The power of Private Equity in transforming companies to the #ImpactImperative (EQT Future Fund)

In this interview, Hedda Pahlson-Moller shares perspectives on the evolution of impact investing and the critical role of private equity to transform companies into sustainable industry leaders that can provide solutions to global challenges.

Adopting do not harm policies to reduce negative footprint is only the first step to increasing a positive ‘handprint’ in order to drive net POSITIVE scenarios.

Hedda joins EQT as the Impact Director on the Mission Board of their 4B euro long-hold private equity fund FUTURE, targeting transformation beyond ESG into positive impact. The fund aims to inspire a deep shift in the role of finance in addressing solutions for planetary and societal health.

An interview by LPEA (Luis Galveias) - original source HERE

Impact investment has been around for several years, but in quite niche pockets. Are we seeing it now opening up to mainstream funds?

Values-based investing has always existed in finance, from faith-based funds to activist movements. The Quakers refused to invest in slavery. Financing from religious groups (and these are serious investors) established negative exclusion screening way before it became popular. It’s been around and evolving for a long time.

Impact investing was adopted across asset classes and by financial actors when the notion of generating positive societal benefits alongside financial returns proved itself not just possible but necessary, not to mention urgent. We are talking about measurable positive contributions to society – meaning people AND planet. The intersectionality of the two is obvious. Environmental degradation is effectively a crime against humanity if you look at the impact of climate change. You cannot separate or attempt to address one without the other. And whether in a low-income community in emerging markets or next door in France, climate solutions will not work if they are not accepted and supported by people.

The debate was always whether impact implies an implicit trade-off to financial returns. The answer has been proven by impact funds delivering robust performance linked to underlying strategies, with many outperforming traditional benchmarks.

A recent quote from Paul Polman (who also sits on the EQT Mission Board) in Harvard Business Review sums it up nicely – and perhaps more politely than I would put it: “It’s increasingly absurd and surreal to have to justify investing in our very survival”.

The debate was always whether impact implies an implicit trade-off to financial returns. The answer has been proven by impact funds delivering robust performance linked to underlying strategies, with many outperforming traditional benchmarks. There has also been a recent explosion of successful ‘traditional’ financial actors adopting impact strategies. There is a strong business case to be made, even if I can insist that the moral and logical imperative is much greater.

So yes, impact is now officially ‘mainstream’. It has been a long, arduous – and I can add humbling – journey to gain attention and credibility to the role of finance in addressing global challenges (and not just causing them). Now I have the privilege to represent the #impactimperative on boards of government bodies, NGOs, family offices and even public and private equity funds that are committed to evolving their strategies to build a better future. The appetite and demand for investment products that take responsibility for harm reduction as well as contributing to solutions will become the new gold standard – this change can’t come soon enough.

How did you become aware that companies could also have an impact rather than just be making money for their shareholders?

Realization came when the words came into play, meaning I understand and even applied the concept before there was a taxonomy. I think we all inherently get that non-financial factors (sterile of a term as it is) drive value creation. And we recognize that value (and risk) goes far beyond monetary. We just needed language and frameworks to apply – along with some brave pioneers who were prepared to break from the flock and declare a purpose beyond the shareholder doctrine. It was so obvious and so necessary.

I started teaching MBA courses about 16 years ago. While reviewing academic literature, I came across the concept of social entrepreneurship – effectively business models addressing societal challenges. It made so much sense and resonated with my own investment activities. I discovered investment-ready organizations around the world tackling pressing issues like access to water, education, health care, social housing – just about any social or environmental problem. In 2015, we were introduced to the Sustainable Development Goals (UN SDGs) that created a useful framing and from there it became easier to find projects that were aligned to these thematics.

In two decades of angel investing, I noted it was always non-financial factors that determined survival – the passion of the team, the commitment to their solution… the thrill of solving a challenge and being part of that disruption and journey. Entrepreneurs that had purpose and values always outperformed. I took that investment strategy to the rest of my portfolio and screened for that same purpose, values and commitment across asset classes – there are more and more options for values-based investors to choose from.

We all have to keep inquiring and demanding more to drive this transition – from our bankers, financial advisors, and anyone placing capital. If you look at the recent IPCC (Intergovernmental Panel on Climate Change) Sixth Assessment Report, the window that we have to shift our business and financial practices is closing quickly, both due to environmental and social urgencies. As we say at TIIME – the time is NOW.

The pulse for impact funds came initially from committed fund managers but do you think we’re seeing new GPs embracing impact as a response to the growing demand by the investors? If so, what drives them?

GPs are attentive and reactive to investor demand and start adapting to the market calling for SRI, ESG and even ‘impact’, not always knowing what it entails… Some show up to stay ahead of regulatory pressures or keeping up with trends. But I find quite a few are adapting to a much deeper interest in aligning to a deeper sense of intrinsic values. Institutions are made up of people with a sense of dissonance if their organizations invest against their belief system. What’s the meaning of reducing airmiles and using electric vehicles, trying to be diligent in recycling or teaching children about justice and equity and then getting to work and placing capital perpetuating the root causes? That’s hard to reconcile.

