The Six Dynamics of Impact Investing
Since my first acquaintance with business and finance in high school, I have been hoping to find a novel commerce-based concept that will change things for good. While completing my BBA, the 2008 financial meltdown spurred me to think more about ways financial systems can better aid our society. Coupled with some experience in social enterprise, my passion for ‘social finance’ led me to discovering microfinance and impact investing.
Impact investing is a particularly intriguing financial phenomenon for me. Under impact investing, financial transactions are executed not only with the motive of a monetary return but also to seek social/ environmental returns.
The Canadian financial market is gradually accepting and learning more about impact investing. There are lots of informative materials being published on impact investing, one notable publication being, “A Market Emerges: The Six Dynamics of Impact Investing” (The Six Dynamics).
The Six Dynamics is the second report of the Impact Investor project, which is a partnership initiated by InSight at Pacific Community Ventures, The Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business and ImpactAssets. This project’s primary purpose is to develop an impact investing knowledge base through data and guidance from successful impact investment funds worldwide.
In the Six Dynamics report, we can find illustrations of diverse impact investing practices along with the identification of six distinctive elements of impact investing. These impact investing revelations make this report a recommended read for a novice and even an expert.
For a taste of the report’s intelligence and practicality, here are some examples of how the six dynamics of impact investing relate to our country’s financial market.
1. Active Investors
Compared to conventional investing, impact investors play a more comprehensive and active role in the development of impact investments funds as ready-made funds are rarely available. Furthermore, since impact investing is a relatively young field in Canada, the incumbent impact investors play an important role of testing the waters and potentially attracting more investors in the future. A great Canadian example of a high-profile impact investor is Arlene Dickinson and her investment in La Siembra.
2. Pioneering Funds
Successful impact investment funds need to be diligently assessed, and investment strategies and expectations need to evolve through experience. To do so, the funds will require large financial resources, in-depth investment knowledge, strong industry connections, and a focused mission. The pioneering RBC Impact Fund, which is the first major Canadian financial institution to engage in impact investing on a large-scale, fits these requirements very well.
3. Financial Ingenuity
The traditional financial systems are a good starting point for developing the impact investing schemes. While making adaptations to the traditional investment models, deliberate efforts need to be made to ensure that the deviations are kept to a minimum. By doing so, mainstream investors won’t be dissuaded away from impact investing due to complexity and/or unfamiliarity. Additionally, impact investment funds should be structured with risk reduction elements. The concept of government lender risk reduction programs such as CSBFA could be applied to impact investment funds as well.
4. Platform Influence
Establishment of large-scale retail impact investment platforms will help the industry grow to a great extent. Currently, there are few organizations taking the lead in developing such platforms in Canada. Amongst them is the Resilient Capital Program, which provides a financial vehicle for depositors to earn a guaranteed fixed return through investments in social enterprises.
5. Performance Problem
Since most impact investment funds are at an early stage, concrete data on financial and social performance are not available to prove any success. One of the ways to deal with this issue is to focus not only on tracking financial output, but also consequent outcomes of the impact investments. The Ontario Ministry of Economic Development and Innovation has recently taken the initiative to assess outcomes measurement for its innovation activities’ expenditures.
6. Aligning Interests
It is imperative to ensure that all parties involved in the impact investment process have a common goal. Through transparent and articulated communications, impact investment entities can ensure that all parties have aligned interests. This will help avoid any conflicts related to the operations and outcomes of the impact investment fund.
Our nation’s social finance and impact investing industry is at a burgeoning stage. Hopefully, by engaging readers and advocates like you in discussing reports like the Six Dynamics, the attainment of far-reaching ‘do good’ financial models is not far away.
Photo credit: Pictures adapted from the Six Dynamics report.