The impact class concept was introduced in detail and vetted at the in-person meeting of the project’s Advisory Group on February 10, 2016. The following section includes highlights of that discussion, as well as the feedback received from 27 of the 40 participants in the meeting through a subsequent survey.
It is important to note the survey’s sample size of 27 is not large enough to be considered representative of the market at large, though the Advisory Group was convened to represent the diversity in impact investing, including by role, asset class, geography, focus, and other considerations.
Support for impact classes
As mentioned above, support for the concept of a categorization framework was decidedly positive. Eighty-one percent of the 27 respondents agreed “the field of impact investing needs a broadly accepted and applied framework for categorizing the many ways in which funds / intermediaries create impact through investment.”
Figure 15 below shows the idea of “impact classes” specifically also had broad support, with 15 percent of respondents ready to test the frameworks as presented, and another 67 percent seeing potential for impact classes, either in their own work or for the market.
Some participants were also enthusiastic about the specific variables and frameworks presented in this paper, but there is more work to be done to determine if the variables identified are appropriate, and whether they are being categorized and assembled in a way that will be useful to the market.
Prospective uses of impact classes
Participants in the February Advisory Group meeting were also surveyed on prospective uses for impact classes. In general, the responses were positive across various uses, with only one receiving less than majority support. Those that received the most support were: research, sorting investments, educating advisers, and portfolio construction. Public communication was viewed as the least promising use.
Regarding research uses for impact classes, one participant in the February meeting observed: “It may be helpful to have some sort of apples-to-apples comparison on the impact dimension. All these funds will be compared to one another, whether we decide what those groups are or not. Someone will put things into groups, and then someone will test the market based on that. It will make more sense if [this grouping] is based on input from practitioners, not just coming straight out of academia.”
On impact classes’ role in sorting investments, another noted: “Every year I come across [a new] investor and realize: You guys think about this the way we think about this … This clustering methodology enables us to say, here’s what I mean by that.”
Feedback: Common themes
Advisory Group members, project interviewees, and other market practitioners have been encouraged to provide input and feedback over the course of the project, including on February 10.
This feedback has reflected the particular perspectives in the market of practitioners, with accordingly varied levels of interest, support, and/or perceived value. The prospective impact class framework – like any other framework – applies more directly to the circumstances of some actors than others. In general, asset owners have been the most supportive of the impact class framework. Advisers have been relatively supportive. Investment managers have been mixed in their support, with those that emphasize impact in their work being the most enthusiastic.
The input can generally be grouped into the following common themes:
• Practicality and market uptake are key: Designing the impact classes for practical application will be essential to ensuring widespread use. One commenter noted that impact classes could be “a tremendous breakthrough” provided there is buy-in from asset owners and fund managers.
• Simplicity and clarity are paramount: Some commenters re-emphasized that the framework must be simple in order to avoid misinterpretation, misuse, and confusion.
• Questions about implementation: A few commenters observed that it will be important to consider how investment managers will be placed into impact classes – either through self-classification or by an empowered third party.
• Need for education: It may be difficult for some who are new to the space, including some advisers and their asset owner clients, to be able to immediately understand and adopt a new framework: Education would be required.
• Contribution to understanding of financial return: Some commenters noted that a framework focused exclusively on the impact dimension would not be useful to them unless it also contributed to a better understanding of financial risk and return.
Key risks to impact classes
Impact classes are not without risks. Informed by feedback from interviewees and Advisory Group participants, the following risks are among the most significant:
• Maintaining integrity and preventing abuse: Impact classes are intended to be nonjudgmental and straightforward to verify, ideally allowing investment managers to appropriately self-identify without the need for a third-party arbiter. There is a risk the impact class framework becomes murky and less usable if managers do not self-categorize accurately. Guidelines or principles for placing oneself into the correct categories may mitigate this risk.
• Maintaining impartiality and resisting distortion: Impact classes are not intended to indicate what products or investment managers are “more impactful.” Any variables that undergird impact classes should showcase a spectrum of viable impact practices, each potentially appropriate for different kinds of investors and investment managers. If this impartiality is not achieved or is lost during implementation, there is a concern that investment managers will manage to and message to what is measured, to the detriment of operational efficiency and clarity.
• Classification may limit innovation: One risk raised by practitioners is that placing investments into categories may inadvertently discourage innovation, by influencing the market to stay within those confines. Impact classes, though they do attempt to categorize and cluster, are not intended to exclude or limit new potential innovations. Care should be taken that impact classes do not become restrictive or determinative with regard to which investment managers receive funding and whether new models are able to gain traction.
In spite of the risks and the difficulty of adopting another new framework, 77 percent of February 10 meeting participants described the meeting as value-adding for the field and 100 percent indicated they would like to remain involved going forward either directly (85 percent) or peripherally (15 percent).
Meeting participants also emphasized the importance of continuing the effort. As one survey respondent wrote: “I think that issues around abuse/error and being reductionist are concerns but that net-net it’s still worth attempting.” Another commented: “I’m not concerned about a wasted effort among the advisory group. This is an issue that needs to be addressed.”