How can we invest for profit and social impact? How can we understand the impact of a diverse portfolio? How can we help to embed social impact into commercial businesses?
In Nesta's recent report Setting Our Sights these questions are discussed. Here are the updates to Nesta's approach based on five years of learning:
The importance of alignment While the portfolio is still young, Nesta's strongest investments to date have demonstrated alignment between commercial success and social impact. They have been particularly successful with businesses where impact is core to their commercial strategy. For example, Oomph! use their evidence of impact on older people’s health and wellbeing as part of their sales strategy. As a consequence, Nesta have introduced alignment as a specific requirement for investment.
Impact risk has many dimensions Nesta's previous approach defined impact risk as the standard of evidence provided by that venture. While this is an important factor in whether estimated impact is realised, there are other factors that can identified at the point of investment that may raise or lower the risk to achieving social impact. As a result, the definition of risk has been broadened to reflect the importance of the skills and attitudes of the leadership team and the logic underpinning how the product or service will lead to impact.
Setting expectations It has been found that co-development of an impact plan is a crucial time for setting mutual expectations about the time and effort required to measure impact. Where it has worked well, agreeing the impact plan has been an opportunity to ensure that the venture is well resourced to deliver on impact measurement and that timelines for data have been sensitive to business milestones.
The challenge of maintaining focus on impact Nesta's highly standardised approach to a very narrow impact assessment framework for early investments in NII meant that they did not always strike the right balance of flexibility to changing business needs with maintaining a focus on impact. As a result of this inflexibility some ventures became increasingly distanced from their impact plans to a point where measurement and engagement ceased to be relevant. Turning the situation around could then be extremely challenging as the venture, by then, had often lost its focus on measuring impact. In future impact investment funds NII will strive to maintain a robust, but flexible approach to impact plans so that wherever a portfolio company starts to deviate from its impact plan, they work with the management team to develop a strategy for getting back on track or adjusting the plan in the same quarter. Nesta will ensure that impact conversations continue to be held quarterly, no matter what the situation.
Impact at the investment committee In the past Nesta made sure that there was social impact expertise on the Investment Committee. Earlier in the life of the fund this expertise was concentrated in one person who often had to ‘fly the flag’ for impact alone. As the fund has progressed the organisation has taken steps to ensure that all committee members feel equipped to participate in substantive conversations on social impact by making our impact assessment more transparent and consistent, highlighting particular areas for discussion. In future impact investment funds, Nesta will continue to review the dynamic of conversations in the committee to maintain proper oversight and accountability for social impact.
Heady, L. (2017, October 3). Five lessons from five years of impact investing. Retrieved from Nesta: http://www.nesta.org.uk/blog/five-lessons-five-years-impact-investing