This year has seen the impact investing market begin to bounce back following a slowdown in 2023.
Impact fundraising activity has been picking up steam across private equity, venture and real assets strategies, but also increasingly in private debt and burgeoning areas such as secondaries. Despite a broader fundraising malaise in private markets, LPs appear steadfast in their allocations to impact, catalysed by growing opportunities in areas such as climate and the energy transition.
Here, we outline three key developments shaping the market as 2025 approaches.
1LPs maintain their taste for impact
Appetite for impact and sustainability is on an upward trajectory across a range of investor types. In the UK, Local Government Pension Scheme funds and investment pools – in which some administering authorities have pooled LGPS assets – have become increasingly active in the impact space.
“Liquid assets have largely been done and pooled now,” Franklin Templeton head of UK distribution Dean Heaney tells affiliate title New Private Markets. “Over the last 12-18 months, there’s been a real focus on the private asset side of pools, with them looking to build out their alternatives portfolios.”
And while sustainability has always been important to LGPS funds, Heaney notes a move beyond the traditional integration of sustainability “towards generating impact within some of those alternative portfolios”.
LGPS funds are not alone in this regard. According to Rede Partners’ Private Markets Sustainability and Impact Report 2024, 61 percent of LPs increased their allocation to impact and sustainability funds over the last 24 months, with a similar proportion intending to increase their allocation over the coming 12 months.
2Climate themes dominate
Climate remains a particularly hot area for impact investment. In the Rede survey, 58 percent of LPs say the climate and decarbonisation thematic has become more important to their investment mandate than it was two years ago, while energy transition and decarbonisation top the list of primary focus areas for their sustainability and impact investment programmes.
This is reflected in the broader impact investing space, where energy is the most popular sector for increased allocations over the next five years, per the State of the Market 2024: Trends, Performance and Allocations report from the Global Impact Investing Network. The report also found that more than nine in 10 respondents address climate change through their impact investments, including reducing or preventing greenhouse gas emissions, and supporting climate change adaptation and resilience.
Indeed, a number of funds with a climate or transition focus across alternative asset classes have held closes this year. Within private equity strategies, there are certainly opportunities to invest behind climate technologies and services that help facilitate decarbonisation, but when it comes to portfolio company decarbonisation, reducing emissions during the standard PE hold period can prove challenging. In such cases, ensuring a company is on the right trajectory – and that decarbonisation efforts are being properly set, managed and measured – is key.
“When we’re thinking about it from a private equity lens, we’re thinking about what the industry is going to require from us on the emissions profile of the business, and do we have conviction that we will be able to support that business and achieve those objectives in our hold period?” says Natalie Adomait, a managing partner at Brookfield. “Can we get [a company] on the path so that even if we exited it, it is so far down the carbon reduction journey, we know that it will be achieved post our exit?”
“AI will revolutionise impact measurement for portfolio managers who adopt it”
Wilson Chan
Permutable AI
3Investors look to AI
Of course, measurement – whether related to emissions targets or broader KPIs – is not always straightforward. Fragmentation across impact frameworks, difficulties in comparing impact results to peers, and verifying impact data received from investees are among the main challenges facing impact investors, according to the GIIN report. It can also be a point of contention between asset owners and fund managers, with almost a third citing difficulty aligning on which impact metrics to measure and manage as a challenge to the asset owner-manager relationship.
One technology that could potentially help address some of the issues at play here is artificial intelligence. GIIN found that just over half of impact investor respondents plan to explore AI applications within their investment processes over the next 12 months, with 24 percent expecting to use it as a tool for impact measurement and management. Developing and effectively applying AI to such use cases is no easy feat, but the technology certainly has its proponents.
“AI will revolutionise impact measurement for portfolio managers who adopt it,” says Wilson Chan, chief executive of fintech firm Permutable AI. He tells Private Equity International that the AI revolution is only just getting started. “The key innovation will be combining massive scale with human-level accuracy. We’ll see AI conducting continuous, real-time impact assessments and developing predictive models to forecast investment impacts.”
While not everyone is convinced about AI’s potential, or ready to explore its use cases – as evidenced by the 47 percent of impact investment respondents to the GIIN survey who have no plans to integrate AI – interest in the technology is growing. Some 31 percent of respondents view AI and machine learning as very important impact investing technologies, up from 17 percent in 2018.
