From Venture to Scale: The Role of Impact Private Equity in Scaling Climate SMEs

The Missing Link in Climate Finance

Over the past decade, climate investing has successfully accelerated innovation, but it has also revealed a persistent financing gap for businesses ready to scale.

While venture capital has played a critical role in nurturing early-stage climate solutions, thousands of climate enterprises remain stuck in the “missing middle” – too large for venture investors and too small for traditional private equity. Between early-stage innovation and large-scale infrastructure financing lies an underfunded segment: businesses that have proven demand but lack the growth capital needed to scale.

Impact private equity funds are increasingly stepping in to fill this gap.

More than an extension of ESG strategy, these funds actively deploy institutional capital into private businesses that can generate both financial returns and measurable climate outcomes.

Leading impact investors and climate-focused fund managers – including Brookfield Asset Management (Global Transition Fund), KKR (Global Impact Fund), Blue Earth Capital, Triodos Investment Management, and Aavishkaar Capital – are demonstrating that commercial success and deep decarbonization increasingly go hand in hand.

To prevent “impact washing” (claiming impact without substance), these funds rely on standardized, internationally recognized frameworks: GIIN IRIS+, Operating Principles for Impact Management, and UN Sustainable Development Goals (SDGs), etc.

For asset managers and institutional investors, climate private equity is no longer just an extension of ESG strategy. It is emerging as a core pathway to deploy growth capital into businesses that are already generating impact and are now poised for expansion.

Private-market investing continues to play a central role in impact investing. Recent GIIN data indicates that private equity accounts for a substantial share of impact investing assets, reflecting investors’ preference for active ownership and long-term value creation in businesses that generate measurable social and environmental outcomes.

Why Climate SMEs Matter More Than Ever

Climate businesses sit at the intersection of innovation and implementation. They are no longer testing ideas; they are:

• Deploying distributed renewable energy solutions.
• Scaling climate-smart agriculture models.
• Expanding circular economy businesses, and
• Delivering water, waste, and resilience solutions.

Yet, despite their importance, these growth-stage enterprises often fall into a persistent financing gap. They are too large for venture capital, yet too small or risky for traditional private equity.

A climate-smart agriculture enterprise helping smallholder farmers improve yields, or a distributed solar company bringing affordable energy access to underserved communities, often sits in this ‘missing middle’. These businesses have already proven their solutions and established customer demand, but they require growth capital to expand operations, build stronger teams, and enter new markets.

According to the Global Commission on Adaptation, adaptation investments in developing countries could deliver over $7 trillion in net benefits by 2030, yet funding for adaptation – where many climate SMEs operate – remains severely underfunded. Although adaptation finance reached approximately US$76 billion in 2022, overall climate finance totalled US$1.46 trillion, underscoring the continued imbalance between resilience and mitigation investments.

For climate-focused SMEs, the challenge is even sharper. They require capital that is not just patient, but also capable of supporting operational growth, market expansion, and governance strengthening.

The next challenge in climate finance is no longer discovering new solutions; it is helping proven climate businesses secure the capital they need to scale.

Rise of Climate Private Equity

Climate private equity is increasingly filling this gap.

Unlike early-stage investors who underwrite uncertainty, impact private equity funds focus on businesses that have already demonstrated traction. These businesses already have customers, revenue streams, and validated business models. The question is no longer whether the solution works, but how quickly it can scale.

A recent report from the Climate Policy Initiative (CPI) suggests that global climate finance reached approximately $1.3 trillion in 2023 and exceeded $2 trillion for the first time in 2024. However, a disproportionately small share of this capital reaches emerging markets, and even less is directed toward growth-stage climate enterprises.

This imbalance highlights a structural inefficiency in climate finance. Capital exists, but it is often not reaching the businesses, stages, or regions where it is needed most.

What Makes Impact Private Equity Different

While traditional private equity focuses primarily on financial performance, impact PE funds operate with a dual mandate of returns and measurable climate outcomes. This changes both how investments are evaluated and how value is created after capital is deployed.

Climate private equity requires a broader lens during diligence. In addition to assessing financial fundamentals, investors examine factors such as a company’s potential to reduce emissions, strengthen climate resilience, align with evolving regulations, and sustain its impact over the long term.

The objective is not simply to identify commercially viable businesses, but to understand whether their growth can contribute meaningfully to climate and sustainability goals.

Investors also tend to play a much more active role. Rather than acting solely as providers of capital, impact PE funds often work closely with management teams to strengthen governance, improve operational performance, expand into new markets, and develop more robust impact measurement and reporting systems.

This active engagement helps businesses build the foundations required for long-term growth while ensuring that climate outcomes remain central to the company’s strategy.

Expanding climate enterprises, particularly in emerging markets, also requires patience. As a result, impact PE funds typically adopt longer investment horizons, allowing sufficient time for businesses to scale operations, deepen market presence, and unlock their full financial and environmental value.

Why Asset Managers are Leaning In

For asset managers evaluating private impact funds for institutional investors, this evolution presents a compelling opportunity.

As primary vehicles for deploying expansion capital into the real economy, these private impact funds offer strategic exposure to mature businesses with tangible assets, expanding revenues, and direct links to climate outcomes. Compared to high-risk, early-stage venture investing, this growth segment provides significantly greater visibility on cash flows and clearer pathways to profitability, all while delivering measurable environmental outcomes alongside financial performance.

