Efforts to create impact should be maintained throughout the term of an impact investment, while the benefits should be made clearer to the institutions backing impact funds, researchers say.
Impact investors are increasingly aware that they need to drive impact in the companies they fund right through the term of their holdings in order to maximise the benefits. According to a new report from industry association Impact Capital Managers (ICM) and impact consultancy Tideline, there are a growing number of examples of good practice that the impact sector can call on to show what is already being achieved.
In the New Frontiers in Value Creation report, illustrated by 13 case studies, the authors conclude that a committed approach to impact value creation throughout the lifetime of a holding can drive both financial and impact performance.
Diane Kulju, ICM’s director, Impact Measurement and Management and Research, told Impact Investor that some investors tended to focus more on impact at the pre-investment due diligence and screening stage and again when measuring impact further down the line. However, they missed out on opportunities to do so more actively in between.
“Really, it’s in that middle portion, when they are actively holding the investment, that investors can do a lot to increase impact. So this report aims to create a framework to dive into what some impact investors are already doing during that period to drive impact and financial performance,” she said.
Impact value creation
The authors identify “impact value creation” as a key concept in the report. This is defined as “the actions that investors take as owners, lenders, and influencers to enhance impact efficacy – i.e., the degree of scale, depth, or duration of the measurable social or environmental benefit”.
While investors may see impact efficacy as a driver for improved financial returns, both fund managers (general partners – GPs) and institutional allocators (limited partners – LPs) have historically lacked a clear framework for determining how different investment activities add value, according to the report.
Key considerations
Four considerations are highlighted that the researchers say are foundational to impact value creation and which can help private market impact managers develop, communicate, and implement their approaches to value creation. These are: financial materiality of impact – the extent to which impact efficacy affects financial performance; sources of impact value creation – identified as intentionality, stakeholder focus, impact networks and expertise and data; impact value creation modalities – pathways to achieve impact in a particular investment opportunity; and visibility of impact opportunities – the degree to which impact opportunities are visible to investors and how managers can help to shape perceptions.
The research also identifies various levers for action often used by impact capital managers when pursuing specific impact and financial objectives.
“Our focus with this research was to look beyond the noise about what impact investments are or aren’t, and instead spotlight the specific investor actions that are integral to improved business performance,” said Ben Thornley, co-founder and managing partner at Tideline.
According to Kulju, ICM hoped the guiding frameworks in the report would provide a platform for investors and general stakeholders to discuss and develop their existing impact strategies, and that the research could be built on in the future to develop additional impact levers and activities that drive impact and financial performance improvements.
“We hope the research also gives additional ideas about how investors can apply different tools, maybe ones they hadn’t thought of using – and we’re hoping that, for LPs, it brings clarity and consistency around the language that they use to talk with their GPs and how they can have strong due diligence conversations,” she said.
Case studies
To show what is already being achieved in the sector, the report features a variety of case studies on the work of impact investors. These range from a healthcare sector investment by Bain Capital Double Impact, which delivers both commercial performance and measurable positive social and environmental outcomes, to a Nuveen investment in the Indian microfinance sector.
Kulju said Nuveen’s investment in Indian microfinance provider Annapurna was a good example of how impact and financial performance improvements could go hand in hand. As part of its strategy, Nuveen has ensured that climate risk considerations are incorporated into Annapurna’s services.
“This is a more transformative approach, looking at how the microfinance industry can evolve beyond what it’s already doing. By incorporating climate risks, Annapurna is both helping to protect existing microfinance customers, as well as offering new products and services to them,” she said.
The report is the latest in a series of publications produced by ICM and its partners, examining aspects of impact investing. and how an impact-focused approach can generate improved returns for investors. A report published in December 2018, also in collaboration with Tideline, looked at how social and environmental focus on investment management could boost financial returns. A related report with law firm Morrison Foerster, published in April 2021, looked at legal tools and processes used by private capital investors to improve impact during an investment. Another report published with Morrison Foerster in 2023 explored ways to strengthen impact and financial value at an investment’s exit point.
