One of the defining trends in impact investing in the past year has been the mushrooming interest in impact management, the essential practice of integrating impact at each stage of the investment process.
This is thanks to field-building efforts led by the likes of the Impact Management Projectand Global Impact Investing Network (GIIN), along with the attention marquee entrants have attracted from a much larger investor base. When Bain, TPG, Partners Group, and others arrive on the scene, investors want to know: Is it for real?
The scrutiny is welcome and appropriate. Many of the fundamental challenges in impact investing—confusion, inefficiency, and misalignment—can be traced back to the difficulty of differentiating and articulating the impacts in impact investing, which is part of what impact management sets out to do. While the field still lacks a commonly accepted way to easily distinguish between approaches to impact, that has not stopped investors from making tremendous progress in putting impact management into practice.
This progress—and the growing understanding impact investors and their stakeholders have of the effects of their investments as a result—is creating the sorts of robust, actionable examples and tools the field needs to demonstrate the veracity of impact investing strategies to an ever-growing and diverse audience of investors.
Tideline has supported both the owners and managers of impact capital in developing systems and tools for impact management. Through this work, we have crafted a set of guideposts we call the “IMPACT Principles”—integration, materiality, pragmatism, authenticity, commitment, and transparency—that we believe can help investors achieve robust impact management.
Integration: Impact management involves intentionally weighing both impact and financial considerations at each step of the investment process, including during sourcing, due diligence, execution, support for investees, monitoring, reporting, and exit. Many managers are seeking new partners to help integrate these processes seamlessly and efficiently using tools like custom screening criteria, due diligence questionnaires, performance dashboards, and purpose-built impact governance structures.
The benefits of integration are manifold. For example: There are more opportunities for investors to be “additional” by delivering positive outcomes that would not occur but for their involvement. Monitoring and managing environmental, social, governance, and impact performance over the life of an investment can help mitigate impact risks. Better understanding an enterprise’s impact on the environment, society, and its workers can help inform business strategy.
Materiality: Materiality is a core concept in financial accounting (and now, sustainability reporting) that encourages companies to manage toward and report on aspects of their business that potentially have significant effects. The Global Reporting Initiative’s definitionprioritizes aspects of an enterprise with potential to significantly (positively or negatively) affect society, rather than only those with significant potential effects on the financial condition of the enterprise, as materiality is traditionally defined.
The principle of materiality suggests that an impact investing manager’s investment theory of change, or impact thesis, should be grounded in specific activities and outputs that academic and other evidence suggests will have material positive social and environmental outcomes.
Read more at Stanford Social Innovation Review