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Guide 

Social Impact Investing

Resource Learning

Social Impact Investing

What is impact investing?

Impact investing seeks to generate two things, a financial return and positive social or environmental impact. 

The extent sought in either category depends on the lens of the investor. Impact investing capital can be directed to a variety of asset classes, including direct investment in profit-seeking enterprises. Any market, developed or otherwise, is a candidate for such capital.

Impact areas are varied but include renewable energy, education, microfinance, agriculture, and healthcare. The Sustainable Development Goals offer a framework for impact investors seeking to invest using a thematic approach.

Impact Investing Market Size

In a 2017 survey of the global community of impact investors ( impact funds, development finance organizations, family foundations, etc.), the Global Impact Investing Network (GIIN) reported that those 200+ entities manage more than $100 billion in impact assets.

impact investing market size giinSource: The GIIN Annual Survey (2017)

Just a year later, in that same annual survey, that number jumped from $100 billion to $228 billion in impact assets (with a slightly larger sample size). In 2017 alone, respondents invested more than $35 billion across 11,000 impact investment deals and in 2018 that number is expected to grow by 8%.

 

 

 

Social Impact Investment Examples

Impact investors can be individuals or various types of organizations, and range from the person or entity holding the asset to the people making and/or managing investment decisions. Apart from individual investors, the following (while not an exhaustive list) are organizational types which might pursue impact investing strategies:

Private Foundations

While not as common, a growing number of private foundations are making impact investments. They do this both as a way to fulfill their mission through those investments and as a way to protect/grow their endowments. See why social impact should start with foundations.

Development Finance Institutions (DFIs)

While each DFI may have its own definition of impact investing, or where it falls on the spectrum of impact investing strategies, their focus tends to be the deployment of catalytic capital in emerging markets or simply in markets lacking private investment flow.

Banks

The private banking sector is also growing its foothold in the impact investing world impact areas such as agriculture, education, and social finance. Other banks, like Beneficial State Bank, have created foundations which own 100% of the economic rights of the bank and use that profit to make community-related investments.

Pension Funds

Another newer actor to the sphere of impact investing, pension funds are beginning to take the impact investing market more seriously. According to the World Economic Forum, only 6% of the pension funds in the United States have made an impact investment, although that number is expected to rise dramatically -- 64% say that in the future they plan to do so.


Non-Governmental Organizations (NGOs)

With more and more donors moving from philanthropy to impact investing, NGOs are also seeking to diversify funding sources by structuring impact investment opportunities. According to KPMG, NGOs can look to source and mediate deals between local constituents and impact investors, or design new interventions and seek impact investments themselves.

How to Find Your Ideal Match for Impact Investing? Read Here.

 

Type of Impact Investing

The spectrum of impact investing is a dynamic one, but attempts have been made to break down the range of impact investing approaches. One of the most notable comes from Sonen Capital and is pictured below.

impact investing spectrum

 

At one end of the investing spectrum we have traditional investing, which seeks financial returns with no impact lens whatsoever. At the other end we have philanthropy, and impact first approach with no financial return expectation. In between is where it gets interesting, and is where impact investing lives.

ESG Screening and Sustainable Impact Investing

 

The first two categories on the spectrum after traditional investing are still driven primarily by financial performance. But an impact lens is beginning to take form. Negative ESG (Environmental, Social, and Governance) screening, for example, is an approach which attempts to keep capital from being allocated to assets involved in “harmful” sectors of business. How that is defined is up to the investor or the fund, but some examples are given in the image above.

What follows is Sustainable Impact Investing, which takes those ESG factors into account alongside the financial returns expectation. Capital is allocated to assets which contribute positively to one or more of those ESG elements (even if somewhat indirectly) while also performing well financially. The idea is that investment opportunities that have good ESG scores will improve overall financial performance, and those with poor ESG scores will have poorer financial returns.

