The Impact Classes of Investment

What are the different kinds of impact that investments have on people and the planet?

PGGM

The IMP has developed a set of impact classes that group investments based on their impact characteristics.

 

A growing number of investors are motivated to manage the effects of their investment portfolios on people and the planet. These investors vary widely in their intentions and constraints. For example, a passive retail investor looking to mitigate risk by avoiding harmful activities is likely to construct a different investment portfolio to a foundation using its entire capital base to advance its charitable mission. Different again is an institutional investor’s portfolio that anchors new investment products addressing social issues in its clients’ communities.

To efficiently align their portfolios with their intentions, all investors need to be able to understand the impact of the variety of enterprises or investment products available to them. In addition, the intermediary asset managers and the enterprises seeking investment want to identify aligned investors and avoid being compared inappropriately to opportunities that have a different kind of impact, or avoid being judged on just financial performance alone.

In response to this, the Impact Management Project (IMP) has collaborated with over 2,000 investors and enterprises to develop “impact classes”, which group investments with similar impact characteristics based on their impact performance data (or, in the case of new investments, their impact goals). In short, an impact class combines the impact of an investment’s underlying asset(s) with the contribution the investor makes to this impact.

Impact classes are not intended as a replacement for progress towards ‘globally accepted’ measures that could enable the impact of individual investments to be compared. Instead, impact classes offer an immediate and complementary solution for differentiating the type of impact that investments have, even when very different measurement approaches are used.  

The matrix below illustrates the range of impact classes currently in the market, brought to life by illustrations of investments found in each class. Much like financial asset classes, these impact classes – represented by each box on this matrix – are an equivalent shorthand for conveying whether the impact characteristics of an investment opportunity match an investor’s impact intentions and constraints.

Several asset managers have already classified their investments using these impact classes. Browse our Impact Class Catalogue of mapped investment products; or, to see an asset owner’s use-case, toggle the filter of the interactive matrix below to see the mapping of a multi-asset class institutional investor’s portfolio.

We invite investors to join a growing community of asset owners and managers that are publicly classifying their investments by impact class. These leaders share the view that we can increase the efficiency with which capital supply and demand are matched to achieve impact, as well as welcome further market participants by acknowledging different intentions and constraints. This investment classification guide outlines how an investment product (or a portfolio of investments) can be classified using impact data – qualitative, quantitative, ESG and outcome-based – of the underlying assets. We will be releasing more detailed guidance and examples of this classification process using different investor perspectives in early 2019.

To include your product in the IMP’s listing, or to provide feedback on this process, please contact us at team@impactmanagementproject.com.

The IMP would like to thank all of the thoughtful contributors to this methodology – in particular our Advisors and Contributing Authors. We would also like to acknowledge the work of Omidyar Network, Tideline and Cathy Clark of Duke University who first made the case that a set of widely embraced impact classes are important for the industry.

The IMP’s investment classification guide provides step-by-step guidance for classifying your investments using whatever impact data – qualitative and/or quantitative – is available from your underlying assets.

Impact classes bring together the impact performance (or goals) of the assets being invested in (x-axis) and the strategies that the investor uses to contribute to that impact (y-axis).

The matrix below profiles a set of impact classes which – much like asset classes – group investment products with similar impact characteristics. An impact class brings together the impact performance (or goals) of the assets being invested in (x-axis) and the strategies that investors use to contribute to that impact (y-axis). Descriptions of each impact class can be found here.

You can toggle between different versions of the matrix below, using the drop-down menu on the top-right corner. The first view is populated with illustrative investment products by impact class; the second is populated with a real asset owner’s initial classification of their portfolio of assets. More details of how an asset owner has classified its portfolio can be found in this case study.

