The private equity (PE) industry is hunting for new paths of growth. One industry leader is touting the effectiveness of thematic investing in both achieving that growth and creating social and financial impact at the same time.

Reynir Indahl, founder and managing partner of Summa Equity, says that the Sweden-based PE firm uses a “theory of change” framework to develop its impact investment strategy. It focuses on two main themes: resource efficiency and tech-enabled transformation. Through this approach, which prioritizes collaboration among different stakeholders and investments in multiple targeted themes, Summa Equity has raised one of the largest impact funds in Europe.

“We believe systemic investing will unlock more returns,” Indahl says. He recently spoke with McKinsey’s Per Klevnäs and Peter Cooper about Summa Equity’s distinctive investment philosophy, the business case for decarbonization, and why the broader industry hasn’t fully embraced the thematic investing mindset yet. An edited excerpt of the conversation follows.

McKinsey: Can you explain how Summa Equity’s investment philosophy was developed?

Reynir Indahl: It all started with the financial crisis in 2008. I was pondering why no one had seen it coming and got more and more worried about what appeared to be several other crises compounding: environmental, social, and political, to name a few. The realization that some of my own investments at the time contributed to these problems led to yet another crisis—a personal one. I felt like I was part of the problem. After some reflection, I asked myself, “What can I do to contribute to something positive? How can I be part of the solution?” The answer became Summa Equity.

Value creation strategies have shifted in the past decades, but it used to be that they all had one thing in common: External world challenges didn’t really matter. Within PE, firms typically focused on improving one company and how it could drive value. Moreover, while assessing the attractiveness of a potential investment, PE firms focused mostly on the near term, ignoring both risk and opportunities in the longer term, which meant they were often blindsided by external challenges.

Now external world challenges are setting the tone, and we need new systems to address them. PE firms can no longer view any company in isolation; they need to collaborate in new and different ways. It is no longer about being a supplier or a customer; it is about partnering and reconfiguring the value chain across industries and asset classes. By pursuing multiple investments, PE firms can accelerate change and create meaningful value.

This is where our theory-of-change framework fits in. This framework informs our strategy planning and how we look at investing to solve global challenges. It influences where we should invest and maybe where we shouldn’t. It also informs our view of where the world is going and how challenges are most likely to be solved. Ultimately this helps us identify the opportunities in these future systems.

McKinsey: How do you evaluate investments under this framework?

Reynir Indahl: Our investment focus is not on a particular industry but on impact investing inspired by two themes: resource efficiency and tech-enabled transformation. We invest in companies that are working to make the world better in relation to the environment, social well-being, or effective digital governance. In fact, we were among the first private equity firms to commit to the UN Sustainable Development Goals, and all of them can be mapped to our themes.

When Summa Equity evaluates an investment, we view the company through our thematic lens: “What problem are we solving? How is the company aligned to the solution? And how can we measure the improvement?” We spend material time getting ahead of the wave through extensive modeling and hiring in-house experts with real-world expertise across our key themes.

This approach stands in contrast to environmental, social, and governance [ESG] investing, which is focused on investing in companies based on how well they abide by various ESG requirements—for example, commitments to use nontoxic materials or certain worker rights—rather than their actual impact on the world, such as the amount of material reused or quality of life improvement for a group of people in care. One could say that ESG investing is focused on input, whereas impact investing is centered on output.

McKinsey: How is your investment approach linked to the wider idea of decarbonizing high-emitting industries?

Reynir Indahl: It is indeed closely related to “brown to green” investing. Take the example of the material-and-waste ecosystem, which is responsible for around 15 to 20 percent of Europe’s emissions. New and already available tech solutions could allow us to lower these emissions by 55 percent and Europe to become 80 percent self-sufficient in terms of material use as a continent. The investment required is around €230 billion—less than 0.1 percent of GDP per year—by 2040. The value creation is six to seven times upside—between €1 trillion and €2 trillion in value—all while making progress toward the Paris Agreement goal and creating new jobs.¹Investing in a circular and waste-free Europe, Summa Equity, April 19, 2023.

A systemic investing strategy fits well in this instance because you need a series of different aspects to come together. For example, you need technology companies to develop innovative new ways of sorting, recycling, and creating valuable raw materials or energy; waste aggregators to collect from disparate sources that achieve sufficient scale to invest in extracting value out of waste, including returning raw materials back to the ecosystem; customer-facing companies to extract premium or long-term off-take contracts for products and services that reuse waste; and regulators that level the playing field—for example, by introducing a CO₂ tax for waste incineration or landfills or by making it easier to obtain permits for new ways of treating waste.

Brown-to-green investing, therefore, is critical. Changing entire ecosystems inevitably involves not just funding new green scale-ups, which are necessary, but making more impactful use of assets that are already there, like those in the existing industry. Half of required CO₂ emission reductions to reach net zero are about turning brown assets into green ones.

We see a huge opportunity in buying such brown assets, given their depreciated value; obtaining the necessary infrastructure and permits; and then investing to make them green. Take once again the example of the waste ecosystem—and specifically the example of waste to energy. Activities in this category have just been delisted from the EU taxonomy. However, we know that waste to energy will be part of the EU waste ecosystem as a better alternative than landfill for a long time. And for some hazardous waste, there are currently no alternatives to incineration. Moreover, there are more than 500 waste incineration plants in Europe.²Investing in a circular and waste-free Europe, Summa Equity, April 19, 2023. Incineration, therefore, needs to be decarbonized, and there are several new technologies that are economically viable and that can be retrofitted to achieve this.

The business case for brown to green is compelling. Many high-emitting businesses are undervalued. Transforming these can help avoid carbon tax, increase disposal fees because they are considered environmentally friendly, raise the value of recovered materials, and boost the supply of green energy.

McKinsey: Why hasn’t thematic investing taken off yet? And what are the keys to success with this strategy?

Reynir Indahl: To do this well, one has to really understand all the industries that interact in this system, the value chain, as well as the changes happening—in terms of both mindset and technological tools. We have gone deeper in some of our thematic verticals, like circularity and aquaculture, and built strong, scalable platforms.

The world needs to get to more inflection points. When you look back over history, systems tend to stay static and then very rapidly change due to a disruption. Timing is critical. It is easy to be either too early or too late, which will hurt investment returns.

But Summa Equity is not speculating on future ideas. We focus on mature businesses and how to scale them while embedding new technologies and expanding the business model. These businesses are commercially successful today, but by improving themselves and cooperating with others, they can rapidly be transformed and drive more industry inflection points. So even though there is uncertainty related to the direction of green policies following the US election, this will not impact our core strategy. The reason is simple: Our financial success has come from consistently investing in profitable, essential solutions that thrive without reliance on subsidies or policy support.

Practically, it can be difficult for big PE firms with an industry focus to adopt a thematic approach, given the way they are structured. The approach cuts across different sectors and types of investment—buyout, growth, infrastructure—which is how most PE firms organize their funds. They have reporting lines, expertise, and even incentives set up counter to this.

We have operated thematically from the start, but that doesn’t mean other firms can’t do it—especially newer funds that are less entrenched. I’m seeing more and more thematic investors emerging.

McKinsey: What advantages does systemic investing provide in the current context, where overall PE fundraising, deal activity, and performance continue to face headwinds?

Reynir Indahl: We have delivered best-in-class returns to our investors. And it is clear from our experience that companies that lead the transformation both perform well in difficult times and get a premium to their peer groups.

We believe systemic investing will unlock better returns. With a theory on how certain problems need to be solved and addressed, PE firms can guide investments across asset classes, whether venture, growth, buyout, or infrastructure. These companies can cooperate and accelerate growth easier, which will enhance value and returns.

With this approach, there are more opportunities for cooperation among PE firms and “corporates,” as well as public–private partnerships. Ultimately this creates more profitable investment opportunities.

And at the end of the day, we are investors. We focus on what we are comfortable investing in during the next five-year period, regardless of external market circumstances. There could be positive surprises if changes accelerate—and the world sure would benefit from it. But our underwriting and return predictions are not based on that, which is a bit conservative, seeing that we receive positive tailwinds from accelerating changes.