As the investment landscape evolves, impact investment has emerged as a transformative force. It goes beyond adding a charitable component to financial initiatives and aims to create measurable, positive change ingrained within business operations. To achieve this, impact investment must transcend the superficial integration of impact key performance indicators (KPIs) and pursue a more profound merging of profit and purpose.
At its core, impact investment is about harnessing the power of capital to create a better world. It’s a response to the pressing issues of our time, from climate change and inequality to health crises and beyond. Yet, the allure of blending profit with purpose poses a significant challenge: ensuring that impact doesn’t become a secondary concern or, worse, a marketing afterthought.
Beyond the Numbers
Impact KPIs (Key Performance Indicators) are essential tools for assessing the effectiveness of investments in achieving their intended social or environmental benefits.
It gets a lot of focus in the investment world for a good reason – finding good impact data is a big problem in impact investing. At investor meetings, the most popular topics are about measuring, managing, and reporting impact.
However, focusing so much on impact as a metric will not capture the full potential of the impact investments. We need to embed the impact at the core of the companies we invest in. This means ensuring that their mission and operations are inherently driven towards positive outcomes and stay so over time, creating a lasting and sustainable impact.
Reflective Questions for a Deeper Approach
To elevate impact investment above traditional venture capital models, let’s consider some reflective questions that challenge us to think more profoundly about our objectives and methods. These questions are key for creating a balanced deal, that focuses on impact.
They are part of the Impact Card developed by the LISI Foundation (an initiative I co-founded), which is linked at the end of the article.
What do we want to achieve together? This question sets the stage for alignment between investors and social entrepreneurs. It’s not just about setting up targets but defining a shared vision of the change we want the social enterprise to bring to the world. Whether it’s improving access to education, reducing carbon footprints, or enhancing public health, our shared goals must be ambitious yet clear.
How will we protect the mission of the company? As companies grow and evolve, there’s a real risk of mission drift, especially in the face of financial pressures or market demands. Protecting the mission requires intentional strategies, such as embedding impact objectives into corporate governance structures or creating mission lock mechanisms that ensure long-term commitment to core values.
How will we work together (including when things don’t go as planned)? The path to impact is rarely smooth. It’s filled with unexpected challenges and setbacks. The resilience of the investor-entrepreneur relationship in these moments is critical. Open communication, flexibility, and a shared commitment to problem-solving are key to navigating rough waters together.
How will the company keep making positive impacts without us? Ultimately, the true test of an impact investment is whether the company continues to drive positive change independently. Building sustainable business models, fostering a culture of innovation and responsibility, and empowering local communities are ways to ensure lasting impact.
The Importance of a Holistic View
To answer these questions well, both investors and companies need to look at impact in a big-picture way. This means they should not just focus on quick results but also think about the big changes we’re helping to make. It’s about seeing how social, environmental, and economic areas are all connected and trying to help them balance out.
Building the Future of Impact Investment
As we look to the future, the evolution of impact investment should bring deeper integration of impact considerations at all stages of the investment process. From due diligence and investment decision-making to ongoing management and exit strategies, every step offers an opportunity to reinforce the commitment to positive change.
On this path, we shouldn’t just settle for adding impact goals to our list of what makes a good investment. We should deeply consider what it means to invest in a way that brings both financial returns and helps society move forward, seeing them as closely connected goals.
Read LISI’s Impact Card, which is part of the Impact Term Sheet ecosystem:
