For super funds and their advisers

Industry classifications to fight ‘impact washing’

2 Ben Thornley_Web

Just as when ESG under its various guises was in its infancy, so too impact investing has been struggling through a dilemma to do with classification and standards to help smooth the bumps in the sector’s growth path. The classification part of the problem, at least, now appears to have been solved.

At a webinar overseen by US impact consulting firm Tideline and Duke University’s Cathy Clark on December 15, two big allocators to impact, Bank of America and StepStone Group, discussed their classification frameworks and the growing use of the “ABC” classes of impact, created by the ‘Impact Management Project’.

Cathy Clark

Ben Thornley, a founding partner of Tideline, said the ABC classes were becoming ubiquitous in their adoption by investors, their managers and other players in the industry segment. The ABC classes were also a natural complement to various other industry standards, the most notable among them being the ‘Operating Principles for Impact Management’, an initiative incubated by the International Finance Corporation. The ABCs represent the types of impact investor and their investing philosophies. According to a Bank of America framework, they are:

A: meaning Avoid – faith values with norms screening; ratings-based and thematic screening; and, material risk screening.

B: meaning Benefit – ratings-based or single factor-based integration; best in class or multi-factor integration; and, comprehensive solutions-orientated integration, and

C: meaning Contribute – impact aligned; impact driven; and, impact first.

In 2015, Thornley and Clark, the faculty director of the Center for the Advancement of Social Entrepreneurship (CASE) at Duke, led a research project to explore the value of classification in impact investing, just as definitions of ‘sustainability’, ‘ethical investing’, ‘social’ and ‘responsible’ investing were still in a state of flux before settling down with an all-encompassing ESG description.

The more recent and more rapid growth in what most people view as ‘impact investing’ made it more difficult to compare apples with apples for investors to analyse risk, return and impact than with ESG. Negative screens, for instance, don’t get you far in impact investing, be they for the E, the S, or the G, or even all three.

Thornley and Clark wrote in a recent note posted on the Impact Alpha website: “As more people managing larger portfolios wanted to turn to impact, we feared that without more rigorous ways to classify intentions and performance around impact, they would be understandably nervous to step in.” The results of the 2015 research and industry-wide discussions that took place around it consisted of two main developments:

  • The coining of the term ‘impact classes’. Like asset classes, impact classes are a way to group investments with similar characteristics, but by impact traits instead of financial ones. After engaging with dozens of investors, it became clear they believed that robust segmentation in impact investing was essential to market clarity (by simplifying terms), market efficiency (by creating a common taxonomy), and market assurance (by creating observable and comparable clusters), and
  • The creation of the Impact Management Project (IMP). A natural outgrowth of the research, the IMP was launched in 2016 after being incubated by Bridges Ventures, a UK-based private equity and venture firm. It is an industry-wide collaboration to agree norms and benchmarks for understanding and managing impact. Thornley and Clark said: “The IMP is now established as a pillar of best practice. The five dimensions of impact clarify that ‘what’, ‘who’, ‘how much’, ‘contribution’, and ‘risk’ are key attributes that underlie every impact investment. And the IMP’s ‘ABC’ categorisation system, which organises enterprises and investments by their impact strategy, has been thoroughly vetted globally and is currently being integrated into the major impact ratings, standards, and certifications.”

In addition to the ABCs, the IMP has created a second framework that is fast becoming ubiquitous, known as the ‘Five Dimensions of Impact’. They are:

IMP’s five dimensions:

  • ‘What’ tells us what outcome the enterprise is contributing to, whether it is positive or negative, and how important the outcome is to stakeholders
  • ‘Who’ tells us which stakeholders are experiencing the outcome and how underserved they are in relation to the outcome
  • ‘How much’ tells us how many stakeholders experienced the outcome, what degree of change they experienced, and how long they experienced the outcome for
  • ‘Contribution’ tells us whether an enterprise’s and/or investor’s efforts resulted in outcomes that were likely better than what would have occurred otherwise, and
  • ‘Risk’ tells us the likelihood that impact will be different than expected.

