When affiliate publication Agri Investor spoke to Australian GP Gunn Agri Partners about the firm’s second vehicle in September 2020, there was one detail regarding the fund’s structure that we found particularly intriguing.

Managing partner Bradley Wheaton said the firm would link the fees it is paid to the sustainability performance of the fund’s assets. In other words, if Gunn Agri failed to hit its impact targets, it would receive a financial penalty.

“It will make this offering one of the first for investors in ag to have a firm commitment to achieve an impact on the way in which the farms are developed and operated in the investment mandate,” Wheaton said.

He added that the metrics measured would include carbon sequestration, carbon abatement, levels of biodiversity and input use. However, Wheaton could not give specific details of how performance in these areas would be linked to fees.

In the months since, a growing number of investors have also signalled their intent to link carried interest to sustainability targets and, crucially, have provided further details on how the clause is structured in their funds.

For example, growth investor EV Private Equity – formerly known as Energy Ventures – is in the market seeking $350 million for its sixth fund. The GP told affiliate title New Private Markets in April that it will forfeit 25 percent of its carried interest if it fails to hit its target “impact pledge”, which is a net reduction of 1 million tons of CO2e over a 10-year period.

More recently in September, Trill Impact closed its debut vehicle on €900 million. The firm, which was founded in 2019, will link 10 percent of its carry to impact targets that are specific to each individual portfolio company and will be defined and agreed to at the investment stage.

Raising the ante even further last month was impact investor Swen Capital Partners with its Blue Ocean fund, which links 50 percent of its carried interest to impact goals. The fund will invest across the three verticals of overfishing, ocean pollution and climate change, which will bring it into the aquaculture space.

The French firm has some track record with impact-linked fees, with its 2019 Impact Fund for Transition – a renewable gas and clean hydrogen vehicle – linking 30 percent of its carry to impact goals.

All three firms – EV Private equity, Trill Impact and Swen Capital Partners – have confirmed that the fulfilment of impact and sustainability targets will be scrutinised by a third party. This should go some way to alleviating any concerns about GPs marking their own impact assessment homework.

One area that remains slightly grey, however, is the nature of the specific impact and sustainability targets themselves. Some managers have understandably told us they won’t be able to share the finer details until their funds begin deploying capital and they have case studies they can present.

One of the big questions here, of course, is whether the targets will be suitably challenging for the GPs and they do not simply constitute a very low hurdle that will easily be cleared.

What is encouraging, however, is that Swen intends to link 100 percent of its carry with its next generation of funds, managing director Jérôme Delmas told Agri Investor.

Given that the impact and ESG investment themes have drawn more and more LPs to private markets in the last 12-24 months, it raises the question of whether more core GPs will explore this fee structure to signal their commitment to impact and differentiate themselves from competitors.

As things stand, there are few other initiatives out there that a manager can present to demonstrate how sustainability is woven into their operations.