3 – Market Practices

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The Navigating Impact Investing project builds on and benefits from many attempts to parse impact investing’s “big tent.” The following analysis presents an overview of the impact investing process, focused primarily on the impact dimension. At each step in the process, key considerations are highlighted, along with sample existing frameworks and tools that provide clarity on each of these respective considerations. Taken together, the considerations and tools provide a summary of notable current market practices, as well as an opportunity to introduce the unique role of impact classes within this context.

The investment process overview is presented below in Figure 2.


The considerations highlighted above are not intended to be exhaustive. Investors may incorporate a variety of impact-related factors in their investment processes beyond those included here, or may differ on the importance they place on each.

In the subsections that follow, the impact investing process diagram will provide a basis for exploring a sample of tools currently used in the market. For the sake of clarity and simplicity, we have placed each of these tools within a particular step in the process, along with the considerations they most directly address. However, it should be noted that many of these tools could be used at different points in the investment process, according to the particular needs and interests of investors. Furthermore, the investment process is often less linear and more iterative or cyclical than this schematic implies. For example, investors have developed sophisticated tools that apply at the execution and evaluation stages, which are also useful for goal- and strategy-setting. This more dynamic and iterative process, known as impact management, is the subject of a report due to be released in the summer/fall of 2016 by Bridges Ventures.

Step 1: Define vision and motivations

The impact investment process begins with an asset owner focusing on their overarching vision and goals for impact, shaped by one’s unique motivations, values, and intentions.


Goals and preferences

As with traditional investments, an investor questionnaire is often used to help surface some of the goals and preferences of investors, both financial and impact-related. For financial considerations, these questionnaires typically cover questions related to risk tolerance, liquidity needs, time horizon, and financial objectives. To address the impact dimension, example issues include impact themes of interest, degree of impact sought, willingness to take risks to achieve impact, and geographic preferences.

Intentions and motivations

As one example of a recent effort to bring clarity at this stage in the process, in 2015 Barclays announced an investor questionnaire tool18 and published a report19 that bring a behavioral finance lens to discerning an investor’s impact objectives. The tool consists of 24 questions that advisers can use with their clients to draw out how strongly they feel about particular impact goals. Beyond this tool, the Barclays report presents a framework for impact investing and philanthropy they call a “social budget,” which is intended to help investors determine their motivations for seeking socially beneficial outcomes and making high-level decisions about how to allocate their capital.

Step 2: Develop strategy and narrow investments

With the vision and goals defined, these fundamental considerations must be translated into a strategy and corresponding set of prospective investments.


Geography and sector

At the highest level, investors often begin by considering the geographic focus and sectors (or themes) that best align with their impact goals. Rockefeller Philanthropy Advisors’ (RPA’s) 2009 overview of the impact investing market is perhaps the most commonly used visual (see Figure 3) at this early stage in the process. Its axes reflect the dimensions most commonly discussed in financial advisers’ initial conversations with clients and used by institutional asset owners when they allocate capital: theme/sector and asset class.


Individuals and organizations have been able to use RPA’s graphic to identify what products exist across sector interests broadly, and where to look for them by asset class. By grouping impact investments by asset classes according to their role-in-portfolio exposures (i.e., Liquidity, Income & Wealth Preservation, Capital Appreciation & Wealth Growth, and Inflation Protection), the graphic helps provide a proxy for expected financial risk and return for various impact investment products. Similarly, impact sector/theme acts as a short-hand for characterizing the type of impact created by various investment products.

The CAPROCK Group has recently developed a tool called iPAR (Impact Portfolio Allocation Review) aimed at helping clients allocate capital according to theme and geography, among other considerations. As seen in Figure 4, the tool allows investors to see how their portfolio is allocated across a range of interest areas. The effort intends to create a comprehensive set of themes that can apply across asset classes, allowing an investor to see and evaluate thematic alignment. A similar visual component maps investment allocation according to geography as well.