Thornley and Clark say: “Clearly, more investors are looking for impact, upping the temptation and risk of ‘impact-washing’. And impact investing products are increasingly being offered by diversified rather than specialized investment managers, making differentiation all the more critical.”

Bhavika Vyas, a member of the StepStone responsible investing team focusing on impact, said he firm had created a parallel platform for impact, compared with that used for other PE investments. “Impact is a little different for us because it’s more focussed,” she told the webinar audience.

It uses the IMP five dimensions, and the impact scorecard mirrors that of the manager’s broader responsible investing process. She said that most of StepStone’s impact investments are Bs and Cs. The firm does not share its classifications with its external managers, but they become “a part of the conversation”, she says. “We have seen some impact washing.”

She said that perhaps because StepStone had been “aspirational’ with its manager selection, there was significant dispersion among the Bs and Cs, whereas on the responsible investment side of the firm, there was a “more normal distribution” between managers.

StepStone Group is a publicly listed US private markets manager with about US$72 billion (A$93 billion) under management as of March 2020.

Cathy Clark saw SRI (socially responsible investing) mostly as “avoiding things that are bad”, rather than actively reducing harm, which would not qualify as an ‘A’ in impact investing, she said.

Bank of America’s Anna Snider, the firm’s New York-based head of due diligence of the CIO’s office, who also runs the firm’s manager selection, said: “The world has become more complex. It’s an evolution in how you invest. People tend to start out by avoiding what’s bad and evolve from there.”

The classification of impact investments, along with all ESG investing, will be subject to new European regulations starting in March this year with the Sustainable Finance Disclosure Regulation followed in 2022 with the first part of the Taxonomy Regulation, both designed for better transparency for investors and counter ‘green washing’.

Claudia Coppenolle, founder and CEO of the European-based IMP+ACT Alliance, a tech-orientated project known as the Impact Classification System (ICS), which helps funds to classify themselves. She told the webinar audience that the ABCs represented a logical extension of the work her organisation was doing.

She said the SDGs (United Nations’ ‘sustainable development goals’) were an essential element of the ICS platform. “They have proven helpful in creating commonality in the way people describe impact. We aim to further align with the SDGs… 2021 has the potential of being the Year of Classification or, if not that, the Year of Impact Investing more broadly.”


Bridges Ventures, which funded the development of the IMP, is also one of the backers of the IMP+ACT Alliance. Bridges is a private markets manager run out of London, New York and Tel-Aviv which was launched by Sir Ronald Cohen, Michele Giddens and Philip Newborough in 2002 They are three already highly successful private equity managers with a special interest in social investing. Bridges launched the first fund of its kind in the UK – a “growth capital vehicle targeting market-rate returns by investing in businesses with a positive social or environmental impact”.

The Operating Principles for Impact Management were launched at the World Bank Group-IMF Spring Meetings in Washington on April 12, 2019. These nine principles bring greater discipline and transparency to the impact investing market, requiring annual disclosure statements and independent verification of Signatories’ impact management systems and processes.

Signatories are a diverse group of impact investors, comprised of asset managers, asset owners, Multilateral Development Banks and Development Finance Institutions. In additional to committing to this global standards, Signatories have the opportunity to collaborate and lead on key impact investing initiatives that will help shape the future of this growing market. The principles are:

1: Define strategic impact objective(s), consistent with the investment strategy.

2. Manage strategic impact on a portfolio basis.

3: Establish the manager’s contribution to the achievement of impact.

4: Assess the expected impact of each investment, based on a systematic approach.

5: Assess, address, monitor, and manage potential negative impacts of each investment.

6: Monitor the progress of each investment in achieving impact against expectations and respond appropriately.

7: Conduct exits considering the effect on sustained impact.

8: Review, document, and improve decisions and processes based on the achievement of impact and lessons learned.

9: Publicly disclose alignment with the principles and provide regular independent verification of the alignment. The conclusions of this verification report shall also be publicly disclosed, subject to fiduciary and regulatory concerns.

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