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Investors will have to take a novel approach amid the climate crisis

LPs are being asked to 'let go of asset buckets' in a bid to make a meaningful impact on carbon emissions.

“Don’t box us into a private equity category and force us to set a target IRR of 30 percent. That will drive our team to asset-light business models,” said Clara Barby, senior partner at Just Climate.

Just Climate is seeking investment from pension funds, insurance companies and banks – institutions with fiduciary obligations to maximize returns. Launched by sustainability-focused Generation Investment Management, the business is raising several multi-strategy, sector-focused funds.

In her keynote address at PEI’s Impact Investor Global Summit in London this week, Barby explained Just Climate’s “climate-led” approach: “These types of solutions are too asset-heavy for venture and private equity [buckets] but they’re too nascent for infrastructure… We want to be able to invest in company equity and project equity. They have different levels of risk and different returns profiles… We need that flexibility within the [fund].” Barby called on investors “not to get too caught up in whether the target IRRs are high enough for private equity or mature enough for infrastructure. Let go of the asset allocation buckets that have become so rigid.”

Multi-strategy funds are becoming more common in impact investing. BlackRock’s $1 billion-target impact fund will invest in private equity, private credit, infrastructure, real estate and “other niche asset classes”, affiliate title New Private Markets reported last week. M&G’s £5 billion ($6.25 billion; €5.9 billion) Catalyst fund has a mandate to invest in private equity, private credit, infrastructure, real estate and financial assets. An impact fund of funds NPM met at the summit is targeting $250 million to invest in private debt and equity impact funds.

Flexible capital is nothing new for development finance institutions, family offices, foundations and philanthropic entities – the early investors in the impact scene. But the scene has grown and evolved: mainstream GPs have established distinct strategies for social and environmental impact. These funds are usually structured as typical private equity, infrastructure, debt or real estate funds targeting market-rate returns. They typically raise capital from the corresponding asset class buckets of large institutional investors.

But if the reception to Barby’s keynote is anything to go by, some investors are indeed interested in blurring their asset class boundaries for climate impact. Among several investors queuing up to speak to Barby after her keynote was someone from a large US insurance company. The individual said strategy-agnostic products such as those Barby discussed would be “ideal” for their company’s 1 percent impact allocation. An investor for a multifamily office told NPM that, with a private equity background, he was struggling to evaluate impact funds from different asset classes and thought a flexible fund might reduce his fund-sourcing work.

Not all investors will be so open. Said Barby of pension funds: “It’s a harder conversation. Asset owners will have a private equity team and an infrastructure team, and they don’t talk to each other as much as you’d think. We engage at the CIO level, where there’s often a remit to look across asset classes.”

Many of the world’s largest institutional investors have become used to the idea that mission-oriented investment strategies can come in familiar-looking private fund packages. This is no bad thing. But for a mission as daunting as combating the climate crisis, they may need to embrace the unfamiliar too.

– Snehal Shah is a reporter at affiliate title New Private Markets where this piece first appeared.