Investment for impact
Investment for impact is a social investment approach that prioritizes social and environmental impact over financial return. It lies between traditional philanthropy and impact investment, as it focuses on achieving systemic change, uses financial and human resources strategically, and adapts financial processes and practices to generate those changes.
This investment approach seeks to channel venture capital in the form of donations and/or patient investments to scale innovative ideas with a socio-environmental impact.
It therefore plays an important role in strengthening social purpose organizations (SPOs): social businesses ─at an early stage─ and non-for-profit organizations that, due to the very causes they support, will not achieve financial returns.
Investment for impact does not intend to replace other social investment approaches, but rather works alongside them to identify and develop innovative solutions that can be scaled and replicated by other types of investors, such as financial institutions, impact investment funds, or traditional investors looking for a financial return.
Investment for impact aspires to integrate the continuum of capital: economic resources providers that go from philanthropy to traditional investment and that stand out due to their impact, return, and risk expectations.
Continuum of capital
It is important to clarify that investment for impact can be used by different actors of the social investment ecosystem - such as foundations, corporations, investors, family offices, professional services offices, academic institutions, and even public sector actors.
The cases selected and analyzed in this study provide a perspective of how investing for impact is used by this wide array of actors.
This approach is also characterized by borrowing best practices from venture capital funds. These practices include:
Just like venture capital funds maintain their investments for about six years and participate actively in the board of directors of the companies where they invest, investors for impact support entrepreneurs and social organizations to achieve financial sustainability, have a greater impact, and build their capacity, seeking to improve aspects like sales, governance, management, theory of change, etc. That is to say, the focus is on the development and consolidation of the organization and not only on a specific program. Investors for impact are actively involved in the social challenge they support and work for the continuity of organizations, strengthening their capacities, especially organizational resilience, and seeking to attract other donors or investors. They clearly know that their support has a long-term focus, but they also take into consideration from the beginning of the intervention, an exit strategy so that the organization or social business are able to achieve sustainability once their support ends.
Investors for impact are well aware of the needs and capacities of every organization or social business that they support and adjust the financial instruments they provide so that they are appropriate for each organization they are supporting. They also take into account the organization’s level of development its needs, as well as their own risk expectations. These instruments include grants, debt, equity, or more innovative mechanisms like repayable grants, securities, results-based finance, subordinated debt, among others. The selection and use of the financial instrument aim at optimizing resources and impact.
Impact management and measurement
As mentioned before, investors for impact prioritize impact over returns. This requires clear and custom-made indicators, as well as tools that allow to monitor impact. Some of these tools include: 1) surveys conducted among final beneficiaries (an approach promoted by Acumen), 2) evaluations established along with beneficiary organizations to maximize their social impact, 3) standardized metrics such as IRIS+ or GIIRS, 4) other models that integrate financial, social, and environmental impact. Measuring and managing impact also involves data collection to systematically improve impact strategies and decision making, and provide better support to organizations and beneficiaries.
Latimpacto hopes that this study and each of the selected cases will provide a better understanding of this approach, its practice, and its possibilities, and its potential for the region.
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