By Hamlin Lovell, NordicInvestor
While the growth of impact investing has accelerated, definitions and approaches vary widely. Allianz Global Investors (AllianzGI) has a clear definition for impact, as discussed in their White Paper published this summer: Investing for meaningful impact in private markets.
The approach is to seek measurable evidence of companies’ positive impact on environmental and social goals, and to this end companies are grouped into three categories.
The top group are “Significant Positive Impact”, where goods and services core to their business models are solving key environmental and social challenges, often reaching underserved populations and markets, (and avoiding unintended negatives).
The second group, Positive Benefits, still need to avoid negative outcomes, and produce a good impact, but it may not for instance be reaching underserved populations. They need to raise their game to earn a meaningful place in AllianzGI Impact portfolios and the third group, Sustainability Improvers, have even more work to do to become investible for Impact portfolios (and rather, would likely sit within broader sustainability strategies).
Enterprise and Investor level impact
Enterprise-level impact is measured through the AllianzGI framework, a proprietary set of criteria, which is aligned with industry standards such as the Impact Management Project’s five dimensions of impact and the Global Impact Investing Network’s IRIS+ metrics. Key metrics could include tonnes of C02 avoided, underserved customers reached, or income gain to customers.
Alongside enterprise or company level impact, AllianzGI also seeks to identify investor contribution, through financial investment in underserved geographies/entrepreneurs and/or active engagement- to enhance impact generation.
Handprints and Footprints
“We really focus on the company’s handprint, in terms of its positive contribution to environmental and social outcomes, as assessed by our impact framework,” says Nadia Nikolova, Sustainable Private Credit AllianzGI.
The “handprint” measures if revenues of the core business model are aligned to products and services generating positive outcomes. One example could be energy efficiency solutions for buildings, where percentage of revenues coming from this service would be measured. “Companies with a good handprint are very intentional and mission-driven. In addition, they typically seek to maintain a good reputation on footprint measures such as emissions,” says Diane Mak Head of Impact Measurement and Management.
The firm also looks at company footprints in terms of DNSH (Do No Significant Harm) criteria, which is backed up by measurable KPIs. Scope 1, 2 and 3 carbon emissions are the footprint, which is also being used to define impact by some funds. Some direct lending funds using one or more of ESG integration, sustainability improvement, Paris Alignment, Sustainability Linked, or climate transition indices and/or criteria call themselves “impact”, but they may not be pursuing the same goals as other impact investors.
AllianzGI also has its own perspective on negative impact pathways, which can go beyond the EU SFDR definitions of Principal Adverse Indicators (PAI). “For instance, when I was based in the US looking at educational deals, some private universities did not qualify because the students would have a lot of debt at the end of their studies, and at the same time the low quality of teaching at some of these institutions meant learning or employment outcomes were poor. In contrast affordable and high-quality educational technology programmes which supplemented more “traditional” classroom learning, and which had a good evidence base for improving maths or reading outcomes, may be good candidates for impact investing,” explains Mak.
Key sector focus areas
Within climate change, AllianzGI broadens out the concept to include “planetary boundaries”, which covers biodiversity, where there is a huge urgency to find plastic replacement alternatives, as well as sustainable agriculture and green fertilisers that do not leach toxic chemicals.
Examples of possible focus areas could include alternative education pathways to a college degree, which can narrow the skills gap, as well as digitization of healthcare to let practitioners spend more time with patients and prevent “double dosing”.
Impact Due Diligence and Investment Committee
Mak and her team focus on impact aspects throughout the lifecycle of potential and actual investments, working with portfolio managers to design, scope and carry out due diligence on impact themes, areas of focus and individual investments. They are scored for potential positive impact, based on meaningful and relevant KPIs, which can be monitored and managed.
Mak and her team provide deal input as part of pre-screening based on either overt red flags or simply a positive handprint that is not significant enough. In these cases, the idea does not proceed to in depth due diligence. Mak is also a member of the investment committee for deals that progress.
Engagement, deteriorating performance and remedial action
Mak finds impact pathways, such as handprint, and commercial performance, are very closely correlated, but companies need to be closely monitored because their business models can change. If a business is not generating enough positive impact and companies are falling behind on KPIs (or even generating negative outcomes) engagement can be an option. Early detection signs lead to engagement with the company and private equity sponsors.
“Red flags on a DNSH threshold require specific intentional engagement with a company to understand what has happened, and what mitigation actions can be taken over what period to avoid a recurrence,” says Mak.
AllianzGI is generally the sole or majority lender, and thus has a controlling creditor position, which can give it a high degree of influence (even if it does not have as much power as an equity shareholder).
Company size focus
The average direct lending fund has increased in size over the past 10 years, which has shifted the focus to mid to large companies. There are fewer direct lending strategies focused on lower mid-market companies as AllianzGI is.
Emerging and Developed Markets (EM and DM)
AllianzGI aims to apply a consistent impact approach across developed and emerging markets, seeking to pursue the same SDGs, but there are practical reasons for differences in the impact process: “in practice, data limitations in EM mean that we work more closely with DFI partners and rely on their assessments. In developed markets our own analysis plays a larger role, “ points out Mak.
“The Emerging markets context creates an additional layer of credit / political / currency and other risk which require assessment. In these markets, we tend to partner with Development Finance Institutions and use blended finance to reduce said risks to our investors.,” says Nikolova. Providing capital where it is scarce, in underbanked countries, is one example of impact in itself.
In DM most of AllianzGI’s impact investing is in Europe, but it can extend to other OECD countries. , Allianz GI does not expect impact strategies to sacrifice investment returns. Competitive returns are sought.
To download the full whitepaper visit: https://l.ead.me/bePotk or contact philip.vonplaten@allianzgi.com and carl.winnberg@allianzgi.com
This is a marketing communication. For investment professionals only. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns.
