Climate change: The true possibilities of impact business

Matt Meyer, Chief Executive, Taylor Vinters, uncovers the true possibilities of impact business in light of climate change solutions

Prime Minister, Rishi Sunak, has declared that creating climate change solutions will successfully grow businesses and generate jobs and wealth. And he is right. In the last four years, new impact business start-ups have employed more than 35,000 people, and are now worth more than £50 billion, according to the latest data from Dealroom. This includes 12 start-up Unicorns – the qualification being a valuation of $1 billion or more.

The UK’s universities, not normally considered a hotbed of entrepreneurial activity, have founded impact ventures valued at more than £18 billion, say government figures. On its own, Imperial College’s clean energy company Ceres, is valued at more than £2 billion.

A look at impact investment

Moreover, impact businesses are statistically more likely to succeed than the average start-up business. Why? Because they produce returns from solving significant long-term problems that others cannot.

If you consider impact investment at the moment and the potential to develop over the next decade, you can visualise the wholesale tackling of the planet’s major problems through a new wave of innovators and entrepreneurs that, in turn, provide rewarding investor returns.

Impact business is very much in the minority but has the credible potential to yield extraordinary dividends by delivering dynamic large-scale economic growth by creating an activist economy based on innovation and providing urgently needed solutions to the planet’s major environmental and social challenges. Commercial opportunities in areas such as generating renewable energy are being spearheaded by impact ventures. To unlock this dynamic growth, investment market innovation is required.

Traditional corporate investment is based on familiar modelling that does not apply to impact investing, which is predicated on a wider and less precise landscape. One that is centred on the entrepreneurial, not institutional. It is grounded in problem-solving and embraces a wider understanding of sustainable value creation that provides significant strategic worth.

The fact that giant American private equity investors, such as Apollo, KKR, Bain and TPG, have moved into the impact ecosystem is evidence of impact finance becoming part of the mainstream of investment. And the speed of travel in this direction is undoubtedly increasing, and with it, the creation of new impact ventures will become economic drivers. However, for this to happen to scale, several factors must be addressed.

The key point is that it needs to be clearly understood that impact business investment is separate from ESG investment. ESG has an important role to play. But it is about measuring, reporting, the reduction of risk and reputation management of conventional businesses.

On the other hand, impact business is focused on transparently authentic, intentional commitment to change. It takes the front foot in directly making positive change happen.

‘Finance First, Impact First’

Within the investor community, there is increasing awareness and appreciation that intentionality of impact is a fundamental indicator of value and that value is linked to being able to solve the world’s major climate and social problems. This has been termed the description ‘Finance First, Impact First’, or Lockstep model in which investors view finance and impact as integral during decision making.

Despite this, the science of impact measurement still requires consolidation to establish frameworks that make it easier to identify returns. Once established, they will enable investors to more easily understand business models, create better understanding between investors and business founders, improve collaborative common cause, and speed the understanding of the best practice. The greater the knowledge sharing, the quicker the development and influence impact business will make. In addition, reputational risk and opportunity are more important in making investment decisions, leading to faster capital flow.

To live up to its true potential, impact investment requires more mature practice. It has to be more measured. This involves further development of networks and dedication to sharing information.

Market innovation and the economy

The market innovation required is happening. How quickly it takes to complete will directly impact how fast the world’s climate and social problems will be addressed. It will also dictate the timing of the rejuvenation of the economy through a permanent wave of new ground-breaking ventures that, in turn, establish a new culture of enterprise that pushes economic growth.

One positive that will speed progress is the advantage impact businesses have over traditional companies. Research by McKinsey found that the better the environmental and social programme, the more the best talent is attracted. In addition, a survey of 35,000 employees by Randstad found nearly half of Millennials and Gen Zs won’t accept a job unless a company matches their social and environmental values. There is no shortage of other surveys reporting similar conclusions.

The traditional business view of the environment is that action on it involves additional processes and expenses. In the wider community, social as well as climate problems are perceived as a never-ending burden to be paid for on an escalating scale. While the challenges are serious and real, the positive opportunities climate and social concerns present for generating jobs, wealth creation and long-term economic security are hard to over-emphasise.

ECB: Climate change and the financial sector

According to the European Central Bank (ECB), climate change risks the economy and the financial sector. By assessing how climate change and the road towards a carbon-neutral society impact the economy, ECB can account for their influence on their work to help keep banks safe and prices stable. (1)

A ECB/ESRB report in July 2022 found that climate risk shocks may spread throughout the financial system, especially concerning a disorderly green transition. The report discovers that interdependent natural hazards like heat stress, wildfires, and water stress can amplify physical climate risk. Financial market losses from abruptly repricing climate risks could impact insurers and investment funds and trigger credit losses for banks and corporate defaults.

The report gives additional evidence on the systemic nature of climate risks and is a foundation for “a macroprudential policy response”. The report considers the potential for macroprudential policies as part of a broader policy response to address the financial impact of climate change. It argues the case for adapting existing instruments, especially concentration thresholds or systemic risk buffers. Finally, the report is part of the ECB-wide climate agenda that details their ongoing climate-related work, including the continuous monitoring of climate risk in the financial system. (2)

References

1. https://www.ecb.europa.eu/ecb/climate/html/index.en.html
2. https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220726~491ecd89cb.en.html