The Home of Impact Investing in Canada
Bruno Lam

Bruno Lam

Research Fellow, SauderS3i

 

Bruno's Reading List

Demystifying Impact Investing (2014)

Demystifying Impact Investing (2014)

GIIN Annual Impact Investor Survey (2017)

GIIN Annual Impact Investor Survey (2017)

State of the Nation: Impact Investing in Canada

State of the Nation: Impact Investing in Canada

The Potential and Limitations of Impact Bonds

The Potential and Limitations of Impact Bonds

Impact Investing 101 

First, a (short) history lesson.

If you're new to the idea of social finance, the best place to start is at the very beginning - a history lesson of sorts. I was first exposed to the idea of social finance through Dan Pallotta's iconic TEDTalk "The Way We Think About Charity Is Dead Wrong". In it, Pallotta addresses the long-standing divide between social impact and financial profit. These two outcomes are seen as mutually exclusive and as a result, charities are evaluated based on how little they spend on overhead. Why are we so critical with charities spending money on operations but not with corporations that are much less socially impactful?

If we are able to break this divide - this perception that doing good cannot create profits - then we can open up many more channels and vehicles for social good: multinational corporations, mutual funds, the stock market, even Bitcoin!


I want a little bit of everything, just give me a great overview of the impact investing

  • The first report I read on impact investing was by my eventual employer - SauderS3i - a thinktank based at the UBC Sauder School of Business. The report, "Demystifying Impact Investing", does exactly as its title suggests. It breaks down the market, the investor types, and the numerous types of financial instruments that are being used for social impact.
     
  • The other reports I would suggest are the Global Impact Investor Network's annual surveys. Since 2010, they have tracked the size of the market, the assets being used, trends and challenges that investors and entrepreneurs face. The most recent survey was released in May 2017.

Now break it down - what kinds of financial products are available for impact investors?

There are quite a few financial products out there. I'll narrow it down to what I think are two of the most interesting asset classes.

  • Private equity & venture capital: I consider Omidyar Network's "Frontier Capital" to be one of the best reports on venture capital in impact investing. Different types of start-ups need different types of capital - a early-stage venture debuting a highly innovative healthcare device in an emerging market will require "friendlier", more risk-tolerant capital than, say, a medium-sized venture running restaurants in under-served communities. This report breaks it all down.
     
  • Pay-For-Success (PFS) & Social Impact Bonds (SIBs):  In my opinion, PFS/SIBs are some of the fascinating impact investing instruments. When I was writing a brief on social impact bonds for our clients, I found Brookings Institution's "The potential and limitations of impact bonds" very comprehensive and useful for beginners and experts alike. If you're not looking to read a full-length report, check out Emma Tomkinson's blog.

I'm Canadian - what's going on in Canada's social finance market?

  • Although it's a little dated, MaRS and Purpose Capital's "State of the Nation: Impact Investing in Canada" report provides a great snapshot of the Canadian market. It breaks down the market by capital suppliers, the demand for capital, and everything in between (intermediaries and enablers). If you want to know which Canadian organizations are active in impact investing, this is the report for you.
     

  • The Responsible Investment Association (RIA Canada) also does some great work on this front. Their report "2016 Canadian Impact Investment Trends" provides a more updated look at the Canadian market - including market sizes, available investment products, and investor outlook & opinions.


Steve Petterson

Steve Petterson

Impact Investment Associate, Helder Ventures
Executive Director, 10th Avenue Fund

 

Steve's Reading List

The Clean Money Revolution by Joel Solomon

The Clean Money Revolution by Joel Solomon

TED Talk: Jacqueline Novogratz

TED Talk: Jacqueline Novogratz

SSIR: Across the Returns Continuum

SSIR: Across the Returns Continuum

Scaling Demand-Driven Training Programs Framework

Scaling Demand-Driven Training Programs Framework

Enabling social change through innovation and finance 

Defining "better" money.

My focus here will be on my love, and the necessity, of innovation in three areas – the financial world, the mindset of ‘money’, and in the way we tackle local and global issues. I am a believer in the idea that there can always be a ‘better’ way, and that is what impact investing is to me. ‘Better’ can mean many things – a more efficient way of looking at a problem, a more wholesome way of looking at a problem, a more mutually beneficial way to solve an issue that solves the needs of all parties, not just a few. I think these are all applicable when I say that impact investing is a ‘better’ way.

