Impact Investing: A Framework for Decision Making

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Impact investing, through which investors allocate capital to market-based (i.e., profit-oriented) solutions to social and environmental challenges—in contrast to philanthropic or political solutions—has garnered increasing attention over the last decade. Emblematic of this interest was the More for Mission Campaign, launched in 2007 to encourage foundations and other institutions to commit more of their portfolios to mission-driven investments. A key attraction of impact investing is its potential scalability: solving a social or environmental problem through an investment in a profitable enterprise generates profits that both provide and attract more resources to address the challenge than solving it through spending alone.

As we have noted in the past, investors’ pools of capital have always been means to ultimately social (and/or environmental) ends—however those ends are defined by a particular institution or private investor—and we believe that investors should consider impact investing as another tool to achieve mission objectives. Impact investing enables investment assets to directly achieve an organization’s social return goals while also facilitating spending, the traditional means through which pools of capital have contributed to an organization’s mission.

“Impact investing enables investment assets to directly achieve an organization’s social return goals while also facilitating spending.”

However, maximizing desired social returns through an optimal blend of spending and impact investments can be challenging for two reasons. First, incorporating impact investments within the context of a long-term investment pool’s (LTIP’s) risk allocations requires careful thought given the often limited size and idiosyncratic nature of the impact investment opportunity set available to a given investor. Second, building an impact investment allocation within an LTIP is a multi-disciplinary exercise, requiring an oversight team with both investment and social return expertise and performance evaluation tools.

Accordingly, this paper provides a decision-making framework to help investors successfully build impact investing portfolios within the context of their LTIPs. We begin with a deeper exploration of the nature of impact investments, to highlight both what they are and why they may be attractive, as well as some of the central challenges that will need to be considered in the selection of these assets. Then, building on the investment decision-making stages in Cambridge Associates’ Risk Allocation Framework, we explore the key questions that impact investors need to resolve as part of their Enterprise Review, Policy Setting, Implementation, and Monitoring processes. Our central thesis is that impact investors should strive to be as specific as possible in articulating their impact investment social return objectives, while at the same time taking a more opportunistic, “bottom-up” approach to impact investment selection and allocation. Indeed, as investors seek to do “more” of “it” (i.e., impact investing), a key first step is for them to be clear about precisely what “it” means to them so they can better, and continually, assess how much “more” of it they can or should do.