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Impact investments are investments made with the intention to generate positive, measurable social, and environmental impact alongside a financial return. Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investment should focus exclusively on achieving financial returns. The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns. (Global Impact Investing Network, GIIN)
This research focuses on uncovering some of the megatrends undergoing early stage (including Seed Funding, Series A, Strategic Investment, and some Series B or C) impact investments in both developed markets and emerging markets in 2022.
The difference between “ESG Investment”, “Socially Responsible Investing”, and “Impact Investing”:
ESG looks at the company's environmental, social, and governance practices alongside more traditional financial measures.
Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria.
Impact investing aims to help a business or organization produce a social benefit. (Investopedia, 2022, Link)
Components of impact measurement for impact investing generally include:
Establishing and stating social and environmental objectives to relevant stakeholders
Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
Monitoring and managing the performance of invests against these targets
Reporting on social and environmental performance to relevant stakeholders
The size of the impact investing market currently stands at USD 1.164 trillion in assets under management (AUM) over an estimation done by the Global Impact Investing Network (GIIN) of ~3,349 organizations (as of December 2021). The vast majority of impact AUM is allocated by organizations headquartered in developed markets (92%), while organizations based in emerging markets only accounted for 8% of impact AUM.
Although most impact investments are led by fund managers headquartered in developed markets. The size of the impact investing market is larger if we include more funds in emerging markets.
According to Cruncbase data, there are 5,346 organizations under the “sustainability” industry group, with 3,212 funding rounds summing up to a total of $34.6B funding amount. Among these deals, the top investor types are venture capital, accelerator, a private equity firm, micro VC, and incubator. 105 IPOs involved, and the total amount raised in IPO reach $4B under the “sustainability” industry. (Cruncbase, 2022, Link)
Agricultural Technology, Artificial Meat, Blockchains, Clean Biotech, Energy Storage, EV, Fin-Tech, Renewable, Recycling, and Software As a Service (SaaS), are some of the leading investment themes in impact investment within the private markets. The sample size is 60 of the major deals in 2022 we analyzed, with 144 investors involved.
The survey results from the Asset Management Association of China show that more Chinese PEs have incorporated social responsibility management into the corporate management framework. By the end of 2021, a total of 67 asset managers in China had signed the United Nations Principles for Responsible Investment (PRI), including 38 private equity firms. In terms of equity investment, from pre-investment ESG due diligence to post-investment ESG performance management, institutions increasingly incorporate ESG factors into the fundamental analysis of invested companies.
The Top Ten Megatrends Around the World
No.1: Sustainability needs a value chain solution, Project44, a logistics startup based in Chicago, enables climate-making decisions that will enable companies to reduce their carbon footprint, and has raised $80 million. While EcoVadis, a global provider of business sustainability ratings for value chains, raised $500M in funding…
No.2: Energy solution providers are gaining finance from government funding, e.g., Ascend Elements has raised a Grant round of $480M from the US Department of Energy. And France-based Faurecia (EPA: EO) has raised a total of €213M in funding over 1 Grant round by the European Commission to develop hydrogen tanks.
No.3: Agricultural tech is emerging to become the next big hit, U.S.-based agritech unicorn Inari Agriculture raises $124M for product development from Flagship Pioneering, Canada Pension Plan Investment Board, Ischyros New York, Pictet Private Equity Investors S.A., Hanwha Impact Partners, and other investors. Another agritech company, Truterra has raised a total of $90M in funding over its Venture round from the U.S. Department of Agriculture (USDA). The company is an agritech provider of customized efficiency tools to improve yield and reduce nutrient loss while protecting natural resources.
No.4: Software as a service (SaaS) becomes a go-to solution for many businesses to manage their climate risks, for instance, the German company, Maker site, a cloud-based product data management tool that helps companies manage product sustainability, cost, and compliance has raised $18.2M in funding from a Series A round led by Translink Capital, Hitachi Ventures, Planet A Ventures, Kompas. Norway-based 7Analytics has raised a total of $2.5M in funding over a Seed round led by 3 investors. Construct Venture and Obos VC are the most recent investors. 7Analytics is building a unique data platform for sustainable planning of the future.
