New ‘impact classes’ framework aims to bring clarity to impact investment

Initiative comes from US consultancy Tideline

A framework aimed at making it easier for financial advisors to talk to their clients about impact investment is under development by US-based consultancy Tideline – which has been engaging with high-profile organisations including JP Morgan, BlackRock, Morgan Stanley and Zurich Insurance Company.

The framework dubbed ‘impact classes’, is outlined in Tideline’s new working paper Navigating Impact Investing, The opportunity in impact classes, written in conjunction with Professor Cathy Clark at Duke University, and supported by Omidyar Network, the impact investment focused foundation created by eBay founder Pierre Omidyar.

The paper says interest in impact investing is growing rapidly, but warns there is an “acute need” for clarity and understanding for the next step in the market’s evolution.

Speaking to RI, Ben Thornley, co-founder of Tideline, said during the work on the report, Tideline identified that there was difficulty in articulating, analysing and differentiating the ‘impact’ in impact investing.

“There are many different sectors in which investors can do impact investing, including health, financial inclusion, social housing,” said Thornley. “But we realised there is a need for a way to distinguish investment opportunities with specific targeted impacts versus those more broadly committed to ESG incorporation. It’s a very difficult conversation since there isn’t really a shared framework or language.”

Tideline’s working paper says while asset classes provide a framework for grouping investments with similar financial characteristics, there is no equivalent shorthand for the ‘impact’ in impact investing, i.e., no set of objective categories of investments that share similar impact characteristics and can be more readily compared and contrasted.

The paper suggests the development of ‘impact classes’ could address this need.Thornley says: “There is a lack of a high-level framework to make it easy for an advisor to talk to clients about how impact investments have impact. There is much discussion about whether there is a “trade-off” between financial return and impact in impact investing.

“The reality is, there can be: sometimes impact practices enhance financial returns or reduce risks and sometimes they require additional resources or are untested and uncertain. But it is difficult to have that conversation with an investor now because there is no accepted way of talking about the interaction between impacts and financial risk/return.

“Some investors are willing to accept or even want a “trade-off”. They will make an investment for the impacts being targeted even if the return is not competitive or the risk is disproportionate. But they can’t understand whether the trade-off they’re making is reasonable: it’s not clear what to benchmark it against. A classification could help make this decision clearer.”

For more mainstream investors mainly looking for market-rate returns, Thornley said impact classes could also help them sort, compare and benchmark impact investments. “We are planning on working closely with a handful to help them apply the framework and embed it into their research and diligence.”

Tideline plans to do further research and market engagement to inform the next stage of it developing impact classes, saying it could lead to a more navigable roadmap for impact investing.

The Advisory Group involved in developing the paper includes the Global Impact Investment Network, Blackrock, the Bill and Melinda Gates Foundation and Christian Super.

Tideline was co-founded by Thornley, who was formerly managing director at Pacific Community Ventures; Christina Leijonhufvud, a former MD at JP Morgan who founded its Social Finance business a decade ago and Kim Wright-Violich, former CEO of Schwab Charitable.

Tideline launched last year in response to what it call a “significant acceleration of institutional activity in impact investing”.