At the end of 2020, Brookfield Asset Management launched a Global Transition Fund. The firm is targeting $12.5 billion for the vehicle, which it has heralded as the largest fund ever focused on the transition to a net-zero economy. Brookfield has described the initiative as its inaugural impact fund, despite the fact that it already boasts a $59 billion renewables business.

Brookfield is far from alone. While already describing itself as a greenfield renewables specialist, Copenhagen Infrastructure Partners reached an €800 million first close on its debut energy transition fund in June, with a target of €2.25 billion. The firm says the fund will enable investors to participate in the decarbonisation of ‘hard-to-abate’ industries such as shipping, steel production and agriculture.

There is no doubt that others will be looking to get in on the act. In a recent interview with Infrastructure Investor, Cube Infrastructure Managers investment director and ESG coordinator Aurelien Roelens said the firm was considering launching a dedicated greenfield fund targeting both impact and financial returns to exist alongside its buy-and-grow brownfield platforms. However, Cube and Brookfield both declined to be interviewed for this story, as did numerous other investors and managers we contacted for this story.

“We have definitely noticed a proliferation of infrastructure funds exclusively focused on the energy transition or impact,” says Lisa Bacon, principal at Meketa Investment Group. “Every time I turn around, another one seems to appear.”

Blurred boundaries

Of course, the boundary between infrastructure and impact has always been blurred. Infrastructure has an inevitable impact on the communities it serves and, in a world where managers are held to increasingly high standards on ESG, one would hope that the impact was largely positive. Indeed, infrastructure is explicitly referenced in three of the 17 UN Sustainable Development Goals and underpins many of the others.

“We have… noticed a proliferation of infrastructure funds exclusively focused on the energy transition or impact. Every time I turn around, another one seems to appear”

Lisa Bacon
Meketa Investment Group

Renewables and other forms of energy transition assets have come to mark the intersection of two industries that have evolved dramatically over recent years. Impact investment started life with a focus on micro finance and social enterprise but has inevitably pivoted towards the greatest imperative of our time – mitigating climate change. But it was the infrastructure investment industry that, with the support of tax credits and government subsidies, injected billions of dollars into renewable generation, making it into one of the most inherently impactful industries of our time and creating an indisputably positive impact through the displacement of fossil fuels. Does that mean these firms have always secretly been impact investors without even knowing it?

The answer, it seems, is no. “When it comes to thinking about where infrastructure ends and impact begins, I lean back on the definition we use for impact investment,” says Amit Bouri, chief executive and co-founder of the Global Impact Investment Network. “We define impact as investment made with the stated intention of achieving positive, social or environmental impact, alongside a financial return. That impact also needs to be measured and communicated.”

As the bar continues to rise on ESG, particularly in an infrastructure context, robust measurement and reporting on non-financial metrics is becoming the norm. “Measurement and transparency around non-financial aspects of an investment are obviously a hallmark of good ESG today,” says Justin Ourso, senior managing director for Nuveen Real Assets, whose role spans both infrastructure and impact. “What separates ESG from impact is intentionality.

“Historically, many, if not all, investors in renewables have focused on the investment opportunity first, even while they understood and communicated the carbon reduction impact their investments were having.”

“What separates ESG from impact is intentionality”

Justin Ourso
Nuveen Real Assets

Bouri agrees: “In many instances, a positive impact will be coincidental with infrastructure investment. But that’s not what we are talking about. With impact, we are talking about upfront intention, combined with an ongoing commitment to understanding and measuring the impact performance of those investments.”

North Sky Capital, for example, is an infrastructure investor with a longstanding impact strategy, dating back to 2005. Principal at the firm, Andrew Harris, says that while ESG and impact do go hand in hand, ESG is more about risk management. “It is an input into investment and portfolio management decision making, alongside financial and operational considerations,” he explains. “Impact, on the other hand, is about outcomes. It is about intentionally targeting and then measuring the non-financial benefits that a project produces.”

North Sky managing director Adam Bernstein points to the firm’s investment in Project Golden Bear in California. The scheme takes wastewater methane that was previously flared as well as organic food waste that previously went to landfill and converts them into renewable gas, which is displacing fossil gas. “In addition, the project is creating local jobs in partnership with the local wastewater authority”, Bernstein says. “That is an example of creating direct, measurable impact with an infrastructure project.”

“Investing sustainably or with impact can mean different things to different investors and managers,” says Ben Way, group head of Macquarie Asset Management. “As such, it is really important that investors understand the mandate and objectives of a particular strategy rather than a generic label. This is particularly true, given the very broad usage of these terms within the market today.”

Substance or spiel?

So, does this spate of new impact and energy transition fund launches really represent a strategic shift for these firms, or has impact become a generic and overused label, as Way suggests?

