Different shades of impact in private debt

PENSIOEN PRO PARTNER ROUNDTABLE

Many Dutch pension funds want to scale up impact allocations, particularly in private markets. But ambition can collide with reality when strict impact definitions shrink the investable universe and constrain diversification. Different shades of impact may offer a balance, yet this raises another question: are investors getting the kind of impact they want?

Impact in private debt is not one thing. At one end of the spectrum sit ‘pure play’ strategies that finance companies whose core products directly tackle societal challenges. At the other end are portfolios that align with sustainability themes without an explicit impact objective. In between lie transition strategies, ESG-linked loans, and blended approaches. But at what point does impact stop being impact?

Initiatives like the Global Impact Investing Network (GIIN) emphasize concepts such as intentionality and additionality. Is the impact deliberately pursued, or simply a by-product of operating in a specific sector? Would the activity have taken place without the investment? The answers shape the investable universe, determine portfolio construction, and ultimately influence risk and return.

For pension funds, the challenge is practical: how to navigate between impact alignment and impact generation? Pensioen Pro invited eight pension fund representatives and asset managers to a roundtable to test definitions, compare approaches to manager selection and measurement, and to discuss possible trade-offs.

What qualifies as impact?

The first challenge is defining impact. Anne Kock, who chairs Pensioenfonds PGB’s investment committee, puts the dilemma in clear terms: “If you define impact within private debt, should all investments align with that definition, or do you allow deviations? For example, if you apply a strict GIIN definition, do you also allow transition investments?”

Pension investor APG builds on GIIN but has an in-house approach. Marcin Lenart, Expert Portfolio Manager in Alternative Credits at APG AM: “When we started searching for impact managers in private credit four years ago, impact was often focused on operations rather than products and services. We encouraged a move toward product-based impact, in line with the GIIN/IRIS+ definitions. However, IRIS+ was originally designed for emerging markets, with, for example, circularity not fully covered. So we stepped up and developed our own APG-backed impact library built on top of the IRIS+ metrics to address gaps, and we share this with our external managers.”

Definitions are crucial, agrees Sarah Stols, Associate, Alternative Manager Research at Van Lanschot Kempen. “Partly because of impact washing and reputational risk, but also because we genuinely care about impact and don’t want to label something as impact if it is not. The GIIN definition leans toward pure-play positive impact, but the term impact is also used loosely to describe positive change or transition.”

Stols clarifies that Van Lanschot Kempen doesn’t necessarily focus solely on pure-play positive impact. “But we use our own framework in assessing the level of additionality and define investments as transition, SDG aligned/sustainable, or positive impact. For example, providing a loan to a school in a well-developed area may align with sustainability, but it doesn’t necessarily increase access or close a gap. Financing a school in an underserved area focused on affordable education does. That would be closer to positive impact investing.”

Ralph Engelchor, Lead Portfolio Manager at Achmea, views private debt as an excellent asset class for impact, particularly for cost-conscious Dutch pension funds. “Generally, they focus on pure-play positive impact investments, GIIN-based, complemented by additional themes. Private debt offers cost-effective access to companies that deliver positive change. We focus on solution providers; companies whose products and services are inherently impactful.”

Fang Wang, Head of Private Debt and Infrastructure at IMAS Foundation: “In direct lending, most strategies are SFDR Article 8, but there are many shades of green. At the manager level, we look at net-zero commitments, participation in industry initiatives, PRI scores, and ESG integration throughout the investment process. We also assess ESG-linked ratchets tied to KPIs. At the product level, we see more tangible alignment, for example, asset-based financing such as EV leasing or electric boats serving offshore industries.”

Pure play or more balanced?

At the portfolio level, defining impact often comes down to the distinction between impact-aligned and impact-generated. The first focuses on investing in companies that already deliver positive, sustainable impact, often aligning with existing goals. Conversely, impact generation emphasizes creating new, measurable, ‘additional’ real-world impact that is directly attributable to the investment.

‘Pure play’ impact objectives, focusing on 100% impact, can lead to a constrained universe, limiting diversification and performance potential, says Orla Walsh, Managing Director and Head of Portfolio Management for Barings European Private Credit. Impact, in her view, must sit within a fiduciary framework. “Our objective is to deliver appropriate risk-adjusted returns. In credit, diversification and downside protection are not optional extras but structural necessities. If you narrow the universe to a subset, you are inherently increasing risk.”

Within Barings’ large mid-market direct lending platform, ESG and sustainability specialists work alongside investment teams. Around half of the platform maps to KPI-tracked ESG-linked or impact-aligned loans. Walsh: “We don’t hunt for impact opportunities in isolation. They emerge naturally from the broad opportunity set.”