Impact goals of business
Investor’s contribution
Act to avoid harm
Benefit stakeholders
Contribute to solutions

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

E.g. Ethical bond fund

Listed real estate
12B
5.6%
Private real estate
12B
5.8%
Private equity
9.9B
4.8%
Government bonds
39B
18.9%
Other equities
4.2B
2.0%
Alternative equity strategy
18B
8.7%
High yield markets
4.8B
2.3%
Insurance linked investments
3.7B
1.8%
Total
103.6
49.9%

E.g. Positively-screened / best-in-class ESG fund

Mortgages
1.7B
0.8%
Private real estate
0.1B
0.0%
Other equities
0.5B
0.2%
%
%
%
%
%
Total
2.3
1%

E.g. Sovereign-backed bonds (secondary market) funding vaccine delivery to underserved people or renewable energy projects

Private real estate
0.3B
0.1%
Private equity
0.2B
0.1%
Other equities
0.3B
0.1%
Cash
0.1B
0.0%
%
%
%
%
Total
0.9
0.3%

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

E.g. Shareholder activist fund

Developed market equities
25B
12.0%
Emerging market equities
8B
3.9%
Developed market credits
6.7B
3.2%
Emerging market credits
3.5B
1.7%
Emerging market debt
8.5B
4.1%
Total
51.7
24.9%

E.g. Positively-screened / best-in-class ESG fund using deep shareholder engagement to improve performance

Investing in solutions
6.4B
3.1%
%
%
%
%
Total
6.4
3.1%

E.g. Public or private equity fund selecting and engaging with businesses that have a significant effect on education and health for underserved people

Investing in solutions
1.5B
0.7%
%
%
%
%
Total
1.5
0.7%

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

E.g. Anchor investment in a negatively-screened real estate fund in a frontier market

Structured credit
5.4B
2.6%
%
%
%
Total
5.4
2.6%

E.g. Positively-screened infrastructure fund in a frontier market

Developed market credits
0.4B
0.2%
Emerging market credits
0.1B
0.0%
%
%
Total
0.5
0.2%

E.g. Bond fund anchoring primary issuances by businesses that have a significant effect on environmental sustainability, access to clean water and sanitation

Developed market credits
0.1B
0.0%
Emerging market credits
0.1B
0.0%
Government bonds
0.7B
0.3%
Other bonds
0.1B
0.0%
Total
1
0.3%

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

Investment archetype not widely observed

Infrastructure
6.5B
3.2%
%
%
%
Total
6.5
3.2%

E.g. Positively-screened private equity fund making anchor investments in frontier markets

Infrastructure
0.1B
0.0%
Healthcare real estate
0.1B
0.0%
Healthcare private equity
1B
0.5%
%
Total
1.2
0.5%

E.g. Private equity fund making anchor investments in businesses that have a significant effect on income and employment for underserved people

Infrastructure
1.1B
0.5%
Microfinance
0B
0.0%
%
%
Total
1.1
0.5%

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

Investment archetype not widely observed

%
%
%
%
Total
0
0%

Investment archetype not widely observed

%
%
%
%
Total
0
0%

E.g. Below-market charity bonds, or an unsecured debt fund focused on businesses that have a significant effect on employment for underserved people

%
%
%
%
Total
0
0%

Signal that impact matters

Engage actively

Grow new/undersupplied capital markets

Provide flexible capital

Investment archetype not widely observed

%
%
%
%
Total
0
0%

Investment archetype not widely observed

%
%
%
%
Total
0
0%

E.g. Patient VC fund providing anchor investment and active engagement to businesses that have a significant effect on energy access for underserved people

%
%
%
%
Total
0
0%

PGGM’s Investor’s Impact Matrix: Mapping the €220B portfolio of a pension fund

PGGM, with a total of €220 billion of assets under management, is the manager of the second biggest pension fund in the Netherlands, PFZW, alongside other smaller pension funds. In working with the IMP, PGGM sought to more accurately understand and communicate what impact their investments are making, and precisely what their role has been in the process.

The results, along with insights PGGM gained along the way, are showcased in this case study report. We learned:

  • The effects of 12% of PGGM’s portfolio cannot be classified at all, due to the nature of the asset class and/or the almost total absence of data.
  • 81% of PGGM’s portfolio businesses is categorised as ‘acting to avoid harm’. Please note that, in the absence of high-quality and granular data, this classification rests on the assumption that these investments respond effectively to the various instruments (exclusions, engagement, ESG integration) that PGGM wields to minimise negative impact.
  • 4.5% of the portfolio provides general ‘benefits to people and/or the planet’ through PGGM’s Investing in Solutions (BiO) programme, which targets investments with measurable impact that relate to several SDGs.
  • Also through the BiO program, about 2.5% of the portfolio is classified as ‘contributing to solutions’ – aimed at making a significant contribution to positive outcomes for specific target groups or causes that are underserved, including climate and pollution.