Who supports pension funds in local impact deals?

An increasing number of pension funds aim to improve the world through their investments. Alongside this goal, there’s a growing desire to create local impact. But how can they achieve this?

In a previous blog post, I discussed two main ways pension funds can contribute to positive change: shifting capital from negative to positive externalities and enhancing existing assets. However, these directions can be interpreted in various ways. Pension funds are now expressing their intention to focus more on local impact. For instance, ABP announced not only a €30 billion commitment to impact investments but also earmarked €10 billion of that for projects within the Netherlands.

Local impact with private assets 

Creating local impact often involves investing in private assets. This takes pension funds beyond the comfort zone of passive investments in public markets and into the realm of private deals. These deals come with characteristics like limited liquidity, longer time horizons, and different networks. Successfully executing impact deals requires specialized knowledge and experience. In the Netherlands, an ecosystem of impact investors is emerging, driven by a significant need for capital. However, the relationships between these investors and the pension sector are not yet robust. Let’s take a brief look at some key players.

Invest-NL: The central player 

Invest-NL, a state investment fund, provides patient capital to entrepreneurs aiming to make the Netherlands more sustainable and innovative. It finances both companies and investment funds. Notably, Invest-NL focuses on “innovative scale-ups dedicated to the transition toward a carbon-neutral and circular economy.” Beyond deploying its own capital, Invest-NL plays a crucial role in developing markets and value chains during this transition. Additionally, it acts as a coordinating party, bringing together public (Dutch and European) and private financing. By doing so, Invest-NL assists others—such as pension funds—in making impactful investments within the Netherlands.

Impact investment funds 

Numerous impact investment funds already exist, typically providing equity. Entities like PYMWYMIC, Startgreen, 4Impact, iFund, and Rubio Impact Ventures invest in innovative entrepreneurs committed to improving the world. The impact fund landscape includes many more players, especially on the venture capital side. Furthermore, growth capital (e.g., SevenGen) and buyouts (e.g., Mentha) are gaining prominence, suggesting that the market is maturing and becoming more attractive to pension funds.

Specialization

Carbon Equity is an impact fund that invests in small companies developing climate technology through Venture Capital (VC) and Private Equity (PE), partly here in the Netherlands. Such sectoral or thematic focuses are common. For example:

• Innovation Industries: Invests in ‘deep tech’ companies with a sustainability and scalability focus.
• Shift Invest: Supports early-stage companies making positive contributions to climate and nature.
• Infinity Recycling: A growth investor with a focus on circular plastics.

Impact in private debt

Impact private debt is currently less prevalent. However, Polestar Capital stands out. It offers financing solutions for innovative sustainable production companies through its circular debt fund. Additionally, Polestar Capital plans to introduce an e-mobility and infrastructure strategy specifically aimed at accelerating the transition to zero-emissions in the logistics sector. These loans (approximately €5-75 million) are currently considered too risky or complex for traditional banks, but Polestar Capital’s specialization allows them to handle such investments.

Healthier and more affordable housing

In a previous blog, I mentioned the joint investment by ABP, BpfBouw, and Bouwinvest in rental and care homes to address housing shortages. Bouwinvest plays a key role, emphasizing:

• Affordability for lower-income groups.
• Appropriate housing allocation based on both target groups and household needs.
• Well-being features, such as indoor climate, safety, and access to social activities.

Greening the existing housing stock

There’s a significant challenge in making the existing housing stock more sustainable. The National Warmth Fund provides accessible financing for this purpose, along with Polestar Capital. Additionally, mortgage advisor Viisi is well-positioned for this task. With a customer base of highly educated individuals, Viisi receives numerous mortgage applications for older city properties. Green investments can be seamlessly integrated into mortgage advice for homebuyers, facilitating more accessible and rapid greening efforts.

Regional development companies (ROMs)

ROMs focus on regional impact. They are “enterprises with public shareholders, aimed at strengthening the economy and employment in a region,” according to ROM Nederland. There are eight ROMs in The Netherlands (provinces in brackets):

• Horizon (Flevoland)
• Oost NL (Gelderland & Overijssel)
• Innovation Quarter (Zuid-Holland)
• LIOF (Limburg)
• NOM (Drenthe, Friesland, and Groningen)
• Impuls Zeeland
• Rom InWest (Noord-Holland)
• ROM Utrecht Region

Additionally, there are regional energy funds working at the provincial or city level to accelerate the energy transition.

Interconnections in the Ecosystem

The aforementioned entities intersect in various ways. For instance, during a recent funding round for Mosa Meat - a Limburg-based pioneer in lab-grown meat production - Invest-NL, LIOF (the Limburg Regional Development Company), and Polestar Capital (via the Limburg Energy Fund, LEF) were involved.

The ecosystem also includes entities that pension funds cannot directly invest in but serve as valuable sources of knowledge and value creation. For example Greyt connects startups and scaleups with experienced part-time CFOs and controllers, facilitating investor interactions. Major cities host initiatives to support startups and foster local ecosystems. For example:

• Up!Rotterdam offers a “Green & Sustainable Investor Readiness Program” for budding entrepreneurs.
• Incubators assist new companies in their startup and growth phases. Fresh Ventures in Rotterdam, a startup studio, supports entrepreneurs aiming to make a difference through circular and regenerative food.
• A list of venture builders in the Amsterdam region is available.

Moreover, there are organizations focused on strengthening specific sectoral ecosystems. RotterdamSquare, for instance, brings together education, businesses, and facilities in the field of Life Sciences & Health in the Rotterdam region. Despite this wealth of knowledge and expertise, fragmentation remains a challenge.

Measuring impact and network effects

While I’ve mentioned several names above, this represents only a small portion of the ecosystem. Unfortunately, I lack a comprehensive overview. However, a few observations stand out:

1. Impact Measurement: Many entities are actively improving their impact measurement. This serves both their decision-making processes and their ability to demonstrate impact to downstream investors. Specialized players in impact measurement include Cigarbox, ImpactHouse by Grant Thornton, and Salacia Solutions. Additionally, the Impact Institute contributed to developing impact statements for organizations like Alliander and ABN AMRO.
2. Collaboration: These entities collaborate extensively. They rely on each other and reinforce one another. The potential network effects are substantial. By enhancing information exchange and sector-specific expertise, the ecosystem can become stronger and more effective.

Pension funds can play a more significant role than they have thus far. Their investments, expertise, and preferences can contribute to shaping the field, as described by Marti et al. (2023). I eagerly await further research that better maps the size and functioning of the Dutch impact investment ecosystem, including the methods employed by investors.

Disciplined experimentation

However, it’s crucial for pension funds to remain disciplined. Early-stage investments carry significant risks. Private assets may involve excessive fees (as highlighted by Oxford professor Ludovic Phalippou), and some private assets can have highly negative impacts (as discussed in Brett Christophers’ book “Our Lives in Their Portfolios”). Yet, let’s not allow these challenges to become excuses for inaction. Often, the main barriers are mental—unfamiliarity breeds reluctance.

Blog series

This blog is the third in a series on pension investments. You can also read Blog 1, Blog 2 and Blog 4.

My other series focuses on CFOs and value creation within enterprises. I welcome your feedback at w.schramade@nyenrode.nl.