Impact Financial Integration | Risks & Limitations Common concerns center on data and time
Introduction
One of the concerns that arises for investors around impact-financial integration is that a lack of quality impact data will undermine the analysis. Other investors are anxious that implementing additional processes of impact management may over-burden or alienate the investment team.
The completeness and accuracy of impact data in the investment industry is generally uneven. Some investors express concern about potentially constructing impact ratings that are poorly thought through, or that are based on inaccurate or incomplete social and environmental data, leading to investment decisions based on faulty data and reasoning. Moreover, organizations have shared concerns about whether the approach would add ‘red tape’ to the investment process without improving the quality of decisions.
Investors can mitigate these risks by incorporating perspectives from across their organizations to ensure that the right information is included, and to customize tools for ease of use by their teams. Investors participating in Impact Frontiers cohorts sanity-test their approaches with one another during peer feedback workshops, and with external advisors, before bringing them to leadership teams within their organizations. Investors often conduct pilots on segments of the portfolio before rolling their approaches out more broadly, and continue to revise their data sources, indicators, and methodologies over time.
Feasibility
- Investors that have more capital than deal flow, and as a result, are under pressure to approve all of the deals that pass their impact and financial screens;
- Investors that are optimizing only for financial risk and return, including both mainstream investors and impact investors that will only ever consider impact as a negative and positive screen; and
- Investors that are not accountable to external stakeholders and hence feel less pressure to demonstrate continuous improvement.
Implementation
Investors that have been implementing the practices for three years or longer observe that impact management and impact-financial integration are not projects that are ever finished and put aside.
They become part and parcel of how investors do business. As with any mission-critical process, there are always improvements to be made. That said, ongoing improvements generally require less bandwidth than original development and implementation of the approach.
