Intentionality to Accountability: Future of Impact Investing

Every investment has a positive or negative impact, so intentionality is the first step to impact investing. But what comes after the intentionality, is the accountability. The investor should be able to collect impact parameters and measure the outputs/outcomes to be accountable.
To be specific, very few for-profit social enterprises and for-profit impact funds have the time, energy and money to track and measure the outcomes in which third parties come to validate the impact. To consider the constraints of the social enterprises, we should focus on intentionality and accountability of outputs (well-defined) to produce those desired outcomes.
One way to measure outputs can be Impact Incentive Financing. As an impact investor, we should be able to integrate impact outputs with the financial metrics.
Let’s try to define in terms:
Consider,
Scenario 1:
  • ‘X’ is the ticket size of the investment.
  • IRR expected from the deal is ‘Y’%
  • It’s an equity deal (with CCD as the structure), for ‘X’ investment, investor expects to convert at ‘Z1’ and ‘Z2’ as floor and cap valuation respectively, with a discount of ‘C’% and a fixed coupon of ‘D’% and conversion period of 5 years.
  • If the company achieves following defined impact metrics:
    – reach ‘A’ women or girls during the conversion period
    – Employment of target audience increase by ‘B’%
    – <other impact metrics/outputs>.
  • Then, rather discounting by ‘C’%, investor discount by (‘C’-‘E’)% (where C>E).
  • but making sure with these terms also investor will be to make same IRR of ‘Y’% (if the investor doesn’t want to go below-defined returns), we can consider this case as impact penalizing financing and if the investor is ready to go below ‘Y’% then it becomes incentive financing.
Scenario 2:
  • ‘X’ is the ticket size of the investment.
  • IRR expected from the deal is ‘Y’%.
  • It’s a pure play equity deal, for ‘X’ investment, the investor is expecting ‘Z’% equity. For simplicity, let’s consider ‘Z’%=‘A’% + ‘B’% and say ‘A’% is notional equity and ‘B’% is impact output equity.
  • If the company achieves following defined impact metrics:
    – reach ‘C’ women/girls during the conversion period
    – Employment of target audience increase by ‘D’%
    – <other impact metrics/outputs>.
  • Then, ‘B’% impact equity will liquidate to 0%, so effectively the investor will be left with ‘A’% equity.
  • but making sure with these terms also investor will be to make same IRR of ‘Y’% (if the investor doesn’t want to go below-defined returns), we can consider this case as impact penalizing financing and if the investor is ready to go below ‘Y’% then it becomes incentive financing.
Scenario 3: 
  • ‘X’ is the ticket size of the investment.
  • IRR expected from the deal is ‘Y’%
  • It’s an equity deal (with CCD as the structure), for ‘X’ investment, investor expect to convert at ‘Z1’ and ‘Z2’ as floor and cap valuation with a discount of ‘C’% and a fixed coupon of ‘D’% and conversion period of 5 years.
  • If the company achieves following defined impact metrics:
    – reach ‘A’ women/girls during the conversion period
    – Employment of target audience increase by ‘B’%
    – <other impact metrics/outputs>.
  • Then, rather expecting a fixed coupon of ‘D’% it can be reduced to (‘D’-‘E’)%.
  • but making sure with these terms also investor will be to make same IRR of ‘Y’% (if the investor doesn’t want to go below-defined returns), we can consider this case as impact penalizing financing and if the investor is ready to go below ‘Y’% then it becomes incentive financing.
This is not the perfect or the only way to ensure the outputs get achieved but it can be a way to incentivize the impact outputs to produce the desired outcomes.
Would love to hear from you how are you ensuring the accountability and measuring outputs/ outcomes. How are you making sure of impact with your impact investments? I would love to hear back from you at sagar@humane.network.

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