For many LPs, allocating to climate funds has become a key pillar of their response to the climate crisis. In addition to taking steps to reduce emissions across existing portfolios, some institutions are allocating to climate funds to contribute to their own organisational net-zero pledges. Others are backing climate funds purely because they see it as a commercially smart investment decision.
Whatever the LP perspective on climate funds, investors and regulators are becoming increasingly demanding in their calls for backing up climate claims with evidence and reporting.
“The time when investment managers could assume that they were delivering impact simply because of an investment thesis has passed,” says Maria Teresa Zappia, deputy CEO at BlueOrchard and head of sustainability and impact at Schroders Capital. “The way impact is managed, measured and reported has in fact become a USP for managers, and they have really strengthened their teams, resources, tools and methodologies. We will see investors drop certain managers on the basis of poor impact reporting.”
Simon Hallett, a partner and head of climate strategy at Cambridge Associates, adds: “You can’t just be thematic and assume you have covered the ground. We see a proliferation of funds these days wanting to label themselves as something to do with climate or energy transition. We have to sift between the asset gathering objectives and the real impact.”
For TPG Rise, putting a climate impact reporting framework in place for its $7.3 billion climate fund was an integral part of the offer to investors. “For TPG, the goal from the get-go has been to be very specific when defining the impact and to bring in outside evidence and tools to assess that impact as rigorously as possible,” says Semiray Kasoolu, impact solutions director at Y Analytics, TPG’s in-house ESG and impact capability.
“Large institutional investors have to be able to go back to stakeholders and demonstrate that a climate fund’s impact claims are credible, and that on the commercial basis the vehicle is in no way concessionary,” Kasoolu adds.
It’s complicated
Measuring climate impact, however, is a complicated business. Managers and LPs have to navigate myriad standards and frameworks; standardisation and benchmarking are difficult, and even seemingly straightforward claims on Scope 1, Scope 2 and Scope 3 emissions can be tricky to decipher.
“If you look at financial metrics, a term like EBITDA is something that everyone understands. There is significant benefit to having a common, well-understood language. The world is not there on climate impact yet,” says Matthew Harwood, chief strategy officer at OGCI Climate Investments.
“You can look at one firm’s claims on greenhouse gases, and they can say they will do a gigaton of carbon emissions reduction by 2050. No one knows if that is annual or cumulative. Is it a 100 percent share or do you equity weight? You can’t tell what the emissions numbers mean straight away.”
Harwood says OGCI Climate, in partnership with another climate fund, Prime Coalition, launched Project FRAME, an initiative focused on bringing standardisation and clarity to impact quantification. The initiative is an “open source, collaborative process” that aims to develop and disseminate best practice standards for impact estimation.
Meanwhile, Kelly Goddard, chief sustainability officer at Brookfield Renewable, says Brookfield has prioritised dovetailing manager reporting with recognised kitemarks that will be familiar to LPs.
“LPs expect our measurement and reporting of impact to be quantifiable and transparent. As such, we believe that it is important to align these processes with recognised impact and climate reporting standards and frameworks. This includes the Greenhouse Gas Protocol, IRIS+ and the Operating Principles for Impact Management,” says Goddard.
Kasoolu and Hallett add that their organisations have found the five principles of the Impact Management Project – which cover who makes the impact, what the impact is, the size of the impact, how the impact adds to what the market would do anyway and the risks to delivering that impact – a useful frame for aligning manager strategy with the questions impact-focused LPs are looking to answer.
Although there are credible benchmarks available to managers, achieving standardisation across the climate space remains challenging, given the broad church of assets and technologies that fall under the climate umbrella.
Michael Viehs, a managing director and global head of sustainable investing at Partners Capital, highlights the huge differences between climate-tech funds backing nascent technologies that are not delivering immediate emission reductions but could have a huge impact in the future, and funds backing installed renewable energy capacity.
“There isn’t a one-size-fits-all approach. Different managers have different focus areas and are trying to solve different problems… there will always be a bespoke element to climate reporting,” Viehs says. “The size of an organisation is a factor – you can’t expect the same detail and reporting from a small manager that would be standard for a large institution, where there can be an entire team looking at this.”
Two themes emerge
Even though the spread of climate assets makes it difficult to harmonise how managers report, two themes are emerging as essential building blocks of any climate impact reporting. The first is independent verification of climate performance.
“We believe independent assurance is an important step and we have the fund’s [the Brookfield Global Transition Fund] greenhouse gas emissions independently assured on an annual basis,” says Goddard. “Aligning with standards and frameworks and conducting external assurance helps provide our LPs with confidence that our impact data is transparent, consistent and comparable.”
The second theme is the adoption of forward-looking metrics rather than simply counting up emissions retrospectively. Harwood says Project FRAME has focused on comparing the climate impact of an investment with a baseline scenario, rather than producing backward-looking reporting on carbon footprint or absolute emissions.
Kasoolu explains that the TPG Rise Climate fund moves beyond looking “exclusively at absolute emissions” and focuses its assessment “on the climate impact a company is delivering for each dollar invested”.
“The question for each investment comes down to understanding the differentiated social and environmental impact that can be attributed to a specific company,” says Kasoolu.
For Hallett, a forward-looking approach is essential for addressing the question of “additionality” – which outlines what is going to happen as a result of an investment that would not have happened regardless.
“A fund that is buying existing installed solar or wind capacity, rolling it up into a bigger unit and selling it off again is offering little additionality. Yes, you own megawatts of renewable power, which is a good thing, but has your capital changed anything? There is no impact there,” Hallett says.
“It may sound a bit woolly, but as a manager you have to be able to articulate what your theory of change is and why you believe it is going to pay off. Otherwise, KPIs can become meaningless, because they reveal nothing about the intentionality and additionality of the impact strategy.”