A Simple guide to: Getting started with impact investing
ImpactUpdated on May 9, 2023
Table of Contents
Impact investing is not just a buzzword, it’s a signal that there’s a momentous shift towards social and environmental awareness – one that attracts serious investment attention. Family office investment priorities are moving away from purely financial outcomes, to ones that help make a more positive impact on society and the world at large. For family offices wanting to enter the impact investing space, this guide offers an in-depth introduction to impact investing and breaks down how and where to get started with impact and developing a strategy that actually makes a difference.
Ensure your investments match your values
Over the past decade, an emerging trend towards social and environmental consciousness has started to reshape investment strategies in the family office sector. Family Office investment priorities have begun to shift away from purely financial outcomes, reflecting a growing emphasis on harm reduction and achieving a positive impact to society and the world at large. Next-generation leadership and other influences such as regulators, governments, shareholders and the public at large are driving the growth of responsible investing, of which Impact Investing is an important subset.
Impact Investing has not only become a popular buzzword in investment circles. It is attracting serious investment and looks set to grow exponentially into the future. If you are a family office wanting to enter the impact investing space, ensure that your intent is authentic and that you are willing to put in the time, effort and resources to rally behind it and make it happen.
What is Impact Investing?
There is a proliferation of investment strategies that incorporate ethical considerations into the investment process, including Environmental, Social, and Governance (ESG), Socially Responsible Investing (SRI), and Impact Investing. These are industry terms often used interchangeably but there are actually distinct differences between the various subsets of responsible investing. Although a hybrid approach is often taken, it is important for Family Offices to correctly define their investment strategy as it affects how portfolios are structured and determines whether specific investments are suitable and aligned to broader investment goals.
ESG considers the environmental (e.g. pollution), social (e.g. child labour), and governance (e.g. transparency) practices of an investment that could impact on financial performance. ESG factors are used to supplement traditional financial analysis, identifying opportunities and risks that exist outside of technical valuations. Although there is an element of social consciousness, the underlying objective of ESG remains financial performance.
Socially Responsible Investing goes one step further than ESG in terms of ethical consideration. Investments are selected or eliminated according to specific ethical guidelines, motivated by factors such as religion, political beliefs and personal values. Examples of negative SRI screens could include exposure to tobacco, gambling, terrorism or human rights violations. An SRI approach still prioritises financial goals but aims to achieve these goals without compromising specific principles and values.
Impact investing is an approach that aims to achieve measurable and positive social and environmental impacts. As an emerging and fast-growing asset class, it presents Family Offices with a significant opportunity to channel capital into investments that target positive social, economic or environmental impact while still supporting their financial goals.
Two key components of Impact Investing
Intention: Intention is a critical element of impact investing. In isolation, positive social outcomes do not constitute an impact investment. To be classified as an impact investment, positive social and environmental impacts need to drive the original investment decision.
Measurement: Impact goals should be well-defined and aligned to the core underlying motivation behind the investment. Impact measurement and management is essential to understanding the socio-environmental effects of an investment and evaluating whether investments are achieving the defined impact goals.
The Impact Investment market
Impact investing has grown exponentially over the last 10 years. In 2020, the impact investment market grew to approximately $715 billion in assets under management, according to GIIN. Global challenges such as climate trends, economic inequality and some burning political platforms like gender disparity and racial injustice are providing the fuel to further accelerate impact investment growth into the future. There is also a realization that private sector impact investment will be key to closing the $2.5 trillion annual gap in funds required to achieve the UN’s Sustainable Development Goals (SDGs) by 2030.
Tackling the challenge of impact measurement
With many institutions jumping on the impact bandwagon and making bold impact claims, ensuring accountability and transparency has become essential to minimise impact-washing. That is why there is a big drive underway to align companies and asset managers to best practices in impact measurement and reporting. Frameworks and tools like IRIS+, the SDGs, and the Impact Management Project (IMP) have helped develop consistent, globally accepted guidelines on how to classify, characterise, measure and report impact. These improved standards of impact measurement and management have played an important role in facilitating the recent growth of genuine impact investment.
Three trending topics in the Impact Investing space
Climate-change mitigation has been an increasingly popular focus for impact investors over the last ten years, with renewable energy investment receiving the bulk of this investment. Today, investors have a growing set of options within this space with opportunities to support communities affected by climate-change and to achieve global net-zero carbon emissions. Influential gatherings like the UN Climate Change Conference of the Parties have also supported a greater level of commercial interest in businesses and projects that can help reduce carbon footprint.
Businesses and investors alike have begun to recognize their responsibility in addressing inequality challenges both in society and business. Calls for improving the equality of access to affordable capital, goods and services are being answered with increased investment into initiatives that address racial and gender inequality. This is evident in America, where CDFI’s (community development financial institutions that help communities traditionally underserved by the banking and investment system) are now receiving significant cash injections from the private sector to further advance racial equity.
According to analysis conducted by McKinsey & Co, there is a strong and growing correlation between leadership diversity and a company’s financial performance. Both ethnic and gender diversity have been found to be significant determinants of success. Research has indicated that companies in the top quartile for gender diversity on executive teams are 25% more likely to have above-average profitability than companies in the bottom quartile. It was also found that the greater the representation, the higher the likelihood of outperformance. The findings are equally compelling in the analysis of ethnic and cultural diversity. Top-quartile companies outperformed those in the fourth one by 36 percent in terms of profitability. However, progress in terms of diversity is still slow with McKinsey reporting that female representation on executive teams is only 20%, while representation of ethnic minorities stands at only 13%. The key take-out from this analysis is that, where there is room for improvement, there is an opportunity to invest.
Steps to developing an Impact Investment strategy
Review previous strategy with the intent to identify which priorities should be maintained, scaled up or discontinued.
Assess leadership and organisational structure to ensure that you are equipped with the right people and roles to tackle a directional change.
Allocate resources and time to building and implementing an effective strategy
Identify and engage key stakeholders throughout the value chain. By involving all interested, invested and affected parties upfront, you pave the way for constructive collaboration and buy-in during the strategy development phase.
Explore participation in Impact Networks. Complex problems are sometimes best tackled through teamwork which is why a number of impact networks, with distinct areas of focus, have emerged over the past few years. Social impact networks like GIIN, Toniic and AVPN offer a platform for collaboration driven by shared purpose and can be very beneficial to organizations making the first move into the impact space.
2. Determine your Impact Objectives
A good starting point is to reach consensus on your core purpose. Your core purpose should be an inspirational, specific but ambitious statement of intent that describes the way you would like the world to be e.g “An end to poverty in the world”.
The next step would be to articulate your impact objective. This is the long-term and measurable change that you want to achieve through your investments and activities e.g. “Reduce the youth unemployment rate in your country”. Reaching consensus across the leadership team and consulting with key stakeholders and shareholders would be strongly recommended to ensure alignment of priorities.
3. Employ a strategic framework
At this point, it is advisable to utilize a strategic model that helps to structure all the key components of your impact strategy into a logical visual or narrative. A popular framework for Family Offices is the Theory of Change (TOC) model which documents the impact an organization wants to achieve and maps out all the supporting initiatives, their impact assumptions as well as the necessary allocation of resources. The ToC becomes your live strategy document which translates your purpose into a measurable impact objective and provides you with a structured high-level plan to be continuously tracked and evaluated. Additionally, it is a great strategic platform from which to build your operational plan.
4. The Theory of Change model
Inputs refer to the investments or resources that need to be allocated to the planned activities.
Activities are the actions that will be taken to achieve specific results that support broader planned outcomes.
Outputs are the immediate results achieved from executing the activities. These outputs serve as dependencies for achieving desired outcomes.
Outcomes are the pre-conditions, or things that need to change, in order for your long-term impact to be realized. They can be split into long-term, mid-term and short term outcomes.
Impact is the starting point for your theory of change, the goal and intention around which the strategic plan is built. Your impact statement should clearly articulate the long-term change you want to achieve.
Example: Your impact statement may be to reduce unemployment in your country. One activity to support this could be to sponsor career counseling workshops in disadvantaged communities. An immediate output of this could be improved enrolment in tertiary. A longer term outcome of this output would be a higher number of tertiary graduates entering the job market.
5. Organisational analysis
Analyse current culture and values to determine whether your vision, mission, organizational priorities still align to your impact strategy.
Review resource requirements to ensure that you have the right structures, roles and competencies in place to manage the implementation, tracking, reporting and financial processes associated with your impact investments.
Review leadership and governance, including a review of the Board, investor and investee roles, composition and skills. You must ensure that you have the right people and processes in place to support your impact agenda.
What is impact investing?
Impact investing is an approach that aims to achieve measurable and positive social and environmental impact through investment.
What is social impact investing?
Social impact investing uses financial provisions to generate a positive outcome in response to social challenges. As society becomes more aware of injustices, social impact has become an extremely relevant investment.
Why impact investing?
Supporting ventures that lean toward social or environmental changes, leads to not only minimising or completely eradicating the challenges that affect people locally but can also contribute to creating a better planet. This means that investors are using their wealth to encourage a cleaner environment and a sustainable future for all.
What is the difference between ESG and impact investing?
ESG is a framework used to evaluate how responsible a company’s operations are. Impact investing is an investment strategy that seeks to create positive and measurable social and environmental change through investments.
Connect with one of our experts
Our experts help wealth owners use their capital to create the world they want to live within.
A Simple multi-family office guideOperations
In this guide, we're taking a high-level view of the different types of family offices, and then drilling a bit deeper into the multi-family office space and providing some food for thought when assessing the attractiveness of this option.
ESG for family offices: How to draft an ESG statementOperations
ESG is no longer just a buzzword associated with impact investing. For future-thinking family offices, incorporating ESG into all financial decisions is key. Here's what you need to know about ESG and how family offices can draft an ESG statement.
6 steps to selecting family office technologySoftware
Traversing the sometimes confusing and time-consuming task of family office technological improvement is a challenge that needs a process. Here are the six stages you can use as a guide to help make this determination, circumvent analysis paralyses, and make impactful improvements.
A Simple guide to single family office structureOperations
The emergence of new wealth and an increasingly complex business environment have driven the recent growth of single family offices. Although costly, the single family office concept is a sophisticated and effective vehicle through which to professionalise the management of family wealth and protect it for generations to come, whilst also aligning all activities to a long-term purpose.
In the media