People enjoy working for organisations that have purpose– and to find that sense of meaning in their roles as well. That’s an overwhelming message we are getting from ‘talent’ that the industry is fighting for. We see so many professionals and younger generations asking for advice on how to find work in the financial service industry but with sustainability and impact as a prerequisite.

At TIIME, we’ve been teaching impact investing and sustainable finance to executive MBAs and wealth management courses – you can tell that students want to understand and navigate the field because that’s where they want to commit their careers. So, if you want to capture talent, not to mention discerning LPs, new markets, comply with regulation, build the future, you have to redirect your resources and focus. There is also a noteworthy shift in capital to women as investors that is changing the tune of finance. Gender-smart investing is quickly growing alongside impact investing as a significant values-based investment strategy that will expedite the transition. Add social justice and you will find a new field called JEDI (Justice, Equity, Diversity and Inclusion), which should intrigue just about anyone.

EQT is one of the biggest mainstream funds to commit with the creation of a dedicated Future fund. Can you tell us more about it?

EQT has gone on an impressive journey defining their purpose and values. They have been exploring their sustainability approach by challenging themselves to not just reduce footprint (which is a familiar term for our negative impact on the environment), but also to increase their handprint – the positive mark we are capable of making to people and planet.

There were interesting conversations with Paul Polman, the IMAGINE group and EQT on how to contribute to accelerating the shift in setting industry standards to influence the rest of private equity – not to mention the portfolio companies and their respective industries.

Let me clarify one thing about impact investing: we generally associate impact investing with finding wonderful green companies or organizations and then scaling that business and its positive impact. But there’s another model of impact investing that is just as logical and paramount, which focuses on transforming a company from brown or grey and actively shifting them on the impact journey beyond ESG, beyond compliance and regulation requirements. This pushes companies from avoiding harm into actually contributing to solutions. The investor needs to work actively with the portfolio company to achieve these goals.

In the impact investing field, we talk about “investor contribution” – what do you do as an investor that is special, different, unique and generates intentional positive impact? To come back to EQT, their Future fund has a longer-hold ownership horizon, which means that you’re not racing against time to capture value. It’s really about transforming companies with market changing potential in a way that they influence the rest of the market. It’s not just climate focused like many of the PE products. It focuses on 3 Ps: Planet, People and Prosperity, and with several themes that match the extensive experience and networks EQT already excels in. I sit as the Impact Director of the fund, on something called a Mission Board, which includes Paul Polman (ex-Unilever CEO), Ho Ching (Tamasak) and a few other remarkable leaders in the financial and business world committed to seeing a change in the financial systems. The Future Fund team is a group of exceptional and dedicated professionals leveraging their experience to set new standards in Private Equity – and they are all personally deeply committed, which is the most powerful engine of all. It’s both a pleasure and an honour to work with the team as well as the rest of the committed EQT teams embarking on the impact journey. The entire organization is behind and supporting them.

Should we expect to see the same level of responsibility and commitment into the future by other private equity funds?

Let’s start with the role of private equity. Impact investing really comes from early stage and venture because those were the smaller impact businesses it was grown from. Now we have to shift into growth and later-stage investing to make sure that these companies can reach their full potential. So private equity has to be there, particularly with its active ownership model, which means that investor contribution plays a critical part. There are private equity players that scan the market and pick up divested fossil fuel businesses and do nothing. They not only do not contribute to solutions, they actually continue creating the problems we are trying to solve. But organisations like EQT have a vision of the mark they want to leave on the world. Any private equity firm that has a unique investor contribution should be using their incredible skillset and financial capacity and capabilities to drive the changes that we all know are urgently needed. There’s a responsibility and accountability for private equity to engage and pave the way for future listed companies. There is a growing wealth of impact reporting tools and harmonization of standards enabling leaders to transparently showcase their outputs, outcomes – and impact.

So even without the creation of impact dedicated funds, private equity funds should integrate impact principles into their portfolio and operations?

Absolutely. Anybody who has capital is accountable for building a more sustainable and just future. Private equity players, with their investment capacity and influence, are critical in the shift to have a better functioning economy that has a planetary ceiling and a social floor. It is the Doughnut Economics concept everyone should be familiar with. Investors must recognize that they have the key to unlock solutions to the world’s most pressing problems.

As for the Future Fund, it is not a niche project. The intention is to inspire all of the organisation, all portfolio companies – and why not the rest of private equity. We call it a ‘lighthouse’ project where we aim for transformation at multiple levels. That is the kind of ambition we need to address current challenges. If you can prove that you can drive decent financial returns and growth that you’d expect from a private equity fund, while mitigating harm AND contributing to solutions, then we start building a new paradigm for finance and business. And hope for a more just and sustainable future… for all.