“In many instances, a positive impact will be coincidental with infrastructure investment. But that’s not what we are talking about”

Amit Bouri

There is no doubt that impact and energy transition branding are potent marketing tools in the current environment, as institutional investors are increasingly making their own net-zero carbon commitments.

“We are in the very early innings of a fundamental shift on how global investors allocate capital,” says Paul Buckley, managing partner at First Avenue Capital Placement. “Historically, capital has been allocated solely on the basis of a prospective absolute and risk-adjusted financial return. Going forward, capital will require a good prospective financial return but also a measurable environmental and/or social return.”

“Investors increasingly want to ensure their investments are helping to foster positive societal and environmental change in addition to financial returns,” says Way. “So it is not surprising to see managers responding to this thematic by developing solutions aligned with this objective.”

“We are hearing loud and clear that investors want to invest behind a more sustainable world,” adds Bouri. “If you are a pension fund, it is essential that you sustain returns so that you can pay back pensioners over the long term, which means thinking about a shift towards a more inclusive and sustainable world is unavoidable. That leads to a lot of demand signals for fund managers and intermediaries, which are responding by developing strategies to serve those asset owners.”

Institutional investors are also keen to signal positive impact to their own stakeholders.

When OTPP announced its commitment to Brookfield’s Global Transition Fund, thereby becoming one of the vehicle’s founding LPs, chief investment officer Ziad Hindo explicitly described it as a way of investing capital that would benefit the environment and society while earning attractive risk-adjusted returns to pay pensions.

Kasper Ahrndt Lorenzen, group chief investment officer at PFA Pension, said when the organisation made its commitment to CIP’s energy transition fund, it was part of the LP’s ongoing efforts to decarbonise its portfolio and participate in the green transition of society.

“It is really important that investors understand the mandate and objectives of a particular strategy rather than a generic label”

Ben Way
Macquarie Asset Management

Evolutions in the regulatory environment are fuelling the trend. The EU Taxonomy and the Sustainable Finance Disclosure Regulation in particular are forcing managers to evaluate their investment strategy to ensure they remain relevant and compelling for investors. At the same time, the pandemic has tipped the scales in favour of large and longstanding platforms, motivating them to create new products to meet existing investor demand. And impact has been a natural first port of call.

That makes impact a powerful term, but one that is potentially exploitable. “There is no doubt that some of this is about rebranding,” says Bacon. “Managers are finding new ways of presenting existing strategies. I think the new fund launches we are seeing are being driven by a combination of investor demand and a recognition of where the money is needed. Firms are then creating offerings and packaging them up in a way that appeals to investors.”

“In addition to carbon reduction, an impact strategy will seek to make investments in the local community or make intentional and impactful changes to the supply chain, equipment or material being used,” says Ourso. “It will focus on job creation and health and safety and enhancing local biodiversity. These are all things an investor can proactively look at, and it goes back to the issue of intentionality. Without that intentionality you risk providing the same product with a different label.”

Impact investor perspective

Traditional impact investors are happy with the label being used widely. All they ask is that it also be used accurately.

“Some people may argue investing in infrastructure is an impact investment because building infrastructure is good for society,” says Abhilash Mudaliar, chief portfolio officer at the Paul Ramsay Foundation. “Or [that] any investment in an emerging market is by definition an impact investment because it creates jobs in an economy where there are a lot of people living below the poverty line. That’s where the characteristics of intentionality and measurement become so important for delineating something that is actually an impact investment versus something that may have an impact by chance.”

CDC Group’s deputy chief investment officer and head of asset allocation and capital strategy Yasemin Lamy agrees. She says that in 2010, as part of a collaborative effort by her then employer JPMorgan, the Rockefeller Foundation and GIIN to define impact investment, the word ‘intent’ was “the key item of deliberation”.

“We asked ourselves: ‘Would an investment have to be designed to deliver impact from the investor’s perspective?’ After four months of deliberation, we published this definition: ‘Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’. And 11 years later, I feel this was a critical decision that spurred the growth of the industry with integrity to the mission.

“There are baseline expectations about what a fund has to do to qualify as an impact investor. Beyond intentionality, impact investors need to use evidence and data where available to drive intelligent investment design and then measure impact performance. And finally, impact investors with credible practices use shared industry standards and indicators for describing their impact strategies, goals and performance.”

Operational impact

Lamy points out that firms looking to become impact investors should also ensure they are having a positive impact at an operational level: “Most importantly, a fund manager pursuing impact should employ high-quality practices in how they work – from managing their own teams towards quality employment with diversity and inclusion to managing environmental, social, impact and governance risks in their portfolio. The best impact investors consider the value chain start to finish.”

As long as the firms assuming the mantle of impact investor can demonstrate genuine intentionality and high-quality measurement, there may be a lot to gain from having more fund managers in the impact investment ring.

