Instance Color textures prepares an image's pixels to map to geometric instance IDs. The node maps an object's instance IDs to an imported Texture map's pixels, starting at the bottom-left and counting in row-major order to the top-right. After that, the node wraps around and starts at the bottom-left again. In Figure 1, a 4 x 4 texture map and Instance Color Texture node map the four colors onto different objects using their instance IDs.
Figure 1: Using the Instance Color texture to vary the colors of instanced Objects