This post is an excerpt from “The ABCs (and SDGs) of classification for impact investing strategies,” an article written by Cathy Clark, faculty director of CASE i3, and Ben Thornley, co-founder and managing partner at Tideline, posted in ImpactAlpha on December 15, 2020. Click here to read the full article.
Five years ago, we co-led a research project exploring the value of classification in impact investing, with the goal of making it easier to invest for impact across a portfolio.
At the time, the publicly traded and privately owned parts of the market were using different terms. Definitions of “sustainability”, “ESG”, “SRI”, and “impact investing” were still in flux. And the field was growing, making it harder, not easier, to compare apples to apples when making investment decisions about risk, return, and impact.
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 multi-stakeholder research led to at least two important 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).
- The creation of the Impact Management Project. A natural outgrowth of the research, “the IMP” was incubated by Bridges Ventures. Nearly five years later, after conferring with hundreds of organizations to develop consensus about measuring and managing impact, 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” categorization system, which organizes enterprises and investments by their impact strategy, has been thoroughly vetted globally and is currently being integrated, thanks to the IMP’s structured network collaborative, into the major impact ratings, standards, and certifications.
Fast forward to late 2020 and the importance of classification has become clearer still. ESG investing, now accounts for about 1 of every 3 dollars professionally managed in the US, with 42% growth since 2012, according to the USSIF’s 2020 report released last month. Globally, the GIIN has reported annual growth of assets under management for impact investing ranging from 30-50%.
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.
In our view the Impact Management Project’s use as a means for classification in impact investing will become ubiquitous in 2021, for individual funds and across full portfolios.