Organizing for Impact Investment

There is a wide range of impact investors and each of them has their own unique set of investment and impact goals.  In addition, institutions and other organizational forms which assume responsibility for investing the assets of others, such as foundations, endowments and investment funds, have legal responsibilities as fiduciaries of the ultimate owners of the assets which are being invested.  Each asset owner must address the fundamental questions raised in this chapter and establish a sufficient level of internal formality to build the team and other resources necessary to make good decisions about impact investing, even if those decisions are limited to the selection of intermediaries to actively manage the assets on a day-to-day basis.  Intermediaries, such as fund managers, must also create an organizational framework for impact investing that can be explained to their prospective investors. 

Organizing should begin with visiting (or revisiting) a series of fundamental questions and issues relating to the investment and impact motivations and goals of the asset owner or fund manager.[1]  Simply put, this is the time to wrestle with the fundamental question of what the owner or manager is looking to achieve by engaging in impact investing.  A simple, yet comprehensive, framework for preparing to launch an impact investing programs recommended by Rockefeller Philanthropy Advisors (“RPA”) involves consideration of the following[2]:

·       Why is the asset owner/manager interested in impact investing?  Asset owners and fund managers may have several reasons for considering impact investing including a desire to have a social impact, an interest in integrating traditional investment focused on financial return with philanthropic activities, an interest in supporting the development of innovative technologies by social entrepreneurs looking to implement those technologies to address social problems, a belief that market forces can contribute to the pursuit of social good, an interest in using data and sophisticated data analysis to optimize potential impact, a belief that capital markets can expand the scope of impact beyond traditional philanthropic initiatives and a recognition that impact investing can provide competitive financial returns.

·       What type of changes is the asset owner/manager seeking to achieve through impact investing?  Many investors begin with a list of broad categories such as poverty, health, climate change and/or education, or look for opportunities to invest in funds, enterprises and projects that are focused on specific challenges (e.g., delivery of innovative educational technology), populations (e.g., women, children, elderly, people of color or people with disabilities), locations (e.g., a specific neighborhood area) or institutions (e.g., advocacy organizations, hospitals, schools or charities).[3]  Another approach is to provide support for various parts of an ecosystem created for the development and deployment of innovative technologies to address a range of social problems.

·       How does the asset owner/manager intend to assess progress toward achievement of the goals for impact investment and the desired changes from impact investing?  Asset owners and fund managers must select appropriate tools for measuring the social impact of their investments alongside financial returns and have metrics and processes for measurement in place before each investment is made.  When setting financial and impact targets, consideration must be given to the risks associated with achieving those targets.  Financial risk is an intensely studied and well understood concept; however, the art and science of impact risk is still emerging and metrics are imprecise.  For example, using impact investing to support the development of innovative technology not only involves risks that the development efforts will fail and/or the technology will not lead to the anticipated social outcomes, but also may lead to unintended consequences and negative effects.

·       When does the asset owner/manager expect to realize the anticipated financial and impact returns on the impact investment?  The scope of the challenges that are typically addressed by impact investing generally requires more patience on the part of investors than traditional investments.  When the goal is to develop and implement innovative technologies to address a given social problem, the process may take several years and the efforts will likely run into unanticipated problems that will slow progress.  While the end result will hopefully be substantial social impact and a strong financial return, it will take time and impact investors need to be comfortable with longer time horizons for both social change and financial return.

·       Who does the asset owner/manager need to work with in order to achieve success and growth?  While an asset owner or fund manager can have social impact acting alone, sustainable success and growth comes from working with others and asset owners and fund managers must decide on who they will look to for help in identifying and management impact investment opportunities.  Asset owners and fund managers generally seek to put together a group of investment and professional (i.e., legal, tax and accounting) advisors and build connections with peers in the investment and philanthropic communities who can share experiences and best practices (and offer chances to learn through co-investment, which is also a good way to allocate additional capital to worth projects in order to accelerate and broaden their impact).  Asset owners and fund managers must also consider their appetite and resources for engaging with management of enterprises in which direct investments are made and, in the case of asset owners, the fund managers that they select as their intermediaries.

The answers to each of these questions are the inputs that the asset owner or fund manager needs to effectively prepare for engaging in impact investing and the answers should provide the asset owner or fund manager with a good idea of the level of readiness for actually getting started and the information that is necessary in order to prepare certain investment governance documents that can be used as guides for organizing impact investing activities and creating and implementing the investment strategy.  The asset owner or fund manager should also establish a plan for achieving “investor readiness”, which RPA has described as requiring clearly defined implementation goals and strategies, including a relevant timeline; consensus with key stakeholders, such as family, board, staff and others; relevant experience and expertise, internally from staff or externally from advisors; organizational momentum and capacity, such as processes and systems; and an intentional approach to building the portfolio and finding and managing impact investment opportunities.[4]

This article is an excerpt from my chapter on Organizing for Impact Investment.   To learn more, read my new book: Sustainable Finance and Impact Investment: A Guide for Sustainable Entrepreneurs.

Notes

[1] When used herein, the term “fund manager” should be construed broadly to include managers of the full range of intermediaries described in the previous chapter including charities and other nonprofit organizations that pool contributions from a number of investors and impact investment funds including mutual funds, exchange-traded funds, money-market funds, venture capital or private equity funds and hedge funds.

[2] Impact Investing: Strategy and Action (Rockefeller Philanthropy Advisors Philanthropy Roadmap), 3-10.

[3] Many investors look to the UN’s Sustainable Development Goals (“SDGs”) to identify themes for their impact investment activities and many publications mapping impact themes to the SDGs and their targets (e.g., impact themes aligned with SDG 3 (Good Health and Well-Being) include access to health care, maternal and reproductive health, mental health, and fitness and wellbeing) are available.  See Sustainable Development Goals: Impact Theme Network (Toniic).

[4] S. Godeke and P. Briaud, Impact Investing Handbook: An Implementation Guide for Practitioners (Rockefeller Philanthropy Advisors, 2020), 147.