This article was first mentioned as part of the 0100 Conferences in Amsterdam.
Introduction
As investors increasingly focus on the environmental and social impact of their investments, it’s become crucial to develop methods for measuring and tracking climate impact. To delve into this topic, we sat down with Nito Simonsen, CEO and Co-Founder of ClimatePoint, to discuss the role of impact in Venture Capital (VC), the challenges for VCs in measuring and tracking impact, and how ClimatePoint addresses these challenges with its unique methodology. Delving also into the influence of impact tracking on fund investment strategies and the trends in the market related to Environmental, Social and Governance (ESG).
What does impact mean to VCs?
It means connecting sustainability with the CFO. These used to be considered separate divisions, but now it is necessary to see both of these roles as interlinked. We want to drive capital to the most impactful solutions and now this entire investment space is moving from qualifiable to quantifiable metrics to meet evolving regulatory measures and align decision making with the Paris Accord.
It is common knowledge that impact is facilitated by the ability for investors to engage, incentivize and reward companies for making significant improvements on underlying sustainability factors. Business models and financial returns must be aligned with positive, social and environmental impact. ClimatePoint has emerged as an assessment, optimization, and strategy tool to meet these ambitious goals.
What role does climate impact play in the ESG discussion?
Climate impact is playing a significant role in the ESG discussion, particularly with respect to capital allocation. Quantification of impact potential from the due diligence phase increases our ability to invest in the most promising climate solutions that can safeguard our planet. Article 9 requires forecasting of these emission trajectories along with other environmental indicators identified by the Principle Adverse Impacts (PAIs) so that we can align with the Paris Accord. Optimizing company growth with emission reduction pathways can be extremely complex and requires professional modeling to achieve.
How are VCs measuring and tracking impact now and what are the current challenges?
As of today, many fund managers are falling short of forecasting climate and environmental impact during and following the due diligence phase of investment. There are many carbon reporting tools available in the marketplace, but they are not designed to accommodate the necessary Life Cycle Assessment science for early-stage, and often, pre-revenue solutions.
When investors attempt to apply these tools in their investment process, they quickly become overburdened with technological gaps that neither convey Scope 4 impact nor provide sufficient answers to Sustainable Financial Disclosure Regulations (SFDR). These climate metrics are also necessary to comply with many parts of the EU taxonomy so, unfortunately, not having the right systems in place makes succeeding with impact incredibly challenging. Meanwhile, ClimatePoint offers a platform solution to meet these assessment requirements in an effective timeframe and through a highly efficient workflow process. Third-party accredited methodologies, ones that implement Life Cycle Assessment (LCA), are required for effective measuring and tracking of impact.
How is ClimatePoint addressing these challenges? Why should fund managers use your Impact Methodology?
Investors are financially liable to their shareholders to deliver on advertised Article 9 fund-raising claims. Funds are exposed to significant legal risk if they do not deliver on their respective carbon due diligence and mandated reporting metrics. ClimatePoint has all of the required environmental indicators integrated into their Connect platform so that they are seamlessly forecasted and monitored.
Aggregation, and the Article 9 projection requirement, makes this extremely challenging for funds to manage throughout each reporting cycle. Our ClimatePoint Connect platform solves the necessary mathematical complexities so that fund managers can focus on the implications of impact results and complimentary strategies. With ClimatePoint, fund managers are enabled to optimize their time engaging with portfolio holdings and contribute to maximizing value.
Does this certain way of impact tracking/measuring influence fund investment strategies and how?
It does. ClimatePoint enables climate strategies to be critiqued and refined by investment teams before the actual investment is deployed. This lowers the fund manager’s uncertainty risk related to sustainability action plans (SAPs) and reporting expectations.
Our methodology reveals if the climate impact claims of a potential investment are valid. This is the fund manager’s best way to uncover the ventures that have the greatest impact potential, AND, during due diligence. ClimatePoint standardizes this approach so that all technologies can be evaluated and compared with the same metrics and frameworks. This is critical to evaluating which technologies are the best enablers for industries, sectors, and a low-carbon future.
According to SS&C Intralinks 2023 LP Survey, 37% of LPs are likely to divest from a manager if they are not willing to show their updated ESG policy on an annual basis and 50% of LPs intend to increase their ESG due diligence when dealing with GPs. Funds with specified decarbonization targets can be guided through the best investment strategies through the ClimatePoint methodology which is fully aligned with Project Frame (+120 impact ventures). This approach hedges investors’ positioning for securing the highest volume capital flows now and into the future.
Are these data pointing to inevitable trends in the market?
The trends we are encountering would allude to that fact. As LPs also need to meet their ESG targets and <2000 major corporations have set emission targets in line with SBTi. If these marketed targets are not met, LPs may become exposed to legal and non-compliance risks. With the emerging climate regulations, a larger group of Financial Market Participants (FMPs) have to comply with specific frameworks and regulations.
For instance, the EU Taxonomy has six environmental objectives, including climate change mitigation. Each of these includes a ‘Do No Significant Harm’ component which typically requires impact quantification to prove and verify. With global corporations, investors and governments pledging to become aligned with this EU framework, they will have to disclose specific financial and reporting metrics to achieve this compliance. These mandates have direct implications for investments and capital flows.
ClimatePoint has configured these complex interrelationships and underlying regulatory links into our methodology offering so that fund managers can confidently deliver on all these objectives. Having these systems in place is critical to achieving measurable impact and ultimately driving asset allocation to the most responsible fund managers.
Can we expect a shift of LPs towards more strict impact due diligence when allocating capital to fund managers?
The market is already revealing that capital flows are trending more favorably for ESG funds (Article 8 and 9) than that of Article 6 (non-ESG) funds. According to Goldman Sachs October 2022 Equity Research, Equity ESG funds have received nearly 4x the cumulative inflows vs. non-ESG counterparts since 2019.
Corporate and asset manager climate commitments demand new and proactive impact modelling to achieve their emission reduction targets. It is critical to engage with a strategy that invests and allocates capital to early-stage companies that offer solutions that are necessary to transition to a low-carbon future. Engagement with quantification and forecasting is critical to realizing transformative technologies that can meet net zero pledges. ClimatePoint is already delivering on the tools to keep your organization future fit.
Companies that have verified quantified climate impact are likely to attract higher valuations and investor demand. Therefore, having the right tools and services in place will directly affect shareholder value. ClimatePoint generates clear and forward-looking quantified KPIs to maximize the potential of sustainability action plans (SAPs) and align impact scalability with business growth.
Impact Investors who wish to stay ahead of the curve must start prepping now. Book a introduction with ClimatePoint today.
