Biodiversity

Assessing Impact Potential in Venture Capital

Another Barnes Foundation shot, Philadelphia

Just over 10 years ago, JPMorgan and the Rockefeller Foundation, together with the Global Impact Investing Network (GIIN), published a report claiming that impact investment was an emerging asset class that would reach between $400 billion and $1 trillion in assets under management by 2020. At the time, this prediction seemed like an ambitious forecast. However, in 2020, the market proved its ambitions and the asset class reached roughly $715 billion in assets under management, according to GIIN. Since the emergence of impact investment strategies, private market vehicles have been integral to how the space has been funded (1); a positive case can be made that the private markets are exactly the right place to incorporate sustainable investment ideas. Private markets investors have the opportunity to build long-term thinking into their theses, unlike the public markets which are conditioned by quarterly expectations. In addition, when it comes to startups, it is far better to start a company with proper E, S, and G principles than to try to retrofit a mature company that may have already formed counterintuitive practices.

As firms throughout the private market landscape contend with how they think about and act on sustainable investment opportunities, continuing to study impact areas of interest can provide investors with notable considerations. Depending on one’s thinking, venture capital may be the best space to identify new impact strategies, technologies that positively accelerate these strategies, and the data necessary to become more intelligent regarding impact progress. According to private fund data from PitchBook, perhaps this thinking has been taking form for some time, where the highest percentage of private impact funds closed in the last 15 years can be identified with venture capital strategies.

Exploring this area further (2) reveals that venture capital impact funds have not only gained share in regards to fund count, but also capital raised at a clip of +86% YoY from 2018–2021. While impact fund sizes tend to be smaller than the general population of private market funds, this should not discount the increase in investor attention. Different investor personas are also becoming more involved in impact investing as an asset class, such as Family Offices and U/HNWIs, potentially bringing differentiated insights around non-consensus opportunities to the table.

The best thesis-driven firms often develop their perspective in a very organic fashion. As GPs set out to raise capital, the visions they have in mind are typically backed by various objective truths that may persist within macroeconomic trends, step-function changes in a sector, or new technological breakthroughs. Data always being a key factor in the fundraising process, we can support the identification of focus areas for an investment purpose like Biodiversity with funds deploying against strategies that may align with it. Since 2015, the number (3) of private impact funds with Biodiversity & Climate strategies have grown on average +70% YoY. Leaning on the GP-model fit and time spent developing these investment theses, the availability of data regarding investable opportunities expands. Relationships between factors such as investment scopes, portfolio compositions, and business models underwritten provides a bespoke dataset to study prospective focus areas for Biodiversity from the fund perspective (4a).

The Biomimicry Institute maintains the AskNature database — a growing resource with 1,800+ biological design strategies. This is just one of many organizations providing access to databases, journals, and secondary literature sources to improve our collective understanding of the complex ways we must address biodiversity and climate challenges.

Taking a side step, it should be noted that investable opportunities (funds or companies) that align with Biodiversity as an investment purpose are science- based or technology that interacts with nature. Having close ties to the development of biological innovation, materials chemistry, and nanotechnologies, universities are extremely crucial sources of scientific research. Their rich, actionable data, best practices, and experimental evidence are useful in investment diligence. Additionally, independent organizations like the Biomimicry Institute provide objective research and unique application paths to explore value creation within this scope (4b).

As investors become more familiar with the platforms enabling impact engagement, networking with different nodes of the impact investment space will increase. Through net-new relationships created, the multi-disciplinary dissemination of scientific research and primary data discovery at scale from institutions of this ilk will support the recognition of the economic viability of proposed solutions. Alongside this integrated knowledge-sharing toward impact measurement, layering in accepted impact metrics from frameworks like IRIS+ (5) further provides diligence guardrails and benchmarks within Biodiversity as an investment purpose.

While hard research and conceptual frameworks are useful in outlining direction for Biodiversity in venture capital, a core nuance must be recognized in that biodiversity and ecosystems are extremely unique to one’s locale. Cities may also be quite valuable sources of relevant ecological data and measurement practices as interest in their own ecosystem is paramount. Defining these metrics (6) may involve correlating fund theses and business model efficiencies to the technological and educational strategies used by cities in reducing risks against their ecosystem, including how metrics guide the recovery and integrity of ecological structures. For investors, ecological indicators (7) such as tree canopy cover (acreage equivalent of coverage), wildlife species populations (unique species and population counts), and energy reflected, absorbed, or radiated (air quality and light pollution indices) are illustrative and translatable examples to understand the net-net impact of efficiencies gained by portfolio companies who provide the fabric for these benefits. As companies and investors generate more data to these extents, it will be easier to evaluate risks and opportunities in pricing ecosystem services and their effectiveness as instruments, similar to today’s carbon markets.

An example of convertible, measured ecological indicators is the Lloyd Crossing Sustainable Urban Design Plan in Portland, OR, USA. The energy strategies depicted work together to increase the ecosystem’s use of available solar energy and generate re-investable cost savings for the city, companies, and investors involved.

The Institutional Investors Group on Climate change recently proposed a net-zero investment framework for private equity, and while there are several methodologies like TPI and SBTi, there is no “off the shelf” methodology for investment due diligence. Based on the examples presented here-in, tangible impact metrics cannot just be broad targets for Biodiversity, but must include alignment across ecosystem strategies to communicate their value. If financiers want to support better impact measurement, they must work more closely with the organizations and companies building the technology to measure biodiversity and how it changes with positive, natural collaboration. Ultimately, the more asset classes that can be incorporated into net-zero analysis and strategy, the better chance asset owners and managers have of delivering real-world impact.

ANNOTATIONS & SOURCES

1. Setting the stage. Why do private markets matter within impact investing and to investors seeking to engage with impact investing?
2. Confirming VC is a relevant asset class to explore in this context. Setting the potential scope of research areas for Biodiversity as an investment purpose.
3. While this remains a niche area of private fund investment, we can be confident that established sectors (Healthcare, FinTech, Agriculture) are all indirectly impacted by Biodiversity & Climate. This retains the salience of Biodiversity as an investment purpose worth investing in and the data used to validate investment theses aligned with it.
4. (a/b) Outlining some of the reasoning behind data source identification as it relates to the assessment of funds/companies for Biodiversity as an investment purpose.
5. Providing an example of data source identification as it relates to the assessment of funds/companies for Biodiversity as an investment purpose.
6. Approaching potential decisions of which indicators and metrics may be relevant in the assessment of opportunities within Biodiversity as an investment purpose. I think there may be more data than what I have access to in this context. Additional exploration is necessary to better understand which performance indicators of biodiversity-focused businesses, in particular, would change how an investor thinks about the viability of these solutions.
7. Thinking about benchmark metrics that can be interchangeable with potential, generally accepted impact metrics.

• PitchBook Institutional Research Group, Analyst Note, ESG and the Private Markets
• PitchBook Institutional Research Group, Analyst Note, Impact Funds by Reason and Region
• Global Impact Investing Network, Fundamentals, IRIS+ Thematic Taxonomy
• Paris Aligned Investment Initiative, Net Zero Investment Framework, Consultation on Proposed Components for Private Equity
• Mithun Architects+Designers+Planners/SolArc, Lloyd Crossing Sustainable Urban Design Plan & Catalyst Project
• Stanford Social Innovation Review, The Next 10 Years of Impact Investment