For financial advisors, impact and investing continue to converge, with new concepts and momentum shaping the way investors view their participation. The desire to influence positive change may be at the core, but financial outcomes carry equal weight – especially for investment advisors upholding a fiduciary obligation to their clients.
Strong private impact investing puts a rigorous focus on both sides of that equation, allowing investors to prioritize social or environmental change within a sound economic structure. In an ideal scenario, impact investment vehicles generate measurable results, are positioned to scale geographically or across sectors, and lead to recycled capital that expands the opportunity.
This perspective is a natural evolution of socially responsible investing (SRI) and the practice of aligning portfolios with personal values. When placed in the context of an overall portfolio that includes a balance of public market equities and fixed income vehicles, impact investing provides greater depth to the investment pool. The integrated approach boils down to “intentionality”: by being purposeful in the way financial assets are deployed, investors open the door to personalized, localized, and value-aligned investments.
What makes a great model?
Intentionality is a core component of the impact investing equation. By identifying solutions to systemic issues and designing financial models based on sound investment fundamentals, there is potential to go beyond “supporting a cause.” Capital is put to work in replicable, scalable models that are geared for social, environmental, and financial returns.
Through this thoughtful, intentional design, the possibilities for impact expand exponentially. When competitive returns are part of the picture, these investments can be used as fixed income components of a balanced portfolio, providing regular liquidity at lower risk and the option to recycle capital into impact solutions in perpetuity.
There are three components to a well-designed impact model:
- Financial reliability
It may seem obvious, but impact models that can show reliable returns and opportunities for liquidity gain an advantage. Impact vehicles have commonly locked up capital for long periods of time. In some instances, that can be powerful; however, there are many competing financial products that offer scheduled cash-out windows to provide investors with the opportunity to access returns.
There must also be fundamental strength underlying such a structure. Investments must be just as dependable as non-impact products, with a risk profile that matches the needs of investors. Those that cannot demonstrate this economic foundation are better positioned as philanthropic opportunities rather than investments.
- Measurable impact
Clear, accurate impact metrics are the holy grail for investors. Their ultimate question truly is, “how is my money making a difference?” When companies identify exactly what they hope to achieve and they track their progress, they instill confidence in investors.
They also set the stage for further capital raises. Consistent reporting on impact metrics combined with proven financial strength leads to a compelling story that grows with time.
Localized impact is incredibly important. Localized impact that can scale to affect other regions, however, is the path to significant change. Impact vehicles that master the mission in a specific setting – with clear, measured results and predictable returns – can also deploy systems and technology to repeat their success in different markets or through different applications. These expansive efforts are evidence that with the right management, capital and impact can multiply.
Impact in action
There are a growing number of models that capture the ideal combination of financial strength, measurable impact, and scalability. Two examples that showcase this combination are:
Founders First was formed to support businesses in low-to-moderate income areas and those led by women, people of color, and military veterans. These business owners struggle to overcome the pronounced wealth gap that exists between the white American business class and underrepresented demographics.
Through training, access to business networks, and funding opportunities, Founders First’s portfolio companies are given the fuel they need to succeed. This, in turn, enables them to bring high-wage jobs to their communities and generate wealth that supports the greater economic engine.
The fulcrum of the Founders First financial model is revenue-based financing (RBF), a proven approach that has been used for decades across a variety of sectors. It allows investors to lend money in return for a percentage of revenues until the initial loan amount and repayment cap are paid off. Business owners retain equity and investors can count on a reliable return.
The structure of the funding and supporting services enable Founders First programs to be introduced across a wide range of communities and geographies. This type of widely replicable model creates the potential to drive significant, compounding social and financial impact.
Sunwealth stands as a prime example of a financial model designed to reward underserved communities, advance the energy transition, and meet fixed income needs for investment portfolios.
Built on an innovative, tech-driven approach, Sunwealth partners with educational institutions, municipal buildings, non-profits, and other organizations to provide the upfront funding and back-end administration for solar projects. By bringing renewable energy solutions to those who would not normally have access to them, the company promotes solar justice, reduces carbon emissions, creates local jobs, and provides energy savings to participating customers.
Our team worked with Sunwealth in its early days to construct a model that would support its social goals and improve on the offering to investors. Instead of pursuing growth one project at a time, we reconfigured the financial opportunity into a pooled investment approach. The Solar Fund aggregates high performing, community-based projects into pools that help spread risk and stabilize returns.
Smart investing and greater impact
For investment advisors, building out a range of impact opportunities provides more flexibility for investors to participate directly in positive social change without sacrificing financial fundamentals. In fact, it is crucial to consider the underpinnings of all investments with thoughtful exploration and analysis. Whether for public market or private impact investments, the value of the opportunity must be measured against the strength of management, transparency of reporting, stability of core financials, and the potential to preserve capital and generate real returns.
Carrie Endries is the senior vice president and director of impact investments at Reynders, McVeigh Capital Management