Invest in Planetary Solutions: Profit & Purpose

The Rise of Sustainable Investing and its Challenges

The growing trend of prioritizing both profit and positive societal impact – often referred to as sustainability, ESG, or climate tech – is undeniably reshaping the investment landscape.

Recent data from Bloomberg indicates that globally managed sustainable investment assets reached $35.3 trillion last year. This signifies that approximately one-third of all globally managed funds are now directed towards ventures aiming to “improve the world.”

Climate Tech Investment Growth

As capital increasingly flows into venture capital, efforts are intensifying to address complex climate-related challenges and limit global warming to 1.5 degrees Celsius. A PwC report reveals that climate tech investment experienced a faster growth rate than overall venture capital investment between 2013 and 2019, demonstrating a perceived urgency among investors.

For the purposes of this discussion, the term “impact investing” will be used broadly, encompassing related concepts like socially responsible investing (SRI) and environmental, social, and governance (ESG). Essentially, impact investing centers around “making the world a better place.”

The Subjectivity of "Impact"

However, a core issue arises within impact investing: the definition of “better” is inherently subjective. What constitutes a positive impact can vary significantly depending on individual perspectives.

Consider, for example, Philip Morris, a company producing 700 billion cigarettes annually, yet actively pursuing ESG goals to attract investment. While the rationale may be questionable, it illustrates the potential for ambiguity in impact assessments.

Hans Taparia eloquently highlighted this point:

“You get what you measure, and in the realm of public equity, measurement can be significantly misleading.” Despite this, retail investors may still be drawn to funds based on effective “ESG factor” marketing.

Genuine Efforts and Measurement Difficulties

It’s important to acknowledge that numerous investment managers are genuinely committed to maximizing their positive impact.

To demonstrate this impact, many adopt standardized measurement frameworks like IRIS. However, accurately measuring impact remains a considerable challenge. These measurements are often complex, subjective, and can be more expensive to obtain than the cost of implementing the solutions they aim to improve.

Furthermore, multiple factors can contribute to a positive outcome, making it difficult to establish a clear cause-and-effect relationship. Consequently, managers often focus on measuring actions and implementations, which can easily lead to mistaking leading indicators for actual change.

The PlayPump Example

The PlayPump, a merry-go-round designed to pump water as children played, serves as a compelling illustration of this issue. Metrics such as the number of installations, children using the pumps, or liters of water pumped did not definitively prove improved access to clean water for the community.

Financial Performance Remains Paramount

It’s also crucial to remember that fund managers and corporate executives are ultimately responsible for delivering financial returns.

Unlike quantifiable financial metrics, impact measurements are often imprecise and lack universally accepted standards. This makes it challenging for investors to compare the social impact of different investments or assess relative performance. Consequently, linking compensation to impact measurements becomes exceedingly difficult.

Real impact typically requires time to materialize and often falls outside the direct control of funds or companies. In the fast-paced financial world, prioritizing immediate financial gains often takes precedence.

The Ideal Environment for Impact Investing

A unique environment exists where impact investing can truly flourish. This is one where the incentives of managers and companies are aligned, the specifics of measurement are less critical, and the investment timeframe is sufficiently long to allow for meaningful change.

That environment is found within the early-stage venture asset class.

Impact as an Opportunity Lens

At Creative Ventures, we view impact as a lens through which to identify opportunities. We recognize that greater impact often signifies a larger problem – and consequently, a potentially larger market opportunity and financial return.

Impact is where the most significant problems reside. Rather than focusing on complex impact metrics, we envision a future where electric vehicles are 20% cheaper and have 40% greater range, cancer is cured, and energy consumption in data centers is halved.

Wouldn't the world be a better place if even one of these companies were to succeed?