Five lessons from five years of impact investing
How can we invest for profit and social impact? How can we understand the impact of a diverse portfolio? How can we help to embed social impact into commercial businesses? Our report 'Setting Our Sights: A strategy for maximising social impact' describes how Nesta Impact Investments is tackling these big questions at the heart of impact investing.
It describes how we go about selecting investments we believe will change lives and our approach to managing for impact after investment.
The updates to our approach are based on five lessons from five years of impact investing:
The importance of alignment While the portfolio is still young, our strongest investments to date have demonstrated alignment between commercial success and social impact. We have been particularly successful with businesses where impact is core to their commercial strategy. For example, Oomph! use their evidence of impact on older people’s health and wellbeing as part of their sales strategy. As a consequence, we have introduced alignment as a specific requirement for investment.
Impact risk has many dimensions Our previous approach defined impact risk as the standard of evidence provided by that venture. While this is an important factor in whether estimated impact is realised, we have learned in the last five years that there are other factors we can identify at the point of investment that may raise or lower the risk to achieving social impact. As a result, we have broadened our definition of risk to reflect the importance of the skills and attitudes of the leadership team and the logic underpinning how the product or service will lead to impact.
Setting expectations We have found that codevelopment of an impact plan is a crucial time for setting mutual expectations about the time and effort required to measure impact. Where it has worked well, agreeing the impact plan has been an opportunity to ensure that the venture is well resourced to deliver on impact measurement and that timelines for data have been sensitive to business milestones. We are committed to ensuring that a collaborative and realistic impact plan is set out before every investment.
The challenge of maintaining focus on impact Our highly standardised approach to a very narrow impact assessment framework for early investments in NII meant that we did not always strike the right balance of flexibility to changing business needs with maintaining a focus on impact. As a result of this inflexibility some ventures became increasingly distanced from their impact plans to a point where measurement and engagement ceased to be relevant. Turning the situation around could then be extremely challenging as the venture, by then, had often lost its focus on measuring impact. In future impact investment funds NII will strive to maintain a robust, but flexible approach to impact plans so that wherever a portfolio company starts to deviate from its impact plan, we work with the management team to develop a strategy for getting back on track or adjusting the plan in the same quarter. We will ensure that impact conversations continue to be held quarterly, no matter what the situation.
Impact at the investment committee In the past we made sure that there was social impact expertise on the Investment Committee. Earlier in the life of the fund this expertise was concentrated in one person who often had to ‘fly the flag’ for impact alone. As the fund has progressed we have taken steps to ensure that all committee members feel equipped to participate in substantive conversations on social impact by making our impact assessment more transparent and consistent, highlighting particular areas for discussion. In future impact investment funds, we will continue to review the dynamic of conversations in the committee to maintain proper oversight and accountability for social impact.
The framework presented in the report seeks to test many unproven assumptions. As we pilot this new approach we welcome thoughts from mission-led businesses, other impact investors and asset owners for how we can strengthen our approach. The questions we will be asking ourselves are set out in each section. If you have reflections on these questions or think there are other questions we should be asking please get in touch.