Impact Investing | February 28, 2023

Six trust-based practices to help investors shift power to communities

Smitha Das

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Guest Author

Smitha Das

Often within the impact investing landscape, “impact” is defined by who we invest in and what we invest in. To truly create systems change and drive greater impact, we must evolve our definition of impact to also reflect how we invest in and support our partners.

At the World Education Services (WES), a nearly 50-year-old social enterprise, our who and what center on advancing economic and social inclusion for immigrants, refugees, and Black, Indigenous, People of Color (BIPOC) communities. Through grants and impact investments, we aim to activate the full spectrum of capital to dismantle inequitable systems and create more inclusive economies. Our investments are focused on backing proximate leaders with lived experience – those who are closest to the communities they serve – creating impact across four areas: opportunity, wealth, power, and justice.

Having made our first impact investments in December 2020, our investment practice has been deeply shaped by the inequities exposed and exacerbated by the Covid-19 pandemic and our collective reckoning for racial justice. Several movements have inspired our ethos to be a trust-based investor, including the Trust-Based Philanthropy Project, Due Diligence 2.0 Commitment, participatory funding models, just transition frameworks, and shared ownership structures. 

We define “trust-based investing” as an investment philosophy and approach that reimagines the relationships between investors, investee partners, and communities, to rebalance power.

Ultimately, through this intentional trust-based approach, we seek to be better partners to the organizations we support and stewards of WES’ resources – becoming facilitators of capital rather than deployers of capital.

While we are still early in our journey, we have begun to implement these six trust-based practices in our work to ultimately shift power to communities and advance justice, equity, diversity, and inclusion (JEDI):

Develop trusted, authentic relationships based on respect, transparency, mutual learning, and accountability. Being trust-based is being relationship-based. As we engage with prospective and current investee partners, we seek to actively acknowledge and deconstruct inherent power dynamics in investing and decenter ourselves.

In an effort to be more transparent and reduce information asymmetry, we published our diligence process and investment criteria online. In early conversations with potential investee partners, we walk through our process in greater detail to give more insight into how we make investment decisions; this practice also keeps us accountable to focus our investment approach on what really matters and not ask everything from everyone.

Do our own homework to reduce the burden on investee partners. This often means our team is first gathering information from peer funders, before asking potential investee partners. And in instances where we are the first check, we do our own research and invite fellow investors to co-diligence with us to streamline efforts.

Candidly, as we have implemented this practice and taken on some of the burden that partners used to bear, we have experienced some real and unintended consequences for our team. With a lean team of one or two, it is difficult to do this work effectively and sustainably. As we enter year three of impact investing at WES and continue to grow our portfolio, we are revisiting traditional investing staffing models and roles and adapting our operational model to sustain this trust-based work.  

Be flexible in our approach to meet investee partners where they are. We customize our impact investments to support an organization’s unique financial and impact goals, based upon their business model and growth potential. Potential investment structures include direct equity or debt, fund investments, guarantees and first loss capital, recoverable grants, innovative finance, or a mix of the above. As we grow our investment portfolio, our team is committed to exploring non-dilutive and non-extractive financing structures, such as revenue-based financing, non-voting preferred stock, dividend models, and other shared ownership structures.

To ramp up the learning curve for complex, innovative investment structures, especially with a small team and as a nascent fund, we leaned on our peer network. For example, before we made our first investments in the employee ownership space, including Apis & Heritage Capital Partners and Project Equity, we developed strong relationships with dozens of experts and leaders in the field, such as Democracy at Work Institute, Social Capital Partners, Gary Investments, Mission Driven Finance, Transform Finance, Common Trust, Francesco Collaborative, Start.Coop, Seed Commons, ICA Group, and many more. This helped us advance our knowledge and understanding of this emerging asset class and ownership models including cooperatives, employee stock ownership programs, and employee ownership trusts.

Redefine risk to unlock access to capital for underinvested in and overlooked communities. As a catalytic investor, we work to address capital access gaps and often act as early institutional capital for early-stage entrepreneurs and first-time fund managers.

For example, while rigid diligence processes may screen out emerging fund managers for a lack of track record, we have adopted alternative ways to assess track record and value relevant lived, learned, and labored experiences, such as investment sourcing capabilities, domain expertise, and prior track records in related work. To date, our team has seeded ten funds, all representing emerging, first-time fund managers, including IRC-CEO, JFF Ventures, Blackstar Stability, and Dearfield Fund for Black Wealth.

Demonstrate participatory investing models that can shift power and decision-making to communities. Participatory investing is defined as an institutional investing approach that ensures communities who have been historically excluded and harmed by existing investment structures hold power and ownership over capital strategy, design, implementation, and outcomes.

In addition to funding new participatory models and field building initiatives, such as the REAL People’s Fund and Common Future’s Action Lab: Participatory Investing, we are redesigning our internal processes and governance structure to shift decision-making to those closest to the work. In February 2022, through a Board-led effort, we shifted all asset allocation decisions for grants and impact investments from Board to WES staff. While this is a start, we are also exploring opportunities to shift decision-making and ownership away from WES and to communities.

Support partners beyond the check through communications support, network connections, companion grants, capacity building programs, strategic guidance, and more. When investment capital is insufficient to achieve meaningful impact, we use an integrated capital approach and blend impact investments with grants to support our partner’s dynamic needs, such as JEDI training, staffing, impact measurement and management capacity, short-term working capital, or GP commitments.

For example, we paired our impact investment in Apis & Heritage Capital Partners (A&H) with a companion grant to support a Fellow for two years, bringing extra capacity to A&H’s lean team. A&H selected a Fellow with relevant lived experience, deepening the bench of proximate leaders in the fund management space.

As WES continues to build out our investment practice, we look forward to sharing our learnings, particularly around how we are designing our culture, strategy, processes, and investments to reflect trust-based values, to help others along this journey.  We encourage fellow investors to rethink the how of investing and adopt trust-based practices. Together, we can begin to acknowledge and dismantle inherent power dynamics in the investment process and shift power to the communities we invest in.

Smitha Das is Director, Mission and Impact Investing at World Education Services.