of the Impact Management Project (IMP), which serves as a global consensus on impact management and measurement norms.
Applying established frameworks for measuring impact
Applying the five IMP dimensions to the Stewardship filter
The IMP is a global consensus on impact measurement, management, and reporting. It states that to understand impact, we need to understand the five dimensions of performance.
Investments are mapped against the underlying targets of the UN SDGs to track alignment where possible
The UN SDGs are an urgent call for action by all countries to end poverty and other deprivations with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.
Source: The Impact Management Project, The United Nations.
