Emerging Impact Investing Best Practices for Families and Institutions
1.0 Impact Investing: A Growing Phenomenon
Every day, we hear “impact investing” on the tongues of more and more investors – and we see impact strategies gaining traction in many of their portfolios, too. A 2015 industry survey found that one in three high net worth investors either owns or is interested in owning impact strategies, and total assets in impact investments are expected to grow by 16 per cent in 2016, according to the Global Impact Investing Network (GIIN). And millennials, as they become more involved in institutional-level portfolio decisions, are continuing to move families and organisations toward socially and environmentally-focused investments.
But as family offices and institutions gravitate toward the emerging impact field – which entails investing in companies, organisations or funds with the intention to generate social and environmental impact alongside a financial return – they are finding that well defined “best practices” can be hard to come by.
Though few practices are set in stone, we’ve noticed a few emerging tactics that have helped families and institutions we’ve worked with on developing impact investing programmes.
2.0 Purpose, Priorities and Principles
For many emerging impact investors, success comes down to framing their decision-making around three strategic “pillars”: purpose, priorities and principles. Taking the time to define values and goals helps unify organisations at the start of their impact programmes, and can streamline decision-making well into the future.
An early focus on the purpose of an impact programme – the personal and institutional motivations and goals behind it – is essential. Investors should know what they are striving toward, and should be able to define it in a statement of purpose that incorporates both financial objectives and specific impact goals. For example, a family or institution may view climate change as a serious risk and therefore support investments in technologies and services that mitigate the effects of a changing climate.
The most successful impact investors remember that consensus is often not immediate. Organisations do best when they discuss and define their core values openly, in a manner that allows all stakeholders a voice. Internal education around impact investing is also important and we encourage both families and institutions to engage with staff and/or external advisors to facilitate and support those conversations.
After defining the core values and goals of an impact programme, the next step is to begin linking those broad ideas to more specific investment priorities. In other words, investors determine where their passions lie (e.g., poverty reduction, the environment, education) and the regions they care about (ranging from a narrow community focus to a more global view that includes both developed and developing countries).
If an institution’s priority is economic development, for example, it can identify investments that aim to achieve positive impact for low and middle-income people and communities. If the priority is education, the impact programme may seek to increase educational opportunities in a specific community – or regions around the globe.
Finally, a set of principles can ensure that investment opportunities align with the overall purpose and priorities of the impact programme and ultimately inform investment decisions. Guiding principles might include the idea that all investments have impact; that investments are an opportunity for engagement through advocacy; that environmental, social and governance (ESG) investments should not detract from financial returns; and that the impact programme should provide continual learning for the institution or family.
3.0 Governance Structures – Roadmaps for Effective Decision-Making
Once an institution or family has defined its purpose, priorities and principles, the next step is to determine the governance structure of the impact investing programme – the roadmap for effective decision-making. Open and honest discussion on the matter is important because there is no single model that works best for all investors.
Some questions that can help inform the ideal governance structure include:
- Who are our stakeholders (for example, a family’s stakeholders may include multiple generations of family members, family office staff, impact constituents and/or other)?
- What are the appropriate roles and responsibilities of each stakeholder?
- Does our current governance structure enable effective decision-making?
- Have we established an efficient communication process by which our stakeholders are informed of performance, impact or other considerations?
An investment committee may choose to designate an individual decision maker who determines the impact programme single-handedly. This can lead to nimbler decision-making, while allowing for less counterbalance against the views of the individual in control. Engaging in a more democratic process, in which family or committee members get equal votes, has its pros and cons as well. And some investors develop a different governance structure for their impact portfolio than the rest of their investments, which also carries a set of challenges and opportunities. Overall, the family or organisation should make sure that roles are well defined, irrespective of which model is used, to provide for a clear decision making process that ensures long-term success.
4.0 Choosing an Implementation Strategy
After defining an investment strategy and governance structure, the family or institution is almost ready to begin investing. One big decision remains: what kind of strategy should we use to implement the impact portfolio?
There are a variety of implementation strategies, and the investor needs to choose the best one for their circumstances, weighing the pros and cons for each.
Opportunistic Deployment Strategy
Choosing an “opportunistic deployment” strategy means making a case-by-case evaluation of impact investment opportunities. This allows for flexible execution and can fit easily into existing governance structures, but can lack cohesion as an approach. Another potential challenge is how to assess each impact-oriented investment against non-impact investments where the criteria for evaluating success may be different.
Defined Implementation Approach
With a “defined implementation” approach, investors determine a set of impact guidelines and use them execute their impact strategy within the broader portfolio. For example, they may establish an impact target – say, 10 per cent of the total portfolio – or use exclusionary screens to avoid exposures to industries they object to, such as tobacco companies or arms manufacturers. This approach can be easy to implement, but may not amplify broader philanthropic and/or investment objectives.
With a “carve-out approach,” the investor develops a distinct portfolio of impact investments, which can be governed and run on its own. With “full integration,” impact investments are part of the total portfolio approach to investments, and investors aspire for full coordination between their portfolio and their impact principles. However, full integration can limit options for investment as, for example, there are currently fewer impact or ESG funds available in certain asset classes (e.g., hedge funds).
Finally, with a “customised platform” a family can tailor a range of capital solutions to meet their entire spectrum of philanthropic needs. The Omidyar Network, which is composed of a foundation and impact investment firm, is a good example of this approach. Customised platforms offer investors the most creativity, but can be costly to build.
5.0 Successful Impact Investing – Other Variables
There are several other variables that emerging impact investors should keep in mind.
Perhaps the most crucial is remembering to pivot and re-evaluate when an impact programme hits a roadblock – not abandon it altogether. Impact investments are often not perfect the first time around, and the ability to adapt and benefit from lessons learned – instead of throwing in the towel completely – is key.
As may be expected, impact programmes are most successful when they are designed in tandem with an investor’s broader philanthropic activities (if applicable). The best impact strategies will complement, if not enhance, any prior or existing efforts to address specific social or environmental issues.
It’s also important to remember that the field and practice of impact investing is quite new, and therefore investors should remain “flexible.” Opportunities abound to learn from other families and institutions that have begun “dipping their toes” into impact investments. Engaging in peer networks, forums and conferences to understand how others are approaching impact investing in their portfolios can be extremely valuable, as can working with external advisors with expertise in impact programmes.
Impact investing is both exciting and daunting, as decades-old best practices do not yet exist. Sticking to the kind of framework we discuss here, and periodically revisiting those objectives over time, could be a great way to get everyone in an organisation or a family on the same page, and can help set an impact programme up for long-term success.
Erin Harkless is a Senior Investment Director at Cambridge Associates and co-author of The Foundation of Good Governance for Family Impact Investors: Removing Obstacles and Charting a Path to Action. She is based in Arlington, VA.
 2015 U.S. Trust Insights on Wealth and Worth, U.S. Trust Bank of America Wealth Management [http://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_AR3FPD...