Investing for Impact: A Leadership Framework for Private Equity Investors

Key Points

• Private equity (PE) is leading the way in driving change and growth in the impact investing market.
• Impact investors can use a variety of innovative methods to develop impact value creation levers.
• Only a minority of investors monitor the results of their contribution, missing the opportunity to fully capture the true impact of their investments.

In today’s landscape, businesses are increasingly recognizing the connections between social justice, climate impacts, and financial returns, which has driven a shift towards impact investing. 

This shift is not just a trend but a significant movement reshaping the industry. The impact investing market reached US$495.82 billion in 2023, up from US$420.91 billion in 2022, reflecting a 17.8 percent compound annual growth rate. The Global Impact Investing Network (GIIN) reported that the market size amounted to US$1.164 trillion in assets under management in 2022. Private equity is at the forefront of this growth, with nearly half of all capital allocated to impact investments coming from private equity and private debt. Major players like KKR and TPG are making substantial commitments, with KKR raising nearly US$2 billion for its second impact fund and TPG closing its Rise Climate Fund at US$7.3 billion.

PE investors can provide critical capital, expertise and exert management influence across the sectors they invest in, initiating steps to drive positive impact. In addition, the holding period of investments, which is an average of about five years for PE firms, is crucial for creating significant value. During this time, asset managers can utilize their expertise to amplify environmental and social impacts. Effective impact leadership within private equity is characterized by proactive engagement, strategic vision, and the ability to drive substantial value through environmental and social initiatives.

Some of the leadership practices in impact investing are: 

• Attributing and Contributing to Sustainable Development Goals (SDG) outcomes: Ensuring interventions contributing to the SDGs and attributing positive outcomes to their specific actions during the holding period provide building blocks toward impact accountability.
• Prioritizing Material Sustainability Issues: Integrating environmental, social, and governance into investment strategies, not only mitigates risks but also identifies opportunities for positive impact. 
• Implementing Impact Measurement Frameworks: Developing impact measurement frameworks with clear impact goals, procedures for regularly tracking progress, and adjusting as needed to achieve desired outcomes. 
• Ensuring Effective Governance: Setting the scene for long-term success by improving board structures and diversity, increasing accountability, and ensuring strategic oversight, which are key for long-term success. 
• Embedding Operational Improvements: Implementing efficiency measures, process optimizations, and leveraging technology to enhance a twin financial and impact performance—enhancing efficiency and reducing costs. 

Impact investors can use a variety of innovative methods to develop impact value creation levers.

Building on these leadership practices, PE investors employ a variety of methods and innovations to drive impact. Investor contributions could be both financial and non-financial, encompassing a range of strategies to create value. According to a report by Tideline Impact Capital Managers, impact value creation levers include:

• Impact Positioning: Strengthening market presence by positioning the brand as impact focused (e.g., by redefining the organization’s vision). 
• Workforce Initiatives: Engaging employees to improve job culture and workforce (e.g., through employee engagement surveys). 
• Impact Incentives: Aligning management incentives with impact goals (e.g., through compensation structures that are linked to impact performance). 
• Impact Risk Management: Managing impact risks to avoid unintended consequences (e.g., by assessing physical and transition climate risk impact on the business). 

Innovative approaches to investor contributions have emerged, particularly in areas like climate risks, technology, and geographic expansion.

Notable Examples of Impact Value Creation Levers 

• Market Building: LeapFrog supported Redcliffe Labs in expanding its healthcare diagnostics services in India through strategic acquisition, resulting in substantial revenue growth and a broader impact reach.
• Product/Service Development: Rethink Capital Partners helped AllHere, an EdTech business, enhance its core product with an AI chatbot during the pandemic. This pivot allowed the business to maintain demand for its services and significantly increase its reach and revenue.
• Impact Risk Management: Nuveen assisted Annapuma, a microfinance business, in integrating physical climate risk data into its operations developing an alert system for customers during climate disasters, and reducing loan default risks.

Only a minority of investors monitor the results of their contribution, missing the opportunity to fully capture the true impact of their investment.

The initiatives below help investors document and validate their contributions, ensuring they are meaningful and impactful. 

Innovative Tools for Tracking Impact

• Impact Frontiers' Investor Contribution 2.0: This tool helps investors better track and monitor their contributions with metric taxonomies and engagement tracking templates. British International Investment (BIL) participated in a pilot project for this initiative, enhancing its ability to track and report on impact contributions.
• MedAccess' Bespoke Counterfactual Framework: MedAccess developed a unique framework to assess and validate expected investor contributions to impact, particularly in the health sector. This framework helps determine where financial contributions will have the greatest impact.

There is the constant challenge of measuring these outcomes, with the need to move from simply measuring outputs to meaningful measurement indicators as to the depth of impact experienced by end-beneficiaries. Looking forward, massive opportunities exist for impact managers to innovate in this area, moving away from easy-to-measure indicators, to building meaningful indicators from the ground up. 

BSR supports its private equity members in adopting effective leadership, and taking innovative approaches backed by rigorous tracking to drive progress toward a just and sustainable world.

For more information or support, please contact us.

This article was originally published at the BSR website "Sustainability Insights" and is written by Diane M. LuTran, Kachi Nwanna, and Bridgett Fisher at BSR.