Mudaliar, who before joining the Paul Ramsay Foundation was a research director at GIIN, says one of the advantages of having more firms moving into the space is a greater ability to meet the growing demand from retail and institutional investors for impact investing products. This also has the potential to bring greater rigour into how impact investing is conducted, as well as encouraging a higher level of innovation.

“More fund managers setting up impact products can support innovation in product design and expansion of product availability across the risk-return spectrum,” Mudaliar says. “The consideration of the social and environmental impact of one’s investments should really just become part of normal investment practice, so these developments are a step in that direction.”

‘Impact washing’ – whereby investors adopt the impact label without applying strong fidelity to impact in practice – is an obvious risk as more firms seek to take advantage of the growing demand for impact investment products.

However, Mudaliar maintains that, on balance, if those adopting the label show a high fidelity to intentionality and measurement, an influx of impact investors can only be a good thing for the market.

“There is an important onus on investors to ask probing questions and conduct diligence on the impact strategies of a fund manager,” he says. “At the same time, we recognise that there are many ways of being an impact investor – or, put another way, of manifesting intentionality and measurement in a fund strategy.”

From innate to intentional

Infrastructure managers are ideally positioned to develop strategies that take them from innate to intentional impact. In many cases, they have the underlying expertise and resources to make this transition, albeit with supplementation. They are also providing an interesting impact alternative from a risk/return perspective.

Impact investment typically runs more along private equity lines, with a shorter hold, additional levels of risk and higher levels of return. Infrastructure managers, however, are providing opportunities for investors to obtain the same kinds of long-term stable returns, inflation-adjusted protections and diversification that they offer in their flagship vehicles, but in the grey area that exists between infrastructure and impact, all within a franchise that the investor already knows and trusts.

“The integral nature of infrastructure to communities, the economy and our environment means enhancing their sustainability can have an outsized impact on helping to fix the root causes of issues like social and economic inequality, resource scarcity, and climate change,” says Macquarie’s Way. “We believe making a positive impact should be the objective of any investment.

“We are custodians of businesses which touch every aspect of people’s daily lives. We therefore have both a responsibility and an opportunity to ensure that we are actively driving positive change for everyone through our investments.”

Bittersweet growth of the impact scene

For some veterans of the impact investing space, the arrival of giant asset managers stirs mixed emotions. Yet, as Toby Mitchenall argues, the pioneers should not feel put out by the new arrivals

“It can be a little frustrating and seemingly a little unfair,” says one veteran impact investment manager, who asks not to be named, about the influx of asset management giants into the space. “They did not spend years creating this industry and evangelising for impact investing…but business is not fair.”

Michele Giddens, co-founder and co-CEO of Bridges Fund Management, told affiliate title New Private Markets in July that when the multi-strategy firm was founded in 2002, it had two objectives: to make investments that combine attractive returns with positive impact, and “to share what we learned along the way, build the field and promote the idea that incorporating impact in your business and investment decisions was the way of the future.” Bridges has been part of the impact vanguard and took a leading role in forming the Impact Management Project, an initiative well known in the field for providing guidance on how to measure impact. “As a firm that has tried to play its part in getting to this point, we have to first celebrate the fact that there are a lot of other players now,” Giddens said.

“We have known for a long time that the big shops would eventually catch up,” says Scott Barrington, chief executive at North Sky Capital, a firm that launched an impact fund of funds in 2005. “This is why we spent so much time in those early years building relationships with all the key players and honing our deal-sourcing and impact-reporting capabilities.”

For Barrington, the arrival of the mainstream asset managers is additive. For one thing, it introduces a whole raft of large pensions – which need to write big tickets and therefore could not commit to smaller impact players – to the strategy. “We are at a bridging moment where these pension plans will start with the big shops and then begin discovering more intentional, yet smaller, funds to invest in, either through their now bigger fund sizes or separately managed accounts that create customised investment themes like the ones we are beginning to do.” It also brings new buyers into the market.

Jane Bieneman is a private funds and impact industry veteran and a senior adviser at consultancy Tideline. For her, the arrival of mainstream managers has helped the wider investment community break the mental connection between positive impact and below-market financial returns.

“I think that might be a myth that is going away, in part because of the mainstream players,” she says. “Every time one of the big firms goes on the road and talks about their strategy, it communicates more and more how almost all of the impact investing market – over 95 percent, based on GIIN survey data – is targeting market rate or better returns. But there is still education needed on that.”

Bieneman says that any scepticism about mega managers entering impact has subsided based on how these firms have conducted their business: “Overall execution has been good. Reputations are at risk and they are putting the right resources behind these strategies. Overall, while there are still some investor concerns, the mainstream firms are getting more accepted in the market.”