ESG Comparison - Investopedia

Source: Investopedia

 

Thematic Impact Investing

Thematic impact investing directs capital towards pre-defined impact areas (defined by the investor) while financial returns are also sought as a parallel priority. It is common for impact investors to have impact areas that they are more passionate about and thus have their portfolios constructed around this impact-seeking ambition.

Such investors seek specific solutions to this impact need. For example, an investor may see lack of access to drinking water as one of the greatest threats to humankind and therefore seeks to invest primarily in solutions addressing this need. Themes could also be broken down by region, for example, focusing investments in Southeast Asia.

Impact-First Investing

As the name suggests, the impact area takes priority as the driver of investment decisions. Financial returns ares still a factor, though not a dominating one. This category often demands a higher risk tolerance on the financial side, for example, targeting early stage solutions which haven’t had as much commercial validation but which have highly scalable impact potential. Or, the investment could be structure as an injection of patient capital into an asset, where priority is the social or environmental success of the impact-seeking endeavor and financial returns are either likely to be below market rate (this is a known factor) and/or paid back over long periods of time. Here are few examples of impact investing that will give you hope for the system change. 

Impact Investing Ecosystem

Asset Owner, Asset Managers and Assets

There is a major alignment breakthrough required between impact ecosystem layers

Three layers are:

  • Asset Owners
  • Asset Managers
  • Assets

For a better Impact Capital flow it is impact thesis alignment is critical.  Impact Cloud® is designed to improve impact data management at each layer.  In addition data pipeline allows to aggregate data between each layer in the trustable manner

Impact ecosystem

 

Impact Data Sharing

Different layers or entities at the same layer are interested in sharing various impact knowledge, such as 

  • Theory of change
  • Impact Strategy
  • Impact Indicators
  • Impact Data
  • Beneficiary Data
  • Project/program data
  • Impact Story
  • Impact Scorecard

 

 

SoPact - Financial Ecosystem-transparent

Impact Investing Funds

The GIIN’s ImpactBase provides a comprehensive list of impact investment products, including a directory of impact investing funds worldwide.

Best for the World also has a useful breakdown of their Top 50 impact funds (from 2016), including a rating system of each one across a variety of categories.

Lastly, the Toniic Directory, which is sourced from Toniic’s worldwide impact investor network, can be used to search for impact investment opportunities across asset classes.

Impact Investing Resources

Making IRIS+ Actionable

Make Impact Theme Actionable in Short Time

In May 2019, GIIN published one the most important impact accounting guidelines called IRIS+.  This is perhaps the most comprehensive impact framework that aligns many of the commonly known Impact Categories with 

Remember:

  • IRIS+ Taxonomy
  • IRIS+ and SDG Alignment
  • IRIS+ and the Five Dimensions of Impact
  • IRIS+ and Core Metrics
  • IRIS+ and Decision Making
  • IRIS+ to Incorporate Stakeholder Voice

 

While these guidelines a great starting point, investor would need an actionable platform for

  • Building Impact Strategy
  • Align IRIS and Custom Metrics
  • Align Data Strategy
  • Build Portfolio Strategy
  • Due Diligence Process
  • Results Collection from Portfolio
  • Actionable Decision Making System
  • Impact Scorecard

 

Curious about how Impact Cloud ® can enable you?

Learn More here:  Impact Management for Impact Investors

Impact Investing Due Diligence

As with any investment, the impact investing process involves a due diligence phase to assess the returns expectations of the investment.

Of course, this phase includes review of the financial indicators one might assess for a traditional investment. But it also includes impact due diligence, which is a bit more subjective in nature(depending on the needs or intentions of the investor).

Impact due diligence processes seek to understand the potential impacts of an investment and how they will be measured and reported. In an investment scenario in which an investor wants to directly invest in a company, to begin an impact due diligence process they might ask themselves questions like:

  • How does this company address a social need?
  • Is addressing this social need a core driver of the business?
  • Does its commercial approach lend itself to creating positive impact in this area?
  • Does it have an impact measurement system in place? What indicators does it use?
  • Are they aware of and/or mitigating any negative externalities of their business practices?