While the RPA framework limits its characterization of impact to theme/sector and does not address intentionality or impact outcomes, other organizations (including CAPROCK) have built proprietary frameworks to highlight different impacts that investments are having. However, there is no widely accepted framework or vocabulary. As a result, the conversation with clients and prospects about approaches to impact often falls by the wayside – at least at an early stage in the investment process, before detailed due diligence homes in on a range of specific impact theses.

Impact approach and evidence

Along with the high-level considerations of sector and geography, the approach to impact and type of evidence required to demonstrate impact performance (to the satisfaction of investors) can be important considerations for investors and a means of further narrowing the set of aligned prospective investments.

Research and feedback from the market has indicated that these factors have been relatively under-addressed by existing frameworks – and yet can be fundamental to defining the nature of an impact investment opportunity, and to identifying alignment with an investor’s goals and strategy.

Impact classes are proposed as one solution to this gap, providing a unique layer of information otherwise lacking in the investment process. The purpose of impact classes at this stage is to provide an additional, high-level lens through which to more efficiently sort investments on the basis of impact in order to identify those that are most appropriate. The nature and composition of impact classes will be explored in detail later in this report.

An example framework that relates to the “type of impact evidence” is seen in Figure 5 below from New Philanthropy Capital (NPC), working with K.L. Felicitas Foundation (KLF). The framework introduces the concept of impact assurance, which refers to the degree of certainty that an impact being sought will be achieved, based on the impact practices and data of investees. The level of impact assurance is categorized within the Impact Assurance Classification stages seen in Figure 5.

The NPC framework encompasses the diversity of potential impact practices among investees, while acknowledging that no single aspect of impact practice is determinative in distinguishing between the classifications. A comprehensive range of variables related to various types and degrees of evidence of impact are evaluated collectively to create a standardized metric (the “Stages” indicated in Figure 5). The metric is designed to meet KLF’s needs, indicating the anticipated strength of the connection between the outputs collected and the actual impacts created (i.e., the impact assurance). The concept of impact assurance helps asset owners determine a level of impact evidence and rigor of investee impact practices that meets their preferences or requirements.


Impact thesis

Recent work from The ImPact (Figure 6) brings together many key components of an investor’s potential intended impact goals into one framework, including an “Impact Strategy,” which characterizes various types of impact on the basis of business model (Product-Based, People-Based, Place-Based, etc.). Brian Trelstad of Bridges Ventures outlined a similar approach in the Harvard Business Review, laying out five types of impact (Place, Process, Planet, Product, and Paradigms).20 B Lab’s Global Impact Investing Rating System (GIIRS) uses its Impact Business Models in a similar way, to emphasize the different ways an enterprise can have impact as a key component of the ratings approach. B Lab categorizes impact enterprises by the way they create impact, whether it is because an enterprise uses a microfranchise model, for example, or is worker-owned and operated, or produces environmentally oriented products and services.21

These characterizations are useful for investors that know what type of impact they want to have (i.e., they specifically want to support new products or help revitalize a particular region). However, using types of impact or impact business models as a sole filter for categorizing impact investments (even within a given asset class) still yields a considerable diversity of potential investments, each appropriate for a different kind of investor. A simple, agreed-upon categorization of impact is still absent from the conversation.


Steps 3 and 4: Execute strategy and evaluate performance

The considerations in the execution phase are often relevant in the evaluation phase as well, as the same impact-related criteria that informs impact expectations and goals in due diligence may be used throughout the monitoring and evaluation processes to account for and evaluate impact. Therefore, for purposes of this analysis, the two steps are combined.


Dimensions of impact performance

At this step in the process, investors are now able to examine the impact characteristics of investments in a deeper, more nuanced fashion, including on factors related to the nature and depth of impact expected from an investment.

Some asset owners and investment managers, particularly those with portfolios composed entirely of impact investments, have developed proprietary frameworks that describe their impact preferences and act as a tool for evaluating investments on that basis. Bridges Ventures has identified four variables (Target Outcomes, Externalities,22 Additionality, and Alignment) as being indicative of the potential for positive change for each of its investments. Bridges’ Impact Radar summarizes their analysis of “impact return” (achievement if performance is as expected) and “impact risk” (the probability that impact performance will be different than expected). In Figure 7 below, an illustrative example of the Impact Radar is presented along with a summary of the underlying questions that determine the levels of impact risk and return among the four variables.