This shift is also influencing how institutional investors think about future growth opportunities.

As Larry Fink of BlackRock observed in his 2022 Annual Letter to CEOs: “The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable…”

While the comment referred to startups, the broader message remains highly relevant for climate investing today. Many of the businesses driving the climate transition are now moving beyond early-stage innovation and entering a new phase: scaling proven solutions into commercially viable enterprises.

This perspective is increasingly reflected in allocation strategies, as institutional investors look for opportunities that combine financial performance with measurable climate impact.

Four Signals Asset Managers Should Watch

For asset managers, climate private equity is evolving from a niche sustainability theme into a strategic allocation opportunity. Four factors are driving this shift:

• Access to undercapitalised growth-stage climate enterprises: Many proven climate businesses remain underserved by traditional financing, creating opportunities to invest in companies with established demand and significant expansion potential.
• Greater visibility on cash flows: Compared to early-stage venture investments, growth-stage businesses often have stronger revenue streams, operating histories, and clearer pathways to profitability.
• Exposure to high-growth emerging markets: Regions such as South Asia are simultaneously facing urgent climate challenges and rapid economic growth, creating favourable conditions for scalable climate solutions.
• Measurable impact alongside financial returns: Unlike traditional ESG strategies, climate private equity allows investors to track tangible outcomes, from emission reductions and climate resilience improvements to livelihood creation and inclusive economic development.

Together, these characteristics position climate private equity as an increasingly important avenue for deploying long-term growth capital into the real economy.

For asset managers, the opportunity is no longer confined to identifying climate innovation but increasingly lies in helping proven businesses expand their reach and accelerate their impact.

The Emerging Markets Imperative

Nowhere is this opportunity more pronounced than in emerging markets.

Regions such as South Asia are at the frontline of climate risk, but they are also becoming centres of climate innovation. The scale of unmet demand across energy, agriculture, water, waste management, and urban systems creates fertile ground for businesses that can deliver practical, scalable solutions. As these enterprises mature, the need for growth capital becomes increasingly important – not simply to fund expansion, but to help proven climate solutions achieve meaningful market penetration.

However, capital alone is rarely sufficient to unlock this opportunity. Scaling climate enterprises in emerging markets also requires ecosystem building and cross-sector collaboration between investors, accelerators, development institutions, and local partners. Strong ecosystems help businesses overcome market fragmentation and create more resilient pathways to growth.

Despite this opportunity, scaling in these markets is rarely straightforward. Challenges persist; many climate SMEs face constraints that go far beyond capital injection:

• Gaps in Institutional Governance: Many mid-market enterprises require significant restructuring to meet the reporting standards required by global LPs.
• Fragmented Ecosystems across South Asia: Navigating scale across distinct, vulnerable landscapes like India, Bhutan, Nepal, Bangladesh, Sri Lanka, etc., requires deep, cross-border operational networks.
• Undercapitalization of Inclusive Innovation: Despite driving highly resilient, localized adaptation solutions, climate enterprises face disproportionate, structural barriers in securing commercial growth equity.

These challenges can slow growth and increase perceived risk, even when the underlying business is strong.

Bridging the Gap Between Capital and Readiness

Addressing these barriers requires ecosystem-level interventions.

Initiatives such as Project SAFFAL, led by Massive Earth Foundation, are helping build a stronger pipeline of investment-ready, women-led climate enterprises across South Asia.

By providing structured mentorship, investor exposure, ecosystem integration, and capacity-building support, these initiatives help enterprises become investment-ready while strengthening the fundamentals that private equity investors look for. This includes improving governance, investment readiness, reporting capabilities, and long-term operational resilience.

For impact private equity funds, this has a direct implication. It expands the pool of investable companies while reducing the friction associated with due diligence and post-investment support.

In effect, these platforms help convert promising startups into scalable SMEs, making it easier for expansion capital to flow where it is most needed.

A Shift Toward Scaling What Works

The increasing role of impact private equity funds reflects a deeper shift in climate investment.

The conversation is moving beyond innovation alone. While early-stage breakthroughs remain essential, the real challenge now lies in scaling solutions that have already proven their value.

This requires a different kind of capital – capital that is patient, engaged, and aligned with long-term outcomes. It also requires investment approaches that prioritise ecosystem building, collaboration, and inclusion alongside financial returns, recognising that scalable climate solutions rarely emerge in isolation.

For private impact funds for institutional investors, this represents a significant opportunity to participate in the next phase of climate finance: one defined not by experimentation, but by expansion.

Conclusion: The Power of Growth Capital

The climate transition will not succeed on innovation alone. The next challenge is enabling proven solutions to reach millions more people, markets, and communities.

Impact private equity funds sit at the center of this transition. By providing scale-up financing to climate businesses, they enable:

• Proven solutions to reach new markets
• Sustainable businesses to achieve scale
• Climate impact to move from promise to reality

For asset managers evaluating private impact funds for institutional investors, the implication is clear: the next frontier in climate investment is not discovering new ideas but backing the businesses capable of delivering them at scale.

For investors, the opportunity may lie less in discovering the next breakthrough technology and more in helping proven climate businesses expand their reach and accelerate their impact.