We often work with clients who want their portfolios to reflect their values, and impact investing is becoming a more common piece of that equation. Some clients recognize there are opportunities to complement their traditional portfolio with private investments that are geared to drive capital towards a specific type of solution—whether that means supporting community initiatives, alternative energy, sustainable agriculture or any number of issues.

There is a wide range of potential financial returns in the impact space. Clients need to understand the risk and return profile for each impact investment, and be ready to decide whether they are comfortable with the approach. To equip our clients with the best information, we undertake a diligence process that is not far afield from our assessments of conventional investments.

We also keep an eye on long-term goals by prioritizing investment models that seek to preserve capital and put an emphasis on returning that capital. When those returns are within expectations, we encourage clients to “recycle” their impact investment capital again and again to amplify social returns over their investing life; this helps assure the long-term sustainability of impact for each client we serve.

The search for private impact investments originates with a client’s specific interests, which we can put into context by gauging suitability for their portfolios. Since impact investments can be found in most asset classes, knowing our clients’ financial and impact goals help to inform our research. We then launch a selection process by connecting with a network of like-minded investors and managers, sourcing ideas and developing themes in concert with partner organizations that create impact on the ground.

This process has led to a history of developing and supporting innovative funding models that invite capital from a range of constituents into impact investments. Being involved in the local and national impact scenes sometimes allows us to be in on the ground floor of financial models. In these cases, we can make suggestions about the creation of investment structures and consideration of impact metrics that we believe will serve client interests and lead to opportunities for recycling capital.

Vetting impact investments requires a number of layers of analysis. While the list of criteria is unique to every investment, here are four broad elements we look at when evaluating the “Impact DNA” of any organization, alongside the more typical long-term operating performance and historic financials:

Does The Business Model Truly Stand Up?

As a fiduciary, we are looking to understand the organization or business as a whole, not just whether it fits our clients’ idea of values-based impact. Basic financials must be thoroughly reviewed: What does its balance sheet look like? Its income statement? How is it funded (by grants, issuing debt, equity, etc.)? What is the longevity and consistency of its records? Are they audited? What is its track record for repaying investors and what has been its financial return? Does it pay its investors promptly on schedule?

An important factor is whether the investment has the potential to grow beyond its immediate footprint. For example, we looked to invest in a renewable energy model with a mission and passion to serve communities and combat climate change. The message of the business resonated with us, and we believed it would be a fit for our clients. Just as important, though, the philosophy and approach could be built for scalability, which is a key criterion for many of our impact investments: we take pride in thinking creatively about models that are replicable from region to region, expanding their potential for meaningful impact.

Is Management Committed?

Looking at the numbers is not enough (in fact, we feel the same way about our conventional investments). We engage management, with the goal of learning directly from a CEO, executive director, fund manager or entrepreneur about their vision for the future. What in their past has given them the skills and experience to plan for and eventually achieve their goals?

For a private fund, we might look to their prior experience in the impact space. How does the manager understand the goals they are setting for portfolio companies, and are they incorporating impact measurement from the start? Is measurement an afterthought to catch on to a recent trend? How transparent are they about their work? How diverse is the management team and what is their commitment to employing diverse backgrounds?

Is The Community Engaged?

Many social and environmental issues can only be confronted productively in partnership with others and through integrated investment and grant opportunities. We therefore go outside the organization itself to engage with the surrounding community. This gives us valuable information about their reputation, their value as a partner, and other insights that can only be gained through firsthand experience.

For example, when we have explored investing in a Community Development Financial Institution (CDFI), we want to know if it is a trusted, well-known player in the community. How defined is its mission and how does it fulfill it? Do borrowers prefer to work with the organization over other options? How is technical assistance provided? Do Board members come from committed impact backgrounds?

How Is The Impact Measured?

Impact measurement is a fast-evolving field, and we look to understand how an organization develops metrics. Are they using a third party? Are they benchmarking themselves? What is important to their Theory of Change? How are they communicating their impact? When working specifically on social issues like affordable housing and small business lending in low income communities, does the organization or business draw employees from these neighborhoods? Have they earned trust and respect by engaging with the community?

Impact measurement is a thorny field. Some outputs are more common and easily measured, such as job creation or community members served. But grander impact goals can be much more difficult to track, especially over long periods of time. How can a number be accurately applied to closing the racial achievement gap or even the wealth gap? This is a nascent area of the field, borrowing heavily from the world of grants evaluation for foundations and philanthropy. But while the discipline of impact measurement evolves, clients can still move forward with an integrated portfolio, considering impact as well as financial return.

Ultimately, any impact investment has to fit a client’s objectives. Having real conversations with them help to define their financial and impact goals, helps to better align clients and advisors, opens doors to broader investment opportunities, and drives capital to areas that will truly benefit.  

Carrie Endries, Ph.D., is director of impact investments for Reynders, McVeigh Capital Management.