All investments, besides making — and possibly losing — money, create change. The things an investment facilitates are an important part of what it really is, and how its performance can best be understood. Harnessing this force for change, and aligning it with the investor’s greater sense of value, can be a powerful means to do good, and thereby, in the fullest sense of the words, to make good investments.
This guide is aimed primarily at impact investors — i.e. investors who make investments into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return (or preservation of the principal). This necessitates paying attention to both financial and social outcomes, as the investor’s ability to make rational and well-informed decisions rests upon their knowledge across these two fronts. However, while a considerable history of financial investing has established the key financial measures and accounting methods, as well as a panoply of analytical tools, on the social side, detailed measurement is comparatively much younger. Impact investors may therefore find themselves equipped with well-developed financial procedures, but less by way of concrete structure on the impact side.
The use of thorough and robust processes to assess, manage, and report upon impact offers investors three key advantages:
- better investment and fund management
A rigorous address of impact is critical to understanding what an investor is achieving, and ensuring that investment strategies are leading to an impact-aligned and impact-efficient use of capital. Impact measures provide investors with the signals that tell them what they did and how well, and enable the use of real data to assess performance — influencing the management of existing investments, and informing future investment decisions.
- better relationships with investee organisations
A structured understanding of impact can help investors engage meaningfully with the mission and impact of their investee organisations (i.e. those working on the front-line to generate the impact), and to ensure that objectives on both sides are aligned. Investors often take a close position to their investees, and can use their sense of the impact being achieved to help identify organisational issues, provide support and advice, assist with impact measurement and reporting, and improve impact discipline (as often happens on the financial side). A firm investor sense of impact can also be used in the management of the investment to incentivise the investee’s impact performance.
- better communication
Having a clear sense of the impact being generated allows investors to report meaningfully upon their own impact, and to be accountable to, and to communicate with: stakeholders, investors (if a fund), commissioners and relevant business partners, and with each other. Communication should be two-way, enabling investors not only to report on what they are achieving, but also to gather feedback, and improve.
The obvious benefits of a more developed treatment of impact, coupled with the recent surge — in particular over the last ten years — of interest in impact investing, has led to significant advances on this front, with areas of firmness and agreement becoming increasingly established. Building on these, this guide sets out current best practice for impact investors specifically in relation to impact. It incorporates a wide range of existing impact research, with the aim of drawing together the best, best known, and most compatible strategies. It is also firmly rooted in active practice. Our own research included a detailed consultation of nine of the UK’s leading impact investors,1 and we have focused very much on: what investors do; what kinds of questions and problems they face; where they demonstrate best impact practice; and where there are realistic and tangible improvements to be made.