by Nick Bayard, President & CEO, Bayard Consulting
At a quarter of a trillion dollars, the market for impact investing is enormous and rapidly growing. Investors who expect a double or triple bottom line are expecting those who steward their finances to conduct thoughtful due diligence on companies that claim to be having a positive impact on the world while also providing a financial return.
Yet despite those expectations, it can be challenging to go beyond traditional metrics in evaluating companies for impact investing. Because the social impact goals vary between organization and investors, and because they change over time, it can be difficult to coherently define or predict the “impact” in “impact investing,” or the “second” or “third” bottom line.
One of the most useful frameworks for organizational analysis in impact investing comes from Transform Finance, which posits that strong impact investments include the following:
Projects that are primarily designed, governed, and, where feasible, owned by communities
Investments that add more value than they extract
The financial relationship fairly balances risks and returns among all stakeholders
Perhaps the trickiest part of this framework is deciding how we define the term “value,” especially over the long term. If social impact investments really have an effect, one might expect that as a result of an organization’s work, the problem it is working to solve is not as much of a problem in five or ten years. For example, if an organization aims to provide affordable housing as a means of addressing regional homelessness, not considering confounding factors, one might expect the number of people experiencing homelessness to be reduced. So how does an organization “plan for success,” and then adapt to continue to have a social impact after that success is achieved? The clearest window into this question comes from working to understand organizational values and culture. How willing are leaders to change and adapt over time? How supported does their workforce feel, and how bought into the organization are they?
While understanding a particular organization’s values and culture takes time and requires some adaptive approaches, here are some examples of questions that can be used as starting points in assessing organizations as candidates for impact investing, along with the rationale for the questions:
Questions like these can add a deeper layer to organizational analysis and to a better understanding of management teams and how they will approach complex challenges. The importance of gaining this kind of understanding cannot be underestimated. As former DevEx reporter Naki Mendoza writes, “For impact investors who are sector agnostic, betting on the management team is equivalent to betting on the business itself.” And asking good questions will help impact investors determine where to find their best bets.
Please note: This article contains the sole views and opinions of Nick Bayard and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security. Any use of this article without the express written consent of Guidepoint and Nick Bayard is prohibited.