Invest in Earth’s biggest problems to save the planet and turn a profit

Whether you call it sustainability, ESG or climate tech, there is no doubt that doing good while making money has taken the world by storm.

According to Bloomberg, global sustainable investment assets grew to $35.3 trillion just last year. That pencils out to about $1 of every $3 managed globally seeking to profit out of “making the world a better place.”

As these dollars flow into venture capital, the world seeks to solve some of the hardest climate-related problems to keep the globe within 1.5 degrees Celsius of warming. Investors seem to sense the urgency: Climate tech investment grew at a faster rate than overall VC between 2013 and 2019, according to a PwC report.

To clarify, the term “impact investing” is being used here loosely and synonymously with other terms, such as socially responsible investing (SRI) and environmental, social and governance (ESG). In essence, impact is “making the world a better place.”

But therein lies the problem with impact investing: If better is in the eye of the beholder (and it is), then what exactly is better?

After all, Philip Morris makes 700 billion cigarettes a year, but it’s striving for ESG goals to lure investors. The logic of how escapes me, but you get the point.

Hans Taparia explained this beautifully:

Contrary to what many investors think, most ratings don’t have anything to do with actual corporate responsibility as it relates to ESG factors. Instead, what they measure is the degree to which a company’s economic value is at risk due to ESG factors. For example, a company could be a significant source of emissions but still get a decent ESG score, if the ratings firm sees the pollutive behavior as being managed well or as non-threatening to the company’s financial value.

You get what you measure, and in the world of public equity, measurement can be grossly misleading. Still, retail investors will buy into the fund because of successful “ESG factor” marketing efforts.

Now, there are genuine investment managers out there who are giving their best effort to make the most impact.

To demonstrate impact, these managers adopt a standard measurement framework, such as IRIS. But impact measurements are notoriously difficult to apply. They are also extremely difficult to measure, and many are also inherently subjective and more costly to measure compared to the solutions trying to improve them.

Moreover, there may be multiple factors generating a positive outcome, and it is often impossible to discern the specific cause and effect in improving those outcomes. As a result, the manager resorts to the next best thing: They measure actions and implementations. But it is very easy to mistake leading indicators for change.

PlayPumps, a merry-go-round apparatus that pumped underground water the more it spun around from children playing on it, is an excellent example of this. The number of installations, percentage of children using the PlayPumps, or liters of water pumped did not necessarily demonstrate whether a community has better access to clean water as a result of the pumps.

Let’s also not forget that these are fund managers and corporate executives who still have to deliver financial performance.

Unlike dollar values, impact measurements are vague and lack true standards, making it more difficult for investors to compare the social impact of an investment portfolio or evaluate relative performance. This also makes tying performance-based pay to impact measurements nearly impossible.

Impact takes time to materialize and is often outside of the fund’s or company’s influence. In the financial world that lives quarter to quarter, maximizing the dollar is always the easier choice to make when a choice must be made.

There is a special place for impact to exist. One where incentives between the managers and companies are aligned, the specific measurements do not matter much, and the time horizon is long enough to make a real difference.

That special place? The early-stage venture asset class.

At Creative Ventures, we use impact as an opportunity lens. We understand that the bigger the impact, the bigger the problem — and likely the bigger the market opportunity and financial return.

Impact is where the problems are. In a world plagued by sophisticated impact measures, our approach imagines a world where an EV costs 20% less and can go 40% farther. A world where we could cure cancer. Where energy consumption is halved in all data centers.

And do we not all agree the world would be a significantly better place if just one of these companies were to succeed?