No.5: Carbon Capture, Utilisation, and Storage (CCUS) is getting funded. According to McKinsey analysis, CCUS uptake needs to grow 120 times by 2050 for countries to achieve their net-zero commitments. LanzaTech reduces emissions and makes new products for a circular carbon economy and has raised a Corporate Round round of $500M led by Brookfield Renewable Partners and Ischyros New York. Qingchuan Zero Carbon (清洁捕获) Technology Co., Ltd., a CCUS in concrete building materials technology company in China, has raised an undisclosed amount in a strategic round led by Suzhou Oriza Holdings and Fujian Aowang Equity Investment Partnership. The company raised millions in RMB from a seed round earlier this year.
No.6: Alternative materials are getting attractions from investors, companies like Outlander Materials, a clean biotech company are focusing on upcycling food waste streams to new alternative materials such as UnPlastic. Outlander Materials has raised a Pre-Seed round from Techstars Sustainability Paris (Techstars). ifeLabs Design, a materials science company that develops technology designed to reduce energy consumption has raised $6M in a seed round led by Asia Green Fund.
No.7: The market for artificial meat is not losing momentum, Paris-based GOURMEY, which creates sustainable cultivated meat, has raised €48m for its Series A from Air Street Capital and 12 other investors including Beyond Impact, Partech, Point Nine, Keen Venture, Partners, Omnes Capital, Thia Ventures, Eutopia VC, Bpifrance, Heartcore Capital to keep working on lab-grown foie gras. UBS’s latest research (September 2022) forecasts a 16% sales Compound Annual Growth Rate (CAGR) to 2027 (to $14.3bn from ~$6bn in 2021), although this is below their previous call for a 30% CAGR to 2025. UBS’s data shows that improving products' taste profiles is the #1 priority when it comes to driving increased consumer adoption. This in turn, as it scales, will also drive prices down (being the #2 priority).
No.8: A financial technology (fin-tech) solution is reaching the buyers’ end: London-based company, Net Purpose gained €11.56M for its investment platform for sustainable investors led by ETF Partners, Illuminate Financial, MTech Capital, Revent, Louis Family and other investors. Net Purpose is the world's first data provider to make impact measurement effortless for investors: who invest for profit and purpose. Net Purpose has raised a total of $11M in funding over 3 rounds. And Doconomy AB, a Sweden-based fintech company that offers digital banking services. Their vision is of enabling a sustainable lifestyle for everyone. Doconomy wants to inspire change in behavior and reduce unsustainable consumption and carbon emissions. It raised its Series A of $19m on Sep 23, 2021, led by Citi Ventures, Mastercard, CommerzVentures, Ingka Investments, and Älandsbanken.
No.9: Time to solve our “plastics problem” … Umincorp, working on plastic recycling through a unique patented magnetic density separation technique, has raised a total of €5M in funding over a Debt Financing round led by Nationaal Groenfonds and Invest-NL. And early this year, Polycarbin secured a seed round of $2M from VoLo Earth Ventures and Ringbolt Capital. The company is specialized in low-carbon lab products made from plastics recycled directly from the lab, creating a sustainable, Closed-Loop scientific supply chain.
No.10: The fund management processes will involve accounting for financed emissions. Financed emissions are the share of GHG emissions associated with investments and are likely to represent the largest part of a GP’s or LP’s carbon footprint (typically greater than 95%). (iCI Carbon Footprint Working Group, 2022) As International Sustainability Standards Board (ISSB) announced its plans to include Scope 3 greenhouse gas emissions as a part of mandatory disclosure. Investors shall get ahead with their funds’ financed emissions through active engagement with investee companies and seek investment in companies that commit to net zero through compelling plans and a proven ability and track records to execute on them.
There are many more deals to be discovered and these impacts investments are striving to take up the market shares from traditional industries that are not transition-ready. Investors are up for a new “hunt” of premium “impact” opportunities.