Sean Allen, Director of Stewardship at Barings, clarifies that his firm’s model is layered rather than impact-first. “Our approach is fundamental ESG integration across the board. We then work with clients on more enhanced solutions.”

Allen: “The question is how to address clients who require intentionality. When reviewing the portfolio and considering ESG-linked loans, we might finance a foster care home or a specialist care provider. In both cases, we link impact-related KPIs to quality-of-care outcomes and include performance-based ratchets. But yes, this is not impact generation in the strictest sense of intentionality.”

Stols: “We look at it across layers. First, the company’s intentionality: does the positive impact tie directly to its financial success? Then, at the manager level, we assess the level of intentionality through their theory of change and investment process. Finally, at our level as selectors, how intentional are we in selecting and working with managers? It’s layered and nuanced. It’s important to be clear. Some clients are comfortable with transition investments, but you shouldn’t label these as pure positive impact.”

It is important to enforce your own definitions with external managers, confirms Lenart. “At APG, we expect that a majority, typically around 60 to 70 percent, of the investments will have an impact according to our definition, and in practice, we aim higher. Secondly, we require Outcome KPIs, aligned with IRIS+, to be reported annually. Where appropriate, we encourage the external managers to link part of their performance fees to this impact, ensuring incentives are aligned.”

Raymond van Wersch, Lead Portfolio Manager Alt Credit at PGGM, points to another risk with credit: “I was wondering how everyone looks at sponsored versus non-sponsored deals, especially the overlap between private debt and private equity. How do you avoid concentration risk in the same company? Being a lender and a shareholder is not ideal when things go sour.”

Return, risk, and diversification

A small impact universe can limit diversification and create concentration risks. Walsh: “If you are an equity investor pursuing concentrated strategies, that’s different. But in private credit, diversification is critical, especially in the current macro environment with geopolitical shifts and AI disruption. The question is how to expand impact without compromising diversification.”

Engelchor states that a thematic focus can also pose concentration risks. “Many clients prioritise a small set of themes such as climate, biodiversity, and health. We then often suggest multi-thematic strategies to preserve diversification. That requires an honest discussion with clients: the solution in the end may not be a perfect match, but it will balance diversification needs.”

Stols: “It’s important to take a total portfolio view. Diversification across sub-asset classes within private debt can mitigate concentration risk. Safeguarding the investment must remain central. If a client wants a specific theme or geography, you may need to broaden sub-asset classes or widen the impact lens toward transition to maintain an investable universe.”

Kock also looks at total asset allocation. “Diversification can also be achieved across main asset classes, not just within fixed income.”

Allen: “We indeed discuss broader private debt strategies with clients, such as infrastructure debt or real estate debt. Impact can span multiple sub-asset classes.”

Kock: “From a systemic impact perspective, combining equity and debt financing may be even more powerful.”

Van Wersch: “We believe that within our 3D investment strategy, it makes sense to integrate both bonds and loans into one credit mandate. That way, you can make a better assessment of risk, return, and impact, drawing on public markets and private loans when they add value.”

Van Wersch stressesflexibility. “If opportunities arise within integrated, broader credit mandates, we can add impact private loans alongside corporate bonds. That way, trade-offs are made from a total portfolio point of view. Financial return is crucial. As the impact credit universe is small and diversification in credit is key, we have decided not to have a strategic allocation to impact private credit. We always look at the added value of impact direct loans in the context of the total credit portfolio.”

There is always a trade-off

Lenart cuts to a core question: “I think the most important question is: when you invest in impact, does it generate the same returns as non-impact?”

Wang: “You can likely achieve similar returns, but you do have to consider that your investable universe becomes smaller. Traditional direct lending focuses on non-cyclical sectors like B2B services, healthcare, and education. If you move into impact themes, you may sometimes take on more cyclical risks, for example, in manufacturing or services. The key question for us is: how can we achieve greater sustainability without compromising returns or taking on more risk?”

Allen points out that one must always make compromises. “It’s important to define non-negotiables versus acceptable trade-offs. In commingled structures, differing client requirements can complicate portfolio management. Segregated accounts can help, but not every asset owner has sufficient scale. So there is always a trade-off.”

Gregor Rossen, Senior Portfolio Manager, Alternatives, at Aegon Asset Management, counters that limiting the investable universe is the intended effect of impact investing. “Shrinking the universe is intentional. If you invest everywhere, you don’t create change. You consciously select companies aligned with a certain vision of the future.”

But Rossen acknowledges that those choices have consequences and points to the importance of analysing correlations. “There may be correlations we don’t yet fully understand. Investments aligned around a similar vision of the future may behave similarly. During recent software turmoil, we reviewed our portfolio and found limited exposure, partly because the sector didn’t align with our impact focus. That illustrates how sub-selection shapes exposure.”

Van Wersch reiterates the PGGM approach to 3D Credit investing, in which integral portfolio management of both bonds and loans is key, and where private credit can play a positive role in assessing return, risk, and impact.

The challenge of impact measurement

If portfolio construction is the first bottleneck, data is the second. Across the table, there is broad agreement that measurement is improving, but also that data are difficult to compare and often hard to aggregate. Rossen: “My main question is whether we can develop clearer ways of measuring impact and create more standardisation around it.”

Stols agrees: “If you cannot measure impact, you cannot manage it.” But she also stressed practicality. “You need a balance between ambitious targets and KPIs that are also achievable, so that they are actually implemented and met.” And quality matters: “You do not want to rely on estimates that are far off or based on listed proxies.”

Wang pushes on the hard edge of that challenge: on qualitative outcomes. “Sometimes investments claim to be SDG aligned, but the assessment is qualitative and not easily measurable.”

Rossen: “You also have to accept that some things cannot be quantified. We ask managers for company-level KPIs and analyse them, but you cannot always aggregate them. That is just reality.” And even when you can aggregate, you still face an interpretation gap. Rossen: “If you report ‘tonnes of waste treated’ or ‘CO₂ avoided’, what does that really say?” Kock makes the link to causality. “And how is this linked to actual change?”

Stols argues that storytelling helps investors communicate what numbers cannot. “Some impacts cannot be captured in one leading KPI. But case studies can show theory of change and give a more holistic picture of what the portfolio is doing.”

The measurement discussion touches on a more practical question: how much influence does a lender really have to get the right data? Wang: “We are the lender, not the sponsor. How much control can we exercise?”

Walsh’s answer is grounded in incentives. “After a loan is signed, we may offer pricing benefits for ESG or impact data. But the reality is that even then, providing the data is not the first priority of management; it’s running the business.” Over time, Walsh suggests, sponsor sophistication is improving, and data flows are increasing even without hard requirements.

Headwinds in the US

The roundtable also shortly addresses the headwinds for impact, specifically in the US. Allen notes that this has changed the sustainability team’s approach. “The last couple of years have not been easy. But it has made us very data-driven in how we look at our client base.” He observes that some US companies still have a clear impact angle but don’t frame it that way.

In Europe, these US developments raise hard questions: can US private debt strategies meet European impact frameworks? And will sponsors tolerate reporting requirements? Kock explains: ”If an investor wants US exposure for diversification, will it meet our impact framework and definitions, and will it report in the way we want?”

Kock describes how this affects allocation decisions. “In our private portfolio, we tend to move a little away from the US for now. More to Europe, but we are definitely looking at emerging markets too. We are seeing that when we invest in US impact strategies, we may have to let go of more restrictions in our impact framework.”

Rossen also sees possibilities in emerging markets. They may offer high additionality, and “if you look purely at impact, there are many opportunities in emerging markets, because you can leapfrog older technologies.”

Outlook

A recurring question is whether strict impact definitions inevitably shrink the market, or whether investor demand is expanding supply. Lenart argues strongly for the latter. “The market is not shrinking; it is growing because of demand.”

Lenart notes that in the early years, many impact managers offered low returns, making allocations more challenging. “However, last year we saw clear momentum. Demand from asset owners has increased, leading to stronger supply. We now see more credible managers offering competitive products.”

Fund sizes are also increasing. Lenart: “Years ago, impact funds were very small, €200 million, €300 million, €400 million at most. Now we see impact funds in Europe approaching €1 billion in size. Larger funds can allocate deals more flexibly, potentially improving risk profiles for investors who need scale and stability.”

Engelchor agrees but warns that capital growth does not automatically translate into more qualifying companies. “If over the next 24 months another 20 asset managers raise €1 billion impact funds, does this mean that the number of qualifying companies really increased? Or is there a risk of creativity in labelling, calling companies ‘impact’ to make the product work?”

Participants:
→ Sean Allen, Director of Stewardship, Barings
→ Ralph Engelchor, Lead Portfolio Manager, Achmea
→ Anne Kock, Trustee & Investment Committee Chair, Pensioenfonds PGB
→ Marcin Lenart, Expert Portfolio Manager, Alternative Credits, APG AM
→ Gregor Rossen, Senior Portfolio Manager Alternatives, Aegon AM
→ Sarah Stols, Associate, Alternative Manager Research, Van Lanschot Kempen
→ Raymond van Wersch, Lead Portfolio Manager Alt Credit, Mandate Mgt, PGGM
→ Orla Walsh, Managing Director and Head of Portfolio Management, Barings European Private Credit
→ Fang Wang, Head of Private Debt and Infrastructure, IMAS Foundation