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Impact-Financial Integration to Guide Investment Decisions

An interview with Mike McCreless of Impact Frontiers

Mike McCreless is Founder and Executive Director of Impact Frontiers, a peer learning and market-building forum supporting investors in pioneering new ways to integrate impact alongside financial risk and return in investment practices. In 2020, he led the investors participating in the first Impact Frontiers cohort to co-author the article “How Investors Can Integrate Social Impact With Financial Performance to Improve Both” in the Stanford Social Innovation Review, as well as an accompanying Investor Handbook. Mike previously served as Head of Investor Collaboration at the Impact Management Project. Prior to that, Mike was Head of Impact at Root Capital, where his article “Toward the Efficient Impact Frontier” was featured in the Winter 2017 issue of SSIR.

Jane Reisman: Mike, modern portfolio theory has a model called the “efficient frontier” for constructing portfolios that balance financial risk and return. What inspired you to build on that model to create the efficient impact frontier?

Thanks Jane, it’s great to be here in conversation with you. The answer for me is very clear: The purpose of impact management is to make decisions. The efficient impact frontier – and really, the broader concept of impact-financial integration – is a way of making information about impact useful for decision-making in an investment context.

Mike McCreless Headshot

Mike McCreless

The idea arose when I was head of impact at Root Capital, a social investment fund. After much time developing our impact management practice, we increasingly had evidence that Root Capital’s loans did indeed create positive impacts, and also that some loans had more impact than others. We naturally wanted to do as many of those as possible but needed also to consider the financial risk and profitability of those loans. In short, we needed a way to go beyond just screening out ‘bad impacts’ and screening in ‘good impacts’ to actively maximizing impact subject to the constraints of our risk appetite, operational budget, and covenants with our own investors.

Unfortunately, impact management and investment management frameworks are not designed to be interoperable. So, each organization that seeks to incorporate impact into investment decision-making, other than through a simple screen, ends up figuring out their own way.

Root Capital’s way was a riff on the ‘efficient frontier’ of financial risk and return from mainstream financial markets. We expanded that concept to include impact. We are excited to launch a video today exploring the concept in more depth. The video actually originated as part of Toniic’s Activator Series, which is a terrific educational program designed to support Toniic’s members to advance their practice of impact investing and we’re grateful to them for their help in sharing this segment with a wider audience.

The efficient impact frontier wasn’t an idea that was original or unique to me or Root Capital, by the way. Leaders like Jed Emerson have been exploring similar ideas for years, and increasingly financial economists such as Jonathan Harris are too, or Lasse Pedersen in the context of ESG.

What was exciting at Root Capital was to put the idea into practice so concretely. It enabled impact to inform decisions about individual loans, and overall portfolio direction, much more systematically than was previously the case. Also, Root Capital is a non-profit lender with a goal of reaching rural farming populations, living on very low and uncertain incomes, far away from the nearest bank. The efficient impact frontier also helped Root Capital’s donors and investors to understand our approach to maximizing the impact made possible by their capital.

The flip side is that impact was not the only driver of decision-making. It rarely will be, if ever. All organizations need also to consider factors like cost, risk, operational complexity, and so forth. But impact deserves a seat at the decision-making table and this was one way to make that happen in the context of investing.

Introduction to the Efficient Impact Frontier.

You later shifted the model into the larger field building work of the Impact Management Project (IMP). Can you tell us about that journey?

I had gotten involved in the consensus-building work of the IMP from early on, around 2016, from my perch at Root Capital. I thought the team was onto something and I wanted to follow and support it. In the meantime, we had also started a pilot at Root Capital to see if the concept of the efficient impact frontier could be generalized to other investment contexts – for instance, to other asset classes such as private or public equity, and also to asset managers with fiduciary obligations.

With the support of the MacArthur Foundation, Metanoia Fund, and Omidyar Network, we got together a small-but-mighty band of a dozen investment funds, each willing to give the idea a try in their own way.

Some of those funds were in fact investors in Root Capital! It was a little awkward. So, when the opportunity arose to migrate that pilot from Root Capital to the IMP, I jumped at the chance. Working at IMP was a great opportunity in its own right, plus it provided a more natural and neutral platform for the Impact Frontiers pilot cohort.

The efficient impact frontier is a way of making information about impact useful for decision-making in an investment context.

The concepts dovetail nicely too. As an investor, once you have your five dimensions of impact from the IMP consensus, what do you do with them? Ideally, you use them to make decisions. But what about financial risk, return, liquidity, and so forth? Now you have five dimensions of impact and at least as many dimensions of financial performance to keep track of.

Impact Frontiers is a sandbox in which investors can figure out how they all fit together, and how to make investment decisions and construct portfolios in consideration of all of the financial and non-financial dimensions of performance that matter to them and to their stakeholders – including the stakeholders that are experiencing the impact in the first place!

Can you tell us how you are scaling? I understand that you have introduced the model to several cohorts using an “implementation lab” approach. Can you tell us about these cohorts and what these cohorts do?

The first pilot cohort finished in 2020. The conclusion was that yes, the concepts are generalizable to other investment contexts, but just about all of the specifics need to be customized to each fund. So instead of trying to come up with ‘the answer,’ we set out to create a replicable set of steps that investors can follow to develop their own answers, using their own data and based on their own impact and financial goals.

Men working with computers and notes

I’d describe the cohorts as a yearlong guided do-it-yourself program in which we support investors in establishing or advancing their own practice of impact management, and most importantly, integrating impact and financial data analyses to inform decision-making going forward. It’s all under NDA and Chatham House Rule. We try to make it a safe and confidential space in which participants can test out new approaches, see what their peers are doing, and get support on the live challenges they are facing.

We launched six cohorts in 2021 in various asset classes and geographies, with more than 80 investment organizations participating. For instance, there is a cohort of multi-asset class investors such pensions, family offices, and funds-of-funds. There is a cohort of community development financial institutions in the US doing amazing work to re-interpret the framework in the context of investment strategies to advance racial equity in the US, in partnