Managing and measuring impact in private markets

• Flows into private market impact investments are growing rapidly, as 2021 rising AUM and record new fund launches show
• Yet further growth in impact investing requires defined processes for frameworks to assess and measure impact
• Allianz Global Investors (AllianzGI) has developed a proprietary framework, aligned with industry best practice, for measuring and managing impact generation in private markets

Our approach to managing and measuring impact aligns with the industry’s leading principles and standards and is integrated across our investments’ lifecycles. (see Exhibit 1):

I.    We establish impact objectives that target key societal challenges in line with the United Nations Sustainable Development Goals (UN SDGs).

II.   We assess the impact materiality and additionality of potential investments by applying our impact scoring system (more below), which is aligned with the five dimensions of impact as defined by the Impact Management Project.³ In order to inform our impact decision making, we have integrated this impact scoring assessment into our investment committee’s investment selection process. This has the potential to contribute significantly towards targeted impact objectives.

III.  We identify core impact key performance indicators to measure and report against, where possible, aligned with the UN SDGs and the Global Impact Investing Network’s IRIS+.⁴ Our intention is to demonstrate impact delivery, as well as to communicate our active engagement with investees in ways that generate greater impact where feasible.

IV.  We are committed to continuous testing, learning, and market-building to strengthen our approach to impact generation. Through partnering with leading impact measurement organisations such as 60Decibels, we are testing impact measurement approaches, and support market-building efforts. For example, we are participating on the UK CFA Institute’s Impact and Investing Panel to develop a pioneering impact investing qualification. As we continue to implement our impact framework across our strategies, we are learning from our experience and advancing our process and methodology on behalf of clients

Exhibit 1: Key components of the AllianzGI impact framework

Source: Allianz Global Investors

1. Consistency of the impact assessment process, incorporating the flexibility to adapt to different private market asset classes and strategies.

We consistently assess impact contribution across two key components:

– Enterprise impact: An enterprise or project’s social and/or environmental impact. This focuses on whether the enterprise/project’s core business model makes a positive, material, and measurable difference – either by meeting a proven need in society or by delivering a clear environmental benefit.

– Investor contribution: The ways in which investors contribute to the impact generated by their investments differ across asset classes and strategies. For this reason, we tailor our impact scoring system to provide different incentives for us as an investor to contribute to impact generation.

For example, as a limited partner investing indirectly via a private equity impact fund manager, our additionality may be achieved by engaging with the fund manager on impact topics as part of the Limited Partners Advisory Committee (LPAC) or as part of an Impact Advisory Council. When we invest directly in debt, we may contribute through negotiating use-of-proceeds and impact reporting requirements that are then embedded within the loan agreement. These requirements ensure that loans are made for impactful activities and that their impact is measured robustly.

For our blended products, which AllianzGI typically manages in partnership with a development finance institution (DFI), the partner may apply its own impact assessment framework when performing impact due diligence on potential investment opportunities. In this case, we work together to ensure broad alignment of impact objectives and assessment frameworks to be confident in our investments’ ability to deliver a material impact. When it comes to financial contributions, AllianzGI’s expertise in structuring investment vehicles with different risk tiers enables commercial investors to co-invest alongside DFI partners in emerging markets. Consequently, this additional capital contributes towards narrowing the annual gap in financing the UN SDGs.

Exhibit 2: Components of the impact scoring system



Source: Allianz Global Investors

2. Considering both potential positive and negative impacts

It is important to identify both positive and negative impact pathways, and to appropriately account for potential material negative impacts in our impact assessments. Consider a skills training programme that improves employability and, ultimately, wage levels for its students, but strains them financially due to its expense. We would apply a lower impact scoring relative to an affordable yet high quality skills training solution.

Alongside implementing our impact approach, we also assess and manage environmental, social and governance (ESG) risks as part of our risk assessment, and we continue to monitor these after investing.

3. Application of data and evidence to increase our confidence around impact generation

Depending on the quality of the product or service being offered by a potential portfolio company and the implementation context (eg, focus geography, target population), investments within the same thematic area can have highly differentiated impact. That is why we go beyond selecting purely promising thematic areas (eg, education), towards applying investment-specific data and evidence where possible to assess impact potential (eg, is there evidence to indicate that this education product can deliver better outcomes for students?). The most important impacts generated by an investment are not always intuitive. Leveraging best available data and evidence where feasible – independent studies, product-specific life cycle assessments⁶, service-specific customer surveys, and sector benchmarks – help increase our confidence that the investment can deliver impact.

4. Enabling comparisons of impact materiality and additionality across investments

We want to understand not just whether an investment has the potential to generate net positive impact, but also the impact’s materiality and how additional that impact is to society. To assess the level of materiality, we quantify where possible the degree of potential impact using best available data and evidence, as aligned with the impact pathways identified (eg, estimated tonnes of CO₂ emissions cut/waste reduced/water saved for environmental pathways; or number of students reached and percentage improvement in learning gains or earnings increase for education outcomes pathways).

We also consider impact additionality by assessing the level of competition in the market for similar products or services, and the degree of market maturity and penetration. The more differentiated the product or service offered from an impact generation perspective, and the lower the penetration rate of similar products or services in the specific implementation context, the higher the potential additionality. This analysis equips us to compare investment opportunities to see how we can generate the most impact, alongside targeted financial returns.

During the due diligence process, our assessment of a) the enterprise or project’s social and/or environmental impact and b) the investor’s contribution towards impact generation are aggregated into an overall impact contribution scoring. This is integrated into the investment committee’s decision-making, alongside financial considerations.

Exhibit 3: Impact scoring system in practice – financial inclusion-focused investment

This impact assessment process enables us to better understand the relative impact merits of potential investments. Over the life of the investment, we update our impact assessment based on the latest evidence and data, which allows us to track our portfolio’s progress in delivering impact. By identifying which of our investments are excelling – or falling short – in impact delivery, we can work with our fund managers and portfolio companies to address challenges and build our impact knowledge for future investment opportunities.