With the rhetoric around impact investing reaching new heights, foundations and
nonprofits would do well to keep the following in mind: Similar to grants, or different forms of non-grantmaking support, impact investing is but one tool in the social impact toolbox.
Just as there are ineffective grants and poorly chosen traditional investments, there are poorly conceived and executed impact investments. On the other hand, when they are planned strategically and executed competently, impact investments can have enormous value and deliver a scale of social impact that may be difficult to achieve, or sustain, with other tools. And, they may yield other less tangible but deeply felt benefits — such as a new appreciation for the variety of ways in which your institution’s assets can make a difference in the world, and a way for otherwise disparate stakeholders to work together toward a common purpose.
10 Critical Questions
To increase the odds of realizing this enormous potential value, we recommend prospective institutional impact investors consider each of following critical questions at some point during the planning and investing process.
- What is the primary driver for your interest in impact investing, and how do you see it fitting into a larger portfolio of traditional investments and charitable activity? For example, do you identify with the divest-invest movement? Or are you trying to seed and grow social enterprise?
- What are your financial (investment return) and social or environmental objectives?
- Are there other internal objectives — such as engaging next-generation members or board leaders in your organization? And do you have the necessary understanding and buy-in to meet those objectives?
- Are you interested in direct investing, or via a fund or other intermediary?
- How stringent are your social or environmental criteria? Who can and should help you define what these criteria should be?
- What is your timeframe for realizing both investment and social return? Do you need an exit strategy?
- How engaged do you want to be with the investee/s and with the social impact you create?
- Do you currently have the capacity to plan, execute, and evaluate your investment/s?
- How do you plan to measure your outputs and outcomes?
- After exiting an investment or concluding an engagement, what will success look like to you from both the financial and social perspective?
Addressing these questions can give an organization some much-needed clarity and direction, in an increasingly crowded and complex field. The process can also flag areas of concern or opportunity, and confirm whether impact investing is in fact the right tool to use. Assuming the answer is yes — answering these questions can also help an organization begin to develop a social impact profile and or approach, for impact investing success.
Building a Roadmap
Developing your own unique social impact approach is ideally the second step in an impact investing roadmap, following a period of learning from the field. Coming to the table armed with some information will help you breathe easier (and make smarter decisions). Your roadmap might include the following organizational milestones:
- Learn from the Field
- Include history, trends, benchmarks and case studies, sectors, popular tools, relevant government policies, and the myriad actors involved; the relevance of education for board and staff; and making connections with peer institutions with impact investing experience.
- Develop a Social Impact Approach
- Now you’re ready to grapple with the 10 critical questions. Use your answers to identify the impact investing “sweet spot” — the alignment between your organization’s purpose, the change or impact it seeks to make, and its internal capacity to execute and measure the success of an impact investing program — while taking into account critical factors like risk and opportunity cost.
- Evaluate the Social and/or Environmental Return of Impact Investments – then Learn – and If You Can, Share.
- Strategic evaluation provides a more rigorous understanding of an investment’s “double bottom line,” to appreciate consequences both anticipated and unintended, and to kick-start learning on an organizational level. If you’ve had a successful exit – dig into the reasons for that success. If not, explore reasons for that, too. And finally, consider sharing your learning with peers.
If you’re ready to learn more about impact investing: welcome! You are joining a big and growing field, with new players, intermediary groups, information sources, and supporting infrastructure. As the marketplace continues to mature, an effective roadmap — informed by the 10 critical questions outlined above — will help your foundation chart its own unique course for success.