Impact investing is a lot like high school sex, says Abigail Noble, chief executive of The ImPact, a new investor network aiming to normalize impact investing among the world’s wealthiest families.
“Everyone is talking about it. Very few people are actually doing it,” Noble said in a recent TedX talk. “And those who are doing it, aren’t doing it all that well.”
The ImPact’s Impact Investing: Frameworks for Families, answers basic questions about impact investing and lays out a seven-step framework to help families make sense of the often daunting diversity of the impact investing marketplace.
Why are families making impact investments? Three key motivations drive families to make impact investments. First, families want to align their investments with their values. Second, families believe social and environmental factors are major drivers of investment risk mitigation and financial outperformance. Third, families believe in utilizing the dynamism of business and the scale of capital markets to address specific social and environmental challenges — impact investing as an amplifier of philanthropy.
How are families making impact investments? The three basic approaches families may pursue are: carving out assets and dedicating them to impact investments, integrating impact investments into their existing investment strategies, going “all-in” with all the assets or operations of a specific entity.
What types of impact investments are out there? To make sense of the universe of impact investing opportunities, The ImPact categorizes all impact investments by five attributes: Asset Class, Sector, Geography, Impact Strategy and Return Profile. This framework makes it easier to compare the financial and social performance of investments to their peers in the same category.
What is an “Impact Strategy”? Key to distinguishing an impact investment from a conventional investment is its impact strategy or the way a company or a fund creates social and/or environmental impact. Families can pursue a range of impact strategies — from “people-“ and “place-based” by supporting a specific group of people or a region to “product-“ or “process-based” by investing in an innovative technology or a sustainable supply chain, for example.
How do families put all of these pieces together? “Each in their own way,” say the authors of the report. The ImPact notes that the process of engaging in impact investing is often dynamic and sometimes convoluted, but, generally, there are seven phases:
1. Explore: Discover and build an initial understanding of the principles and practices of impact investing.
2. Reflect: Identify your motivations — why you wish to make impact investments, and how those investments might fit within your broader “portfolio” of impact (philanthropy, work, advocacy, etc).
3. Assess: Determine the specific needs and constraints that govern your asset owning entities and consider how those needs and constraints shape your investment strategies.
4. Strategize: Develop an actionable impact investing strategy, guided by an understanding of your personal motivations and objectives, and the needs and constraints.
5. Invest: Make impact investments! You can make these investments across asset classes, sectors, geographies, impact strategies and return profiles.
6. Measure: Gather and assesses performance and impact data from the existing investments to determine whether the investments are achieving their objectives and meet the requirements of your impact investment strategy.
7. Optimize: Use the data you have gathered and the experiences you have gained through the process of making and monitoring investments to revise and/or expand your impact investment strategy, in order to continually pursue better outcomes with your investments.
For an in-depth discussion of the impact investing process and each of the impact investing categories, you can access the full Frameworks for Families report, here. For a more details discussion of investments across asset classes, see ImpactAlpha’s review of the ImPact’s asset class series on fixed income, public equity, early-stage impact investing and real assets.
- Frameworks for impact investing
- Fixed income impact investing
- Public equity impact investing
- Early-stage impact investing
- Real assets impact investing
- Private equity impact investing
Photo by Dakota Roos.