Fund Solutions

Private Markets Seeking, but not Measuring Impact

Venture capital firms struggling to define and measure impact, but integrating sustainable investment principles.  

Despite rising private markets interest in impact investing solutions, adoption of standardised impact measurement frameworks remains low, according to specialist data and research provider PitchBook. 

Its new sustainable investment report, which surveyed more than 500 limited partners (LPs), general partners (GPs) and service providers globally, noted that 65% of respondents managing investment products are now offering impact investment strategies – an increase from 57% in 2021.  

Sixty-one percent of allocator respondents and their advisers said that they have allocated to or recommended private market impact investment strategies, also an increase from 57% over the same period. 

Further, 52% percent of surveyed LPs, including institutional investors, said that it is either ‘extremely important’ or ‘very important’ that GPs and other asset managers measure the social or environmental impact of portfolio companies prior to committing to or recommending a fund. 

However, just 16% of all respondents said that they use a standard external impact measurement framework, whereas 27% use a custom framework generated in-house. The remainder either don’t do any work related to impact investing (25%) or currently choose not to measure impact (37%).  

Pitchbook said its prior research had revealed two distinct ‘camps’ in the private markets sector, regarding impact measurement. “One feels measuring outcomes is the only valid approach, while others feel that being in the right areas where Impact is happening is good enough,” it explained. 

The findings reflect a widespread issue for the impact investment market, according to a previous report by the International Finance Corporation (IFC), which noted that only a quarter (US$636 billion) of impact investments in 2020 had a clear impact management system in place. 

There are a number of initiatives being introduced to help investors measure impact outcomes.  

The Impact Management Platform, established in November, aims to provide resources to investors across public and private markets to help them implement core impact management actions, including sustainability-related disclosures and business strategies.  

The Global Impact Investing Network (GIIN) recently launched a corporate investing initiative to support companies looking to develop impact investing strategies, which would in turn give investors increased access to the information they need to determine the real-world impact of their investments.  

PitchBook noted that the most popular sustainable themes targeted by survey respondents with impact investing strategies were energy (46%) and climate (44%). Other environmental themes, such as agriculture and oceans and coastal zones, were also commonly targeted. 

Early-stage impact 

Venture capital (VC) firms are struggling to measure the outcomes of their environmental and social-focused impact investments, PitchBook said. 

Forty-two percent of GPs from VC firms responding to its sustainable investment survey said it is unclear how to define and then measure impact outcomes, compared to 29% of other GP respondents, it noted.  

“In conversations with VCs outside the survey, the sentiment has been that the implementation of sustainable investment principles in a VC portfolio brings unique challenges, as the portfolio companies are sometimes just a couple of people in a garage with no product that can have a measurable impact yet,” the report said. 

Until recently, VC firms have been lagging behind other private market investors in their overall prioritisation of implementing strong ESG-related values in the start-up companies they invest in, a report by the UN-convened Principles for Responsible Investment (PRI) has also said. 

To improve ESG performance and reduce risks among its VC signatories, the PRI report outlined a plan to support future progress, including highlighting existing guidance and initiatives. 

However, the Pitchbook survey found that VC firms are now keeping pace with other private markets sectors. A total of 78% of VC respondents had either partially or fully integrated sustainable investment principles in their portfolios, compared with 72% of the other GP respondents. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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