Another notable example of a due diligence tool is Vital Capital’s Impact Diamond. The framework incorporates four “dimensions” by which investments are rated 0-3 to devise the impact profile. The dimensions are:

Essentiality: Considers the need for the service or product as well as the necessity of Vital’s involvement as the generator of impact. Need is contextualized by the existence, availability, and affordability of alternatives.
Beneficiaries: Considers the segment of beneficiaries targeted by the investment as well as the reach and magnitude of the intended impact. Local and multinational impacts are treated differently.
Locality: The locality dimension considers the ways in which an investment provides local empowerment, including through the creation of local jobs, a focus on local target market, and targeting pressing local needs.
Intrinsic Impact: Investments where there is an inherent positive correlation between the financial and impact drivers.23



Standardized and custom metrics

While efforts to help investors more efficiently allocate impact capital are nascent, work to evaluate and account for impact24 at the investment and portfolio level is well-developed. This is due in part to the increasing use of the GIIN’s Impact Reporting and Investment Standards (IRIS) for quantifying and standardizing social and environmental impact outputs, as well as B Lab’s Global Impact Investing Rating System (GIIRS), which provides an “Impact Rating” of the impact performance of funds and companies. GIIRS is an online self-assessment tool that assesses impact data and performance in a more holistic fashion that is aimed at allowing for comparability, and has been used by more than 6,000 companies to date.25

Of 158 respondents to the 2016 GIIN survey of impact investors, 65 percent indicated they use metrics that are aligned with IRIS and 37 percent (many likely overlap) measure impact using standard frameworks and assessments such as GIIRS, the Global Reporting Initiative (GRI), and others.26 The G8 Impact Measurement Working Group characterized these frameworks as having moved past the point of development and alignment across organizations to a point of standardization that continues to gain traction.27

Increasingly, private and public investors are utilizing standardized metrics to compare impact performance across investments – and in some cases use of these systems is required. For example, when the U.S. Small Business Administration’s (SBA’s) Small Business Investment Company (SBIC) Program expanded its Impact Fund in 2014, it required that funds certified as “Impact SBICs” utilize IRIS and GIIRS for a fund-level impact assessment and perform a portfolio company impact assessment using the standards of IRIS, GRI, or the Sustainable Accounting Standards Board (SASB) in order to qualify for commitments.28

18 ThinkAdvisor (2015). What do impact investors really want? New Barclays tool helps advisors find out.
19 Barclays (2015). The Value of Being Human: A Behavioural Framework for Impact Investing and Philanthropy.
20 Trelstad, B. (2016). Making Sense of the Many Kinds of Impact Investing, Harvard Business Review.
21 B Lab. Impact Business Models. B Analytics website: http://b-analytics.net/articles/impact-business-models.
22 Note: Bridges uses the terms ‘ESG’ (Environmental, Social and Governance factors) and ‘Externalities’ interchangeably on their Radar, since the traditional investment community is accustomed to the term ESG.
23 Vital Capital (2015). Crafting Impact: Presenting Vital Capital’s approach to impact investing.
24 Based on language used by Bridges Ventures to describe the impact investing process.
25 GIIRS website. http://giirs.nonprofitsoapbox.com/.
26 Global Impact Investing Network (2016). 2016 Annual Impact Investor Survey.
27 Impact Measurement Working Group (2014). Measuring Impact. Social Impact Investment Taskforce established under the UK’s Presidency of the G8.
28 US Small Business Administration. https://www.sba.gov/sbic/general-information/key-initiatives/impact-investment-fund/new-2014-expanding-sbas-impact-fund.

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One thought on “3 – Market Practices”

  1. Out of the frameworks and concepts presented, which do you find compelling and why? Are there others that could inform this work?

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