Let's face it, the investment world hasn't always had the best reputation. A lot of people still picture old white men smoking expensive cigars, sitting around a boardroom plotting how much money can be made from a destroyed rainforest or uprooted village. I've pictured Scrooge McDuck diving into a pile of money, myself.
But a lot has changed for investors the past few years. Socially responsible investing, or SRI, has taken the financial world by storm. It's not really a new philosophy. There have always been investors who would avoid what the financial world called the “sin stocks,” like liquor and cigarettes.
In the 80s, especially after Chernobyl, Three Mile Island, and the Exxon Valdez disasters, people became much more aware of environmental issues, and these concerns began to affect investment choices.
The Impact Investment Movement
Today, it's clear that the investment scene has evolved as new generations of investors, from Baby Boomers to Millennials, have jumped into the stock market. At the moment, we're looking at a fairly new movement called Impact Investment, where investors want to have a positive impact on the world, but definitely want to make money, too. The Impact Investment philosophy has been getting some big league endorsement from world leaders and philanthropists.
In 2013, the G8 held a Social Impact Investment Forum, sponsored by the UK Prime Minister David Cameron, who said that Impact Investing will "tackle the most difficult social problems...problems that have frustrated government after government, country after country, generation after generation."
Probably no one has been as high profile in the area of socially responsible investing as President Clinton, both through the Clinton Foundation and Clinton Global Initiative meetings he's organized, which have brought together world leaders, CEOs, nonprofit leaders, and philanthropists to "come up with solutions to the world's biggest problems."
Profit And Progress
Last year, I mentioned one of the pioneers of the profit and progress idea, Vital Capital, which focuses on funding projects in sub-Saharan Africa. The company recently made successful exits from two infrastructure investments in Angola: the Sumbe-Gabela-Waku Kungo (SGWK) electricity transmission project and the Water For All (WFA) water project.
Vital Capital saw that the projects were finished on time and on budget, and ensured environmental, social, and governance guidelines were met that assured the projects delivered the desired impact to benefit the Angolan population. Before you think this was just charity work, Vital's investment in these two projects actually yielded a very impressive IRR of more than 24 percent for the fund's investors.
This, of course, raises a very important question. Profit is one thing, but how exactly do you measure impact?
"Vital's investment approach is predicated on the principle there is no inherent necessary trade-off between financial return and social impact," said Renana Shvartvald, Vital Capital's Head of Environmental, Social and Governance (ESG).
Using the Vital Impact Diamond Model to screen investment opportunities, Vital Capital could translate its fundamental paradigm into a viable investment strategy. The model serves as an impact criteria, which is still not fully addressed by the industry.
"Having a clear methodology makes the screening process clearer," Shvartzvald said. "In fact, when analyzing Vital's pipeline, we realize an equal percentage of investments were rejected due to impact and financial considerations, which clearly reflects our equal commitment and focus on both social and financial results."
Before You Sign The Check…
Indeed, careful assessment is crucial for all investors, especially those of us in the high-tech sector. As someone familiar with startups, I understand the power of the dream — a brilliant idea can be intoxicating. But there is much to consider before signing that check.
Will customers in that market accept this new product or service? Is this a good time for this product? Is the market segment you're targeting large enough to support this idea? How's the competition?
Then there's the management team. Leading venture capitalists David Gladstone and Laura Gladstone once said: "You can have a good idea and poor management and lose every time. You can have a poor idea and good management and win every time."
I still believe in great ideas, but I get what they're saying — good ideas need to be developed, nurtured, promoted, and supported by experienced managers.
The Diamond Model Could Save Investors From An Expensive Gamble
Assessment is a big part of the management process, which is why I'm so drawn to Vital Capital's new Diamond Model. At its heart, it recognizes the goal of both financial return and positive social impact. It also makes assessment before and after investing integral to the process.
Vital has developed a multi-dimensional approach to impact investing, resulting in a methodology which translates fundamental goals into a viable investment strategy. Vital's approach to impact investing consists of pre-investment evaluation and post-investment monitoring and measurements.
That seems pretty obvious. But are you really evaluating or just trusting your gut? That could be an expensive gamble.
The model also prioritizes transparency and accountability. These are qualities every investor should look for in the startups they're considering funding. Transparency should be apparent in each stage of the startup’s life cycle: design, hiring, implementation, monitoring, and evaluation. This is more than just following regulations and policies. It's also about clearly stated values, aspirations, and commitments that can be monitored and developed together.
The Diamond Model also requires "constantly appraising its methodology, sharing it with interested parties, and engaging in a dialogue" with everyone involved. Again, as both an investor and a startup developer, I can't say enough about open communication and cooperation.
Apply This Model To Your Own Ventures
Before the start of any new venture, find or develop tools to measure success and help you determine the true benefits of all your hard work. You might think twice before launching a risky new campaign if you have to justify each dollar.
Don't forget to consider time spent as a cost. Complete a detailed post-mortem when a project is finished to help understand costs and benefits.
If social responsibility is important to you, make it a real part of everything you do, and not just a special project. Social consciousness also about how you interact with your employees, business partners, and community.
If the Impact Investment scene has any lesson for investors, it's that you can make money and make a difference. You don't need to sacrifice one for the other. There can be positive economic and social ROI. That's a great goal for all of us.
What industries have inspired you in your business endeavours? Let me know in the comments.