If we are able to break this divide - this perception that doing good cannot create profits - then we can open up many more channels and vehicles for social good: multinational corporations, mutual funds, the stock market, even Bitcoin!


Why is impact investing important?

There are many differences between traditional investment and impact investing, - different financing models, a difficulty with exits, etc – the list goes on. At the end of the day the most crucial piece is a mindset switch: a transition from the belief that a personal top financial gain is more important than a societal or environmental advancement for our world. Whether you are a future business leader still in university or deep into the world of finance already, the way we think about money needs to change. For this I’ll share with you a book for some good bedtime reading: Joel Solomon, an impact investor located in Vancouver, released a great read that is one part memoir, one part manifesto. It’s titled The Clean Money Revolution: Reinventing Power, Purpose, and Capitalism, and is as entertaining as it is informative. In it he discusses the ideas behind impact investing and the necessity of a mindset switch in how the wealthy view money. He does this with more clarity and insight than I ever possibly could. In my opinion, well worth the purchase whether this is the first time you are hearing of impact investing or you are a seasoned vet.


How can the financial sector innovate using impact investing?

Once a mindset switch is established, the true innovation can begin. How can finance be used to meet the needs of investors while also strategically helping social ventures who are tackling complex issues?

For this, I give you an older TED Talk from the CEO and Founder of Acumen Funds, Jacqueline Novogratz, in which she discusses the idea of patient capital – capital that allows for high levels of risk, long time horizons before seeing returns, and actively seeks out ways to partner with traditional aid. In this talk she discusses her use of patient capital in developing countries but I believe it is necessary in developed countries as well. Within this idea of patient capital lies an opportunity to innovate with new financial products to help match an investor’s need for financial return and an entrepreneur’s need to experiment with solutions to complex issues.

An insightful article came out this fall on the Stanford Social Innovation Review by members of the Omidyar Network. In it, they discuss their transition from how they originally conceptualized impact investing, to the financing strategy they have now adopted. I think it’s a fantastic read to understand the complexities that can come with investing in social change and the innovation that is required.


What local or global issues can impact investing address?

In short, there are many. I think a good place to look is towards the United Nation’s Sustainable Development Goals. These are the issues that need innovation! At Helder Ventures we view ourselves as enablers – there are so many talented entrepreneurs with so many incredible ideas as to how to solve the root causes of these issues, and as impact investors our role is to enable these individuals to achieve success through purpose built financing and strategic advice to grow and scale their ventures.

At Helder Ventures part of our core focus is on innovation in poverty and marginalized communities – a great example of how innovation can drive solutions is the demand-driven training model. The Rockefeller Foundation and MakingCents International provide a great framework.

The most successful social venture is one that can innovate around a societal or environmental issue in such a way that the business model allows for quality returns in time without hindering the cause it initially aimed to address – this allows the company to scale and more effectively address the issue on a national or global level. Check out some of the ‘classic’ examples of successful social ventures: Plastic Bank, d.light, Grameen Bank,


Lars Boggild

Lars Boggild

Impact Lender, Vancity Community Investment Bank

 

Lars' Reading List

Measuring the "impact" in impact investing (Harvard Business School, 2015)

Measuring the "impact" in impact investing (Harvard Business School, 2015)

Standards of Evidence for Impact Investing (Nesta, 2012)

Standards of Evidence for Impact Investing (Nesta, 2012)

HCAP Partners Annual Impact Report 2016

HCAP Partners Annual Impact Report 2016

Sonen CapitalAnnual Impact Report 2016

Sonen CapitalAnnual Impact Report 2016

SSIR: Toward the Efficient Impact Frontier

SSIR: Toward the Efficient Impact Frontier

The Impact Measurement Project

The Impact Measurement Project

Investing for Impact: Practical Tools, Lessons, and Results (NPC)

Investing for Impact: Practical Tools, Lessons, and Results (NPC)

A Primer on Impact Measurement

Putting the "impact" in impact investing.

