July 28, 2022
The International Finance Commission estimated that nearly $2.3 trillion was invested for impact in 2020. In light of this, terms such as ‘double bottom line,’ ‘impact investing,’ and ‘ESG’ have become major buzzwords. But how do investors ensure they are meeting the mission behind these concepts?
Impact investing is a new term, but the concept is not new to us at Advantage Capital. In our thirty years of experience in double bottom line investing, we have developed some key insights to ensure our investments are making a real impact and not just co-opting the trendy term.
Framework is crucial
To evaluate the authenticity of the impact a business is making, it is first and foremost important to determine what sort of impact the investment is expected to make. The broadness of the term “impact investing” is its greatest danger. In aggregating widespread and non-specific impacts such as environmental sustainability and social justice, we lose our ability to evaluate returns on our double bottom line investing strategy.
Firms and individuals need to ask themselves before investing, what is my goal? Is it promoting diversity and inclusion? Environmental sustainability? Affordable housing? Closing the wage gap? The desired impact should be as concise as possible in order to create standards and metrics to evaluate whether businesses are truly reaching this impact goal.
At Advantage Capital, we began investing with a goal to create quality jobs in distressed communities and have expanded our goals as our company has grown to encompass additional desired investment impacts of affordable housing and renewable energy solutions. All of these impacts encompass one overall belief: capital has the ability to change lives and uplift underserved communities. The specificity of these goals is central to the success of our investment model. Our framework, goals and deliverables are focused and succinct. We invest with intentionality and purpose and evaluate every investment against our in-house created impact matrix.
Standards and metrics
A framework means nothing without standards and metrics to measure it by. Establishing tracking metrics is crucial for ensuring meaningful impact.
At Advantage Capital, we start by seeking deals with small businesses that would benefit from capital and are either engaged or willing to work towards quality job creation. The entrepreneurs and businesses we invest in are truly the change makers driving community impact. The jobs, benefits and opportunities they provide are the things that drive household stability and in turn, drive economic growth. And these impacts are exactly the types of things we aim to measure.
Impact can and should be measured quantitatively just as financials are. Companies with strong positive social and environmental impacts should not be afraid to be transparent with their data. After every investment, Advantage Capital makes a concerted effort to work closely with companies to track their performance twice a year, surveying them on key metrics such as average wage, health and wellness programs, wealth accumulation opportunities, job accessibility and more.
This data tracking and measurement ensures our investments are doing what we say they are going to do, thereby keeping us honest. And overall, our portfolio companies continue to make immense contributions to producing positive impact within their communities.
Read more about how we define, track and measure impact in our annual impact report here.