The key here is to assess the ‘impact risk’ of the investment. There is inherently more risk in investing in one company than investing in an impact fund. The tradeoff is that in the former your capital is put to work directly for a cause and the ‘impact return’ is more easily defined. With an impact fund the impact returns would be spread across the assets in the portfolio and impact measured by the performance of that fund as a whole.

See how impact data collection is changing?

Why Your Social Impact Fund Should Be Measuring Impact

A social impact fund exists to catalyze positive impacts through strategic capital allocation. Identifying investment opportunities (the change creators) is what they need to be good at. But they also need to be good at making sure they measure impact.

In this brief article, we’ll share why we think this last point is so important, making the case for both investees and investors to take impact measurement seriously.

For impact investing stakeholders, the reasons we will lay out can be used as strategic ammunition to either revamp those impact measurement processes or begin that important journey.

What is a Social Impact Fund?

It is worth first defining what we mean by social impact fund. Put simply, such entities use pools of capital (sourced in different ways) to make impact investments in change-making organizations.

Funds have differing levels of risk aversion, both on the financial side and on the impact side. But generally speaking, they will look for some spread of returns on both sides, and may even measure impact at not just asset level, but also at broader portfolio and investor levels.

Often, funds will have some sort of thematic focus to their investment strategy (for example, align with one of the Sustainable Development Goals).

UN-SDGs

Why Measure Impact?

The following three strategic reasons shouldn’t be taken as the only three. We feel they are three of the most important, in addition to the most basic reason of all: an impact fund need to know the extent of its impact returns.

With that in mind, here are the reasons why we think that measuring impact can and should form a core part of the strategy of impact funds.

 

1. Make impact investments more successful

Put another way, empower investees to really understand the impact they are creating (and therefore, the impact your capital is helping generate).

There are some social impact funds that won’t even make investments unless those potential assets measure impact. In any case, working with assets to make sure they have an understanding of impact measurement, and also the tools and resources (e.g. talent) to do so will make those assets better at creating that impact in the long run.

Because in managing impact data efficiently and effectively, assets are not only able to pass that data and those analyses along to their social impact funders, they are also able to use the insights to improve intervention design and outcomes for beneficiaries.

 

2. Increase credibility to attract impact investors

Social impact funds also need to attract individual investors and other sources of capital so that they can carry out those allocation strategies.

How might those interested parties who have money in their pockets gauge whether such a fund is worthy of those dollars? As with any investment, they will assess how likely is that the fund will achieve its objectives.

It’s quite simple -- if you and your fund can demonstrate, through transparent and authentic impact measurement processes, that the capital previously deployed has yielded impact then more impact investors will be interested in putting their money into your hands.

impact investing

That means going beyond showing number of dollars invested or number of social enterprises invested in, and really showing the impacts that those dollars have generated.

What has changed in beneficiary lives because of it? That’s where impact is and where credibility lies.

3. Mitigate impact risk

In traditional investing, a core part of the due diligence phase includes the assessment of financial risk. Therefore, for any impact investment, assessing the level of impact risk should also be a fundamental piece of the process.

However, doing so without data is virtually impossible, essentially defaulting the answer towards high risk because there is little to go on to determine an impact profile.

If you and your fund is considering further investment of an existing asset in your portfolio that impact data needs to be clear, accessible, and timely.

Otherwise, making “impact bets” becomes more of a gamble, as opposed to being the strategic, methodic process that any investment should be.

Social Impact Funds Have to Step Up

If we are to bring impact investing and social impact funds into the mainstream across the world, impact measurement needs to be a core part of that journey.

Demanding impact accountability, when done in a collaborative and supportive manner, helps assets step up as well. If they are better able to report on their impact, they are also better able to use those insights to improve how they deliver impact to beneficiaries.

This also helps social impact funds mitigate risk and attract more capital themselves. This is the beauty of impact data. You can put it to work to help make better funding decisions and improve investment outcomes across a portfolio.

We can help you get there by using our cloud-based platforms to work hand-in-hand with assets in the management of those important impact data. Click the button below to get started for free today.

 

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