￼Adopting Impact Investment Strategies
Pioneering leaders in Impact Investing reflect on their experiences, lessons learned, and how to best align decision makers within organizations
A growing number of progressive organizations and individuals are exploring the adoption of an impact investment strategies. These organizations are pioneers in this new and promising form of social capitalism. We thought now was a good time to reflect on their experiences, lessons learned, and how to best align decision makers within organizations.
Our full report, entitled Adopting Impact Investment Strategies: Lessons Learned from Pioneering Leaders is a compilation of our thoughts and those of four Canadian impact investment leaders: Edmund Piro of the JW McConnell Foundation (JWMF); Annette Aquin of the Hamilton Community Foundation (HCF); Martin Garber-Conrad of the Edmonton Community Foundation (ECF); and Julia Langer of Toronto Atmospheric Fund (TAF).
Below are outlined the Four Steps to Success identified in that report.
STEP 1: DEVELOPING A PATH TO IMPLEMENTATION
One of the common threads we picked up early on was that each organization had found their own path to implementation. That said, they shared several common challenges such as mission alignment, board engagement, establishing goals and strategies, ensuring that appropriate governance structures and policies are in place, identifying advisors, and building the internal and external infrastructure to facilitate their programs.
The organizations often cited the influence of early impact investment advocates like Tim Brodhead, Bill Young and Betsy Martin and the release of the Task Force on Social Finance (TFSF). Their report in 2010 made a number of important recommendations including that all foundations aim to have 10% of their assets invested in impact investments by 2020. While most of the organizations we interviewed had entered the arena of impact investment prior to the release of the TFSF, it served as a pivotal event.
New entrants should recognize that these organizations carried out preparatory work — such as board development and board augmentation — often several years prior to their first investment.
STEP 2: ADAPTING THE INVESTMENT POLICIES AND PROCEDURES
We spent some time discussing the importance of amending investment policy statements and the changes necessary to implement decision-making processes. There were a number of common themes. For example, boards were expanded or augmented to include the relevant experience and skills and new investment committees were created to provide the appropriate governance structures to handle new types of investments. It is interesting to note that, in all cases, the first investment made was structured as a loan.
Ongoing commitment from the CEO and staff was clearly required to keep the boards and investment committees moving forward. Early investments proved universally difficult, often as ‘one offs’ and as a result they consumed a lot of staff time and legal fees. In addition, complex rules facing charities and foundations necessitated the creation of investment holding structures such as trusts.
STEP 3: BUILDING THE REQUIRED RESOURCES
The resources needed to implement an impact strategy are greater than traditional endowment asset management. Aside from the amount of staff time required for the moment, we found two primary areas where extra resources were needed. The first area related to the due diligence teams. Unique skills were required to analyze the financial potential of direct investments, private equity funds, and unusual loan structures. At the same time, the abilities to select and oversee traditional investment managers also had to be maintained. Second, additional legal and tax expertise was required. The rules around foundations holding limited partnerships and direct investments were often unclear. And new deals needed to be structured with appropriate downside protection negotiated.
These are unique skills not traditionally found inside foundations where public equities and bonds are the norm. These skills can be expensive to acquire. Traditional private equity investors can spend up to one year on the due diligence on a single deal. The analysis they perform is detailed and painstaking. All stakeholders are typically interviewed, including fellow investees and those who declined to invest. On one deal alone, HCF’s advisor spent more than 90 hours performing the ‘deep dive’ due diligence. As with traditional investments, due diligence is required post investment to monitor portfolio holdings.
STEP 4: MEASURING AND MONITORING FINANCIAL PERFORMANCE AND IMPACT
The organizations we interviewed universally had mature protocols for monitoring traditional investment performance, and while they were certainly able to measure the financial performance of their impact investments, it was generally too early to comment on relative performance to traditional assets. As well, most would agree that existing tools for measuring social and or environmental impact are inadequate. It is still unclear whether it will ever be possible to fully quantify the social impact of these programs. The challenges in developing a system that is intellectually honest, simple and effective were acknowledged by all. It seems the approach taken most often is to get started with investing and then laterally develop policies around impact measurement.
FINAL NOTE: THE FUTURE OF IMPACT INVESTING
We believe that investing strategies will remain as unique as the missions of the organizations that initiate them. We expect approaches to range from to illiquid, high-risk, high-impact investments in direct deals to strategies that mirror those of the traditional markets. We greatly appreciate these pioneers for sharing their experiences to-date and believe they should be lauded for their efforts to expand the mission of their own organizations, as well as their ability to draw together new sources of capital in search of effective solutions to our greatest social and environmental challenges.
Editor’s Note: This piece is excerpted from Ann & Denis’ full report, Adopting Impact Investment Strategies: Lessons Learned from Pioneering Leaders. It has been posted here with the author’s permission. I definitely recommend you read the unabridged report – it is only 5 pages long and quite a good read!