Impact measurement is often included as part of the definition of what makes an investment an “impact” investment. Why is that? It’s because impact investments have the explicit goal to generate a social or environmental benefit alongside a financial return. Without some ability to understand what kind of benefits have been produced, we won’t be sure if we’ve accomplished our goal, or if a more effective solution could have been financed. Impact measurement, at its best, is a type of management information that you use to understand, engage with, and improve the businesses you work with. Ultimately, it’s about all stakeholders being confident that an intended impact has been meaningfully achieved.


Why do impact investors measure their impact?

As a starting point, consider the video below, where a cross-section of active and mature impact investors describe their own motivations for looking to measure the impact of their investments.

One thing I like about the video is that it speaks to how investors are using impact information across the investment lifecycle, whether it is about promoting the market, raising funds, or actively engaging in due diligence on an investment. One of the best guides I’ve found that looks at different measurement tools across the investment lifecycle is “Measuring the ‘impact’ in impact investing”. While providing detailed examples of how various leading organizations measure impact, some of the big picture findings are:

  • Impact measurement has a role from estimating impact as you are selecting from different investment opportunities, planning impact in your specific investment strategy, monitoring investments to course correct and improve operations, and as an evaluative tool for accountability and proof.
  • Some of the most foundational tools are to create a theory of change, which is a logical model of how different inputs are used to produce intended outputs and outcomes, and trying to create mission alignment by using criteria or scorecards in the rating of investments prior to investment.
  • All impact measurement has measurement risk and error, and as investments grow larger and/or impact is a higher priority, there are increasing standards of evidence you might use to be confident that impact has occurred.

What should we measure?

Using a common language is important in any market so that we can efficiently communicate and compare different opportunities to try to make the most appropriate investment decisions.

At the highest level, an increasingly common framework is to seek alignment between investment portfolios and the United Nations Sustainable Development Goals, which are 17 global goals ranging from poverty alleviation to peace and justice. They provide a useful framework for categorizing investments at a high-level.

Going a level deeper, specific outcomes are increasingly being standardized through tools like the Big Society Capital Outcomes Matrix (from the UK), and the Impact Reporting and Investor Standards (IRIS, which are used globally). These are the metrics that give you an indication of whether an impact investment is performing as desired, and are usually gathered as data points at a regular interval, just like financial information.

Ultimately, just like financial performance, impact performance comes with risk. One way to mitigate that risk is to consider the quality of evidence underlying the metrics that is used to justify performance. NESTA’s “Standards of Evidence for Impact Investing” provides a really useful framework to think about this. They suggest:

  • A 5-point scale can be used to categorize different qualities of evidence, ranging from just the theory of why something should produce a positive benefit through robust, often statistical evidence that a product or service can produce those benefits repeatedly, in multiple locations, at scale.

  • The demand for evidence should vary as impact investments mature. Early-stage impact investments have high impact-risk and lower quality evidence, and that’s ok. The purpose is not to use too high a standard to stifle innovation, but to ensure evidence quality grows as an organization does.

  • Evidence standards help to clarify the types of impact risk that we hold as impact investors, including the risk of claiming something that didn’t happen, assuming that we were the cause of observed benefits, or creating other harm.


How are leaders measuring impact?

Given the emergence of some common types of tools, and increasing consensus around standards of evidence and metrics, how are investors actually applying this in practice? There’s a few instructive examples of impact measurement by impact investors in practice that are worth highlighting:

Some investors have created a framework to guide all their investments. As an example, HCAP Partners 2016 Impact Report illustrates how they think about investing to create high-quality employment among underemployed populations in the United States.

Other investors have explicitly evaluated their portfolio against the Sustainable Development Goals. As an example, Sonen Capital’s 2016 Impact Report links all of their investment strategies to their most relevant global goals and describes the impact metrics they use, mostly from IRIS, to monitor each investment.

Impact Measurement is ultimately management information. A great example this in practice is provided by Mark McCreless of Root Capital, a non-profit lender to agricultural enterprises, in “Toward the Efficient Impact Frontier”. By impact rating their existing loan portfolio and comparing it to the expected profitability of each loan they were able to ask important questions that will guide their future work, such as:

  • Is there a trade-off between financial returns and impact in our operating sectors and geographies?
  • Given that we blend philanthropic and commercial capital, how can we best allocate our lowest cost capital?
  • What would be a more optimal portfolio in terms of impact, risk, and return?