Impact Financial Integration | Organizational Challenges and BenefitsWhile the technical challenges of impact-financial integration are significant, managing the associated organizational changes is equally demanding – and equally important.
Introduction
Organizational issues that impact-financial integration touches on include the following:
- Process: where in the investment origination and approval process does the impact rating fit in?
- Roles: for organizations that have in-house impact specialists, does the specialist complete the impact ratings for all proposed investments, or design tools for use by the investment team to do so?
- Decision rights: for organizations that have in-house impact specialists, is the specialist only an input provider to the decision? Or do they have the right to veto investment decisions or escalate decisions to higher levels of organizational approval?
- Systems: How will data about impact be entered, stored, and retrieved?
- Incentives: If the organization offers high-powered incentives for financial performance, does it need to balance these with incentives for impact?
There is no one right answer to these questions. While every organization must ultimately address them in their own way, a few guiding principles for effective change management have emerged from our work.
Alumni of Impact Frontiers cohorts recommend a period of one to two years for development and piloting of the approach, followed by one year of refinement.
This is partly because it takes one annual investment cycle to develop an approach and collect and analyze data. It takes another year to refine the methodology based on lessons from the first year. Of the five steps of impact-financial integration, we have found that the first – creating the impact rating – is generally the most time-consuming, especially for organizations creating one from scratch.
Investors in Impact Frontiers cohorts have observed that going slowly and engaging with investment team members and other internal stakeholders early and often is critical to constructing an approach that those team members would later be willing to put into practice.
For organizations embarking upon impact-financial integration for the first time, the challenges may seem daunting. Investors consistently report that the benefits are proportional to the effort put into the process. Beyond improving portfolio performance, impact-financial integration often yields important organizational dividends, including:
- Articulating more concretely what investors mean by ‘impact,’ and aligning investors’ investment criteria and processes with their desired impact and financial goals;
- Increased efficiency (e.g., less time evaluating unattractive investment opportunities) and effectiveness in prioritizing the most attractive proposed investments; and,
- Improved communication among team members, investment committees, and boards of directors about organizational goals and performance, both impact and financial.
