Why impact Investors and Businesses Need Better Ways to Communicate
Impact businesses and impact investors want the same things—but a lack of tools for sharing information hampers successful collaboration.
By guest contributor Antony Upward, Sustainability Business Architect
Both impact investors and businesses seeking impact investments share a strong desire to see that businesses are tri-profitable— producing financial rewards, social benefits and environmental regeneration. This shared desire to maximize the tri-impact of business comes from the fact that impact investors and tri-impact entrepreneurs fundamentally share the same belief that businesses will do best when they do good.
Based on their shared desire for tri-impact:
- Tri-impact entrepreneurs are driven to choose strategies and design their operations to be tri-profitable;
- Impact investors are motivated to allocate capital (debt, equity or hybrid forms) to investments where they expect both to receive a financial return (ranging from return of principal to market-beating returns) and a defined additional social and/or environmental impact.
Why shared values aren’t enough
And yet, what we’re learning in our conversations with impact investors is that, despite their shared values and intention to act accordingly (and all the goodwill this engenders), there isn’t currently an approach for the investor and the business seeking investment to efficiently carry forward their shared values to the necessary next level of detail. In other words there isn’t a good way for them to gain a shared understanding of the viability and quality of the action the for-impact business is planning and to report on whether what they do has produced the intended tri-impact.
In order for collaboration to work effectively, several things need to happen. Businesses need to be certain that their proposed action (the design of their business model) is well aligned with their intended impacts. They must be able to share the story of their proposed action in a language that will resonate with impact investors. On their side, impact investors need to be able to quickly and accurately gauge whether business plans are realistic. And they need to be able to scope the risks to tri-profitability, spot opportunities to increase tri-impact a business has missed, and communicate these things in a way an that a business can act upon.
In summary: how can the investor and the business to quickly share the action planned by the business in a way that allows mutual understanding and learning while deepening their relationship? How can they efficiently and effectively determine if they are aligned and have a good fit for each other based on their shared values?
The limits of current approaches
But don’t existing techniques used by profit-prioritizing businesses resolve these challenges?
Unfortunately the two most common existing approaches —business plans and reporting— don’t, on their own, enable the required level of values-aligned shared understanding, mutual learning and relationship-building required by impact partnerships. Though both are valuable, both have limitations when it comes to using them in an impact context.
Business Plans: There is no agreement on what a business plan that describes a tri-profitable business looks like; every business and impact investor has their own ideas of what’s required. As Alex Osterwalder and Steve Blank have observed, business plans don’t enable compelling storytelling, a powerful tool for impact businesses. They don’t facilitate learning and they can be inaccessible for investors.
Reporting: Reporting provides some evidence of tri-impact created in the past, but it doesn’t give a view of future impact, which helps investors assess the quality of the planned actions. At this writing, we still don’t have an integrated set of reports (financial, social, environmental) that allow rating and ranking by investors. Hindering the Growth of the Impact Investing Market.
Constraining the impact market
The lack an efficient approach for impact investors and tri-impact entrepreneurs to deepen their relationship around their shared values creates a range of problems for the impact investing marketplace:
- It takes too long for investees and investors to build trust, impacting deal cost and deal flow.
- It’s hard for businesses to tell inspiring stories about all aspects of their planned tri-impact—profit, people and planet.
- Impact investors have trouble communicating about additional opportunities for tri-impact or additional risks they may identify.
- Both parties have trouble identifying a concise set of performance measures and reporting approaches to track all aspects of the businesses progress.
But there is also a wider issue: These communication problems effectively limit both the number of viable tri-impact business opportunities and the supply of impact investments seeking those opportunities. In turn, this limits the scale and development speed of the impact investing market and hence the total quantity of integrated environmental, social and economic benefits being created by business to address today’s most pressing challenges created by the ever growing mega-forces of change.
We think that impact investors and business would find it easier to get aligned on a specific opportunity based on their shared values if they had a shared language to communicate business plans and demonstrate impact. In my upcoming blog, I’ll explore how impact investors and business seeking capital can use new approaches to business models and reporting to align based on their shared values – for their mutual benefit.
About the author: Antony Upward is a Sustainability Business Architect and the Principle of the enterprise design consultancy, Edward James Consulting Ltd. His work focuses on business model diagnosis and design considering all three dimensions of sustainability: economic/profit, social/people, and environmental/planet. He’s one of the developers behind The Flourishing Business Model Innovation Toolkit, a collaborative project of the OCAD University Strongly Sustainable Business Model Group.