There's a lot of excitement about impact investing these days. The industry's main goal, to make money while making a difference, is very enticing. However, with the lack of information on successful impact investments, it's hard to know if impact investments are truly making an impact.
I became fascinated with impact investing during my graduate study, and decided to study its effectiveness on achieving both financial and social returns. After interviewing 25 impact professionals for my graduate thesis, I found that the most successful impact investments are tied to effective social enterprises. These enterprises shared several common characteristics, such as:
• A clear impact mission: it is important to have both a clear mission and plan to achieve the mission. Several investors pointed to the fact that the best financial returns come from enterprises that already have an established impact mission and execution plan. Similarly, an enterprise with a solid business model is crucial. They should already have an established product that addresses local needs and market demands. This differentiates impactful enterprises from those that simply have a good mission.
• Strong leaders: there are a lot of social enterprises fighting for impact investments, PRIs and grants. The most effective enterprises have leaders that are both mission-driven and business-driven, and have the capacity to manage the additional investment. Passion for the cause is vital, but so are business skills to maximize output at a larger scale. Notably, the leaders show humility and are always looking for opportunities. This way, they can inspire and mobilize the team to look at different ways to make a social impact.
• Accountability measures: metrics are crucial to assess an investment's success, but there is confusion as to who should be responsible for measuring outcomes. An enterprise with an internal metric system will be more attractive for investors who want to see concrete, tangible results from their investments.
• A local focus: effective social enterprises have a geographic focus to truly understand the problems on the ground. It is important to have a strong network of local stakeholders to identify the real problem and find a solution. In addition, enterprises that are focused on a certain sector are able to have a deep understanding of the local problems and create suitable products for social impact.
• A multifaceted team: social enterprises not only work in many different sectors, but also have to deal with many different stakeholders. It is important to have a team that have members with varied experiences in both the private and public sectors, and have expertise in a wide range of sectors where their products and services are being offered.
• Aligned interests: a management team with aligned interests is important, not just philosophically but also in business execution. This gives investors confidence that the enterprise is efficient in executing projects with their mission.
Even with the many risks associated with impact investing, a thorough analysis of the impact investees can certainly help paint a picture of how your investment can make a difference. Assessing social enterprises is a crucial step to understand how your money can create social impact.