impact investment strategy

How to implement an impact investment strategy

Impact

Table of Contents

Impact investing goes beyond the bottom line and allows family offices to direct their money towards positive transformation. These good intentions are not enough, however, and to make a real impact, you’ll need a solid impact investment strategy. In this guide, we break down how to establish and execute a successful impact strategy, one that enables good business decisions and outlines a framework to measure the outcomes.

1. Establish a strong foundation

One of the core ingredients and characteristics of an impact investment strategy is intent but be aware that intent alone is not a sufficient starting point for executing your first impact investment deal. The desire to make a positive and meaningful social impact needs to be supported by a sound impact investment strategy that anchors and guides the strategic and tactical investment choices that need to be made. Applying a commercial mindset, however righteous the underlying motive, is simply good business practice and sets the scene for a more long term and sustainable approach to impact investing.

2. Authenticity is key

Impact investing is becoming an increasingly trendy topic in boardrooms across the world. However, it is proving to be more than just a discussion point. There has been a significant growth in impact investment over the last few years and the expectations are that this trend will accelerate into the future.

As an increasing number of players enter this market, it is likely that the noise around impact investing will entice even the most conservative of investors and impact reporting will become a standard must-have in any annual report. Ultimately, it will be authenticity that separates the players when assessing their success in the impact space. A genuinely invested leadership team that rallies behind an aligned impact goal will most likely be putting in the adequate time, energy and resources into making a measurable impact. An impact objective driven by authentic intent is therefore considered an essential precondition for successful and sustainable impact investing.

3. An overview of Impact Measurement and Management (IMM)

One of the core characteristics of impact investing is that performance must be measurable. If resources are being employed to achieve a desired impact, it is essential to use a framework that tests whether your portfolio of investments are delivering their impact goals. IMM is the process by which impact investors can understand the effects of their investments on people and the planet (measurement) and then take action to adapt processes and improve outcomes (management). For this process to be successfully managed, there needs to be a consistent and disciplined approach, transparency in impact due diligence and reporting, and the use of best-practice IMM frameworks like the IFC Operating Principles for Impact Management (for high-level process management) and the IMP Five Dimensions of Impact (to drill down to activity-level measurement).

IFS Operating Principles for Impact Management:

The IFS Operating Principles have helped to establish a common discipline and alignment around impact management. They integrate impact considerations into all phases of the investment lifecycle.

IMP Five Dimensions of Impact:

The IMP framework supports the Theory of Change by ensuring that you have the appropriate level of clarity for each dimension and a holistic understanding across these dimensions. It also assists with the impact due diligence process as well as the monitoring, measurement and reporting of impact performance.

impact investment strategy

4. A five-point implementation plan checklist

When translating your impact strategy into an action plan, make sure that the following components are prioritised:

  • Impact goals need to be clearly articulated.
  • Roles and responsibilities must be well defined.
  • Activities are mapped out with timelines, budget and activity roles.
  • Stakeholder engagement plan is in place.
  • Organisational change-management plan is finalised

5. It’s an ongoing process

Impact investing is an iterative journey that will have ups and downs, successes and challenges. The key to success is good preparation and having the right team of people to translate your intent into the change you want to achieve. Every investment that you make will be a learning experience that will help you to improve your impact investing approach going forward.

6. The four steps to take before investing

Experienced impact investors know that preparation is key to success. Tackling the below four steps places your organisation in a strong position to make sound business decisions that are aligned to strategy, supported by all stakeholders and executed by the right team.
impact investment strategy
Formalise your impact strategy

Once there is agreement and alignment behind a broad vision of success or purpose, strategic planning can commence. The first and most important step in the strategic planning process is to establish the impact objective- the long-term measurable impact that you want to achieve through your investments and activities. Employ a framework like the Theory of Change model to then map out all the high-level supporting initiatives, their impact assumptions as well as the necessary allocation of resources. This will serve as a live blueprint that guides investment decisions and enables effective tracking and reporting. See our guide: “How to get started with impact investment" for more detailed guidance on strategy development.

impact investment strategy
Ensure organisational readiness

Before any investment decision is made, it is crucial that the right people, roles and processes are in place to support your impact investing approach. This must include a governance structure which details decision-making roles and responsibilities. A review of the Board itself may be necessary to ensure that you have the right leadership to drive your agenda. Functional support structures and competencies required for implementation, tracking, reporting and financial management is an area that is often overlooked but needs to be considered when it comes to resource planning and allocation. Company culture and values should also be reviewed to ensure alignment of organizational vision, mission and priorities to your impact objective.

impact investment strategy
Stakeholder alignment

The impact investment journey can have significant impacts on the strategic direction and prioritization of an organization, from both a commercial and non-commercial perspective. There will invariably be conflicting views and priorities when assessing any business transition and it is therefore critical to take a proactive and collaborative approach upfront with key stakeholders. Remember that stakeholders will have different focus areas and values and it is therefore crucial to be adaptable in your approach and develop an engagement plan for each stakeholder, keeping them continuously updated on progress. It is also advisable to balance attention across both financial and impact metrics to secure buy-in from all involved.

impact investment strategy
Identify external support requirements

Impact investing can be a complex space for newcomers and external advisors are sometimes needed to bring in specific expertise in areas like investment management, tax, accounting and legal or they may need to guide you through the entire impact investing process. When selecting an impact investment advisor, be sure that they have the credentials to deliver against requirements and satisfy your key stakeholders. It is advisable to partner with an advisor who has worked with an organization like yours and who can provide examples of how they have supported other organizations in achieving similar impact investment goals. Impact Networks like GIIN, Toniic and AVPN can also be useful resources for any organization entering the impact investing space.

7. How to develop an Impact Investment strategy

impact investment strategy
1. Select your impact investing tools
impact investment strategy

Impact investing tools are the mechanisms that you employ to construct your impact portfolio or influence change. More passive impact investors may utilise tools like screening (the inclusion or exclusion of assets to align with specific values), shareholder lobbying (the identification of corporate practices that can be influenced by shareholders) and ESG integration (the inclusion of ESG factors into financial analysis and investment selection). More ambitious impact investors will explore tools like thematic investing (focused on addressing one particular impact theme) and catalytic investing (Structured to generate positive impact whilst accepting disproportionate risk). Usually, a combination of tools is employed.

impact investment strategy
2. Finalise your time horizon
impact investment strategy

Establishing time horizons is an important step as it has significant impacts and implications on investment decisions. Investors who are solely focused on social impact may be inclined to only consider requirements associated with the social and environmental challenges at hand, often with a longer-term outlook. This can conflict with timelines associated with shorter term financial performance requirements. In line with the true definition of impact investment, it is always important to strike the right balance between financial and impact priorities when determining your time horizons.

impact investment strategy
3. Construct your portfolio
impact investment strategy

Select impact investments that support your Theory of Change and align to the impact tools and time horizons that have been determined. Investment products need to represent and support the impact goals that have been articulated and there needs to be clearly defined mechanisms for how to measure their impact. Some common investment channels include:

Fixed income: Provision of debt capital to drive a specific outcome

Public equity: Very liquid investment option that allows for ESG integration and shareholder engagement

Private equity: Allows for focused thematic and catalytic investment

Real estate: Can facilitate positive impacts to communities and housing.

impact investment strategy
4. Conduct Impact Due Diligence
impact investment strategy

Conducting thorough due diligence enhances investors’ capacity to make more informed investment decisions and increases the potential impact of their investments. Most approaches to impact due diligence fall within three categories: narratives of expected impact (Written descriptions of anticipated impact), due diligence questionnaires (sets of questions about prospective investees’ impact that usually all potential investees are required to answer), and quantitative tools (Quantitative due diligence tools help investors translate both qualitative and quantitative information about prospective investees into standardised, numeric scores and produce expected impact scores to inform investment decisions).

impact investment strategy
1. Select your impact investing tools
impact investment strategy

Impact investing tools are the mechanisms that you employ to construct your impact portfolio or influence change. More passive impact investors may utilise tools like screening (the inclusion or exclusion of assets to align with specific values), shareholder lobbying (the identification of corporate practices that can be influenced by shareholders) and ESG integration (the inclusion of ESG factors into financial analysis and investment selection). More ambitious impact investors will explore tools like thematic investing (focused on addressing one particular impact theme) and catalytic investing (Structured to generate positive impact whilst accepting disproportionate risk). Usually, a combination of tools is employed.

impact investment strategy
2. Finalise your time horizon
impact investment strategy

Establishing time horizons is an important step as it has significant impacts and implications on investment decisions. Investors who are solely focused on social impact may be inclined to only consider requirements associated with the social and environmental challenges at hand, often with a longer-term outlook. This can conflict with timelines associated with shorter term financial performance requirements. In line with the true definition of impact investment, it is always important to strike the right balance between financial and impact priorities when determining your time horizons.

impact investment strategy
3. Construct your portfolio
impact investment strategy

Select impact investments that support your Theory of Change and align to the impact tools and time horizons that have been determined. Investment products need to represent and support the impact goals that have been articulated and there needs to be clearly defined mechanisms for how to measure their impact. Some common investment channels include:

Fixed income: Provision of debt capital to drive a specific outcome

Public equity: Very liquid investment option that allows for ESG integration and shareholder engagement

Private equity: Allows for focused thematic and catalytic investment

Real estate: Can facilitate positive impacts to communities and housing.

impact investment strategy
4. Conduct Impact Due Diligence
impact investment strategy

Conducting thorough due diligence enhances investors’ capacity to make more informed investment decisions and increases the potential impact of their investments. Most approaches to impact due diligence fall within three categories: narratives of expected impact (Written descriptions of anticipated impact), due diligence questionnaires (sets of questions about prospective investees’ impact that usually all potential investees are required to answer), and quantitative tools (Quantitative due diligence tools help investors translate both qualitative and quantitative information about prospective investees into standardised, numeric scores and produce expected impact scores to inform investment decisions).

Q
What is impact investing?
A
Impact investing is an approach that aims to achieve measurable and positive social and environmental impact through investment.
Q
How to get into impact investing?
A
To become an impact investor, it is essential to define your financial and impact objectives. To do so, several elements must be taken into account, including the time and resources available, the desired impact and your risk aversion and investment thesis.
Q
How does impact investing work?
A
Impact-focused investments represent an investment strategy that turns the need to address environmental or social challenges into a business opportunity. Impact investing attracts capital and human talent to companies to create positive change.

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