How To Build Your Impact Investing Strategy

Published in

StartingUpGood Magazine

11 min readDec 7, 2020

This post is part of a series highlighting sessions from the SOCAP 2020 Virtual Global Impact Summit. Continue reading for information on creating an impact investing strategy.

Key Takeaways

The impact investing strategy building process is about 3 things: mitigating risk, maximizing impact and achieving targeted returns. All three of these things need to be done right or it’s unlikely the approach will be sustainable
Social finance strategies are on the rise, particularly in light of COVID, reiterating that if you’re not thinking of companies’ impact on people and the planet, you’re missing something in the way you’re thinking about which companies are going to be long-term, sustainable and successful
Understanding what motivates your organization and how your organization defines success will make your impact investing strategy more successful

NOTE: All screen captures included below come from the presentation above. The content and ideas remain the intellectual property of Spectrum Impact.

Summary

This session is an interactive workshop hosted by Spectrum Impact on how to start building an impact investing approach internally. It offers a deep-dive to help inform how you can get started on impact investing, questions to start asking across your organization and a plan to chart your course. Additional resources from Spectrum Impact can be found below.

Spectrum Impact’s Impact Investing Toolkit
Why and How: An Impact Investing Webinar Series

Speakers

Rehana Nathoo, Founder and CEO of Spectrum Impact

Session Notes

At Spectrum Impact we work with mostly investors and allocators, for-profit and private players
Rehana Nathoo has worked at the UN, the Rockefeller Foundation, BNY Mellon and the Case Foundation. Through these experiences she found the challenges facing these very different entities were more similar than different
Of those attending today, 35% are responsible for designing an impact investing strategy or product within their organization. Others are either individual investors who want to learn more, are already running impact investing programs and products, or are entrepreneurs and/or students
30% of attendees are from nonprofits/NGOs or foundations (and a small representation of for-profits). There is great representation from third party fund managers and family offices as well as entrepreneurs, students and educators
Why an impact investing strategy? It’s a formal, intentional, long-term plan outlining what you want to do and what you hope to see. A strategy framework is formal, meaning it’s a very articulate plan of what the actual activities, outputs and eventually outcomes will be
It’s intentional: it’s prescriptive but doesn’t eliminate room for pivoting
It’s long-term: this piece is quite important in the impact investing universe; part of the value of imp investing strategies is that they plan for the future
Often in large organizations or companies, when decisions have to be made, the impact investing strategy — the new thing that’s not fully baked — is the first thing to go
Ultimately, the impact investing strategy building process is about 3 things: mitigating risk (at the individual or institutional level), maximizing impact and achieving targeted returns; without getting all three things right, it’s unlikely that the approach will be sustainable
Although impact investing is a innovative solution to a complex set of problems, it’s not an entirely new way of doing things

There is a level of insecurity that our clients are willing to take on, and in exchange for that they expect a potential return
What makes this hard is also what sets impact investing apart — there are measurable, intentional positive outcomes that are targeted through the investments that are made
The challenge we have is to continue to balance the trade off between risk and return and also make sure they integrate impact in a thoughtful way
So, in the work we do a) all three things need to be considered and b) in the way risk and return have a comparable relationship, so does impact — there is generally a high risk tolerance intended for high impact outcomes, but (contrary to traditional investing approaches) there may be an acceptability that return will be subordinate or that it won’t happen at all, or return will be sacrificed for impact to occur
We need to take that traditional comparable relationship with risk and return, infuse impact into it, and start to change our assumptions a bit (the risk return impact interplay)
When approaching impact investing strategy, decide what the priorities and non-negotiables are and figure out your sweet spot across these three dimensions (risk, return, impact)

The spectrum of capital you can choose from is really equivalent to a spectrum of risk, tolerance and return expectations
As you move across the risk/return spectrum you are also making some decisions around the impact you want to see
For every schematic out there in the social finance ecosystem there’s another schematic out there that refutes it; there are always different ways of doing this work and exceptions to the rule
See: The Bridges Report, 2017

Global Sustainable Investing Report, 2018
This is a growing set of investment approaches to a really compelling set of problems that we have to deal with as long as we’re on planet earth
Social finance strategies are on the rise, particularly in light of COVID; we’ve enjoyed two quarters of outperformance — reiterating that if you’re not thinking of your impact on people and the planet, you’re missing something in the way that you’re thinking about the companies that are going to be long-term, sustainable and successful

Spectrum Impact circulates its methodology around the above 4 key steps
Designing a strategy is the hardest part. A lot of organizations struggle to find consensus on why we’re doing this work at all
There’s training and engagement to do after building a strategy — don’t go straight to design; internal capacity building is crucial
Step 4 is the thought leadership piece — sharing what you’ve learned, particularly when it goes poorly; private investors don’t have the luxury of opening the books but there are ways of talking about what did and didn’t work without sharing financials

A lot of our clients walk into our doors with a very particular vision — our job is to test those assumptions; what do your activities specifically mean/what are you motivated by
All but one of our clients came in with very different assumptions of what success looks like depending on the teams that are involved (ex: clients that say their c-suite wants one thing but our project team wants another)
Shared objectives need to be created and they need to be shared across the organization
It’s important to scan the market; we don’t need brand new ways to approach problems — why we’re doing it and how we’re doing it is where the difference lies. Go out to the field and look at organizations that are designed similar to yours and look at: do they have the same risk tolerance? Are they trying to achieve the same outcomes?
The efficiency lies in deploying capital in something that makes sense for you using tested mechanisms; resources are often wasted trying to create something brand new
Measurement is critical in the strategy design process; measurement is the best way to understand if your resources are being deployed effectively
IMM= Impact management and measurement (approach that you can use to figure out if your investment is achieving the desired outcomes)

Every organization is doing this work for some type of recognition (which could be internal or external); understanding what motivates your organization and how your organization defines success will make your strategy more successful
On the other hand, ask: what does failure look like? Once we’ve painted a vision — are we all in agreement with that vision?
Self awareness: asking what resources you as an organization have to solve a particular problem — sometimes investors come in wanting something very different than the organization’s plan/capacity
At Spectrum Impact, we need to set realistic goals for each organization and understand its resources for when consultants aren’t there anymore

There is a misconception that revenue oriented capital and philanthropic capital need to sit separately. There’s a way to create synergy and integration is important

Many people said investment goals were either to a) generate profit or b) preserve your initial investment. By asking this, we’re getting an idea of your expectations around risk, return and investment and will use certain tools accordingly to meet specific returns
Knowing the type of profit you need to generate has with it some direction on the types of asset classes you should be invested in, and those things together give us what type of impact you can have (ex: if you are particularly interested in private market investments — venture capital or private equity — we know that traditionally these assets incur a higher amount of risk but they also often promise a certain amount of return, and in the impact investment space, investments into these companies’ products and funds tend to have higher impact)
Equally important — understand the types of investments you’re already engaged in, and understand your limits by asking: what can you not do? This gives insight into who you should be supporting, what types of capital you should use, etc.

Is there one metric that quantifies risk, return, impact?

In our work, we do not use one particular metric; we use these questions to eliminate approaches. Our clients don’t need that one metric because after our strategy process they feel good that their approach is creating the best return for them, but some measurement tools are helpful
Most of the time in our strategy work we create an acceptable floor or minimum threshold, which could be around returns or is an impact threshold — ex: we are doing this work because we want to see X — sometimes that’s output oriented like 100 lives touched, sometimes it’s outcome oriented like we want to see the eradication of poverty in X, Y, Z geography
This approach differs for each client, but we do spend a lot of time trying to assess what the minimum we are willing to accept is on the three categories — risk, return, impact

How long are we willing to wait to see if an approach is working?

From this interactive poll question, most respondents said 1–3 years, which is traditional. This questions is as much about liquidity as it is risk tolerance
1–3 years is not congruent with the way venture capital investments work typically; there are ways around that like convertible instruments that provide liquidity to investors
But, we have a check and balance in our strategy process that says even though our clients are interested in venture capital, there is a lack of tolerance to wait that long; this isn’t a bad thing, it just allows us to get to a place where the capital you have to deploy is appropriately displaced across the risk-return spectrum
The question around what to invest in is important because it gives us a sense of who your partners are that are helping you demonstrate whether the thing you’re doing is effective
So, if you’re investing directly into end beneficiaries, startups, communities, and other companies, you can use your investees to help aggregate data and create a baseline measure, you can ask for their help in figuring out the type of impacts they’re having
If you work indirectly, you mostly invest in intermediaries like CDFIs or fund managers and you probably need to come up with a framework at the investor level that you can give to your managers to help them figure out what they need to gather from their portfolio companies
If you use a hybrid approach, you need both
Word of caution: often the burden of reporting is passed on to the entities that are least set up to do it
For a lot of investors the impact measurement and management activity happens at the entrepreneurial level (often early proof of concept, innovative startups); for them, the demand for measurement is very burdensome
We work with our clients to level set expectations on the right kind of data you can ask for and who you can ask
On the IMM side, we’ve made progress. In the GIIN’s annual survey for 2020 there are 14–26 frameworks that are free or at-cost and easy to use
We are using technology to provide better measurement frameworks (but aren’t yet at the standardization we want)

How do you think about change? Ex: Do you have to take on the burden of due diligence? Do you co-invest? Etc.

These questions are all mechanisms for how you can tell where you land on the risk-return spectrum

How do foundations make indirect investments and find those opportunities?

We’ve noticed that foundations coming to impact investing for the first time are particularly unaware or unfamiliar with the approach and hold lots of misconceptions around returns and complexity
When designing a product, step 1 is to find out the actual internal tolerance and expectation around the investment vehicle and step 2 is to scan your peers

Mapping assets is figuring out what bucket of money we’re designing a solution for (and then setting short and long-term targets)
Some of the most compelling examples we have in impact investing in the venture capital space are 7–10 year funds
Some of the best private equity success takes fund 1, 2, 3, 4, etc. to really be able to see above-market or market-adjusted performance
We need to understand in the beginning that there are limitations to the products themselves
We use two things to codify an investment staying on track — an investment narrative and an investment policy statement (both give our clients tools to understand why they invested in this in the first place)

How are you uniquely suited to add value? Most said by being highly innovative and able to bring new solutions
The perceptions of risk can be as prohibitive as actual risk
Start to get a sense of what you don’t know — start to convene conversations with your stakeholders, identify which resources you can deploy to the problem, ask if you have progress and performance measures to use, etc.
All it takes is a few critical intrapreneurs to start this process

Want to know more?

For more SOCAP content, visit full session recordings on YouTube or see here for other Starting Up Good summaries of our favorite recordings.

Brady Press is a Director at Changing Our World, where she specializes in building strategic corporate citizenship programs. She is a consultant to SDGCounting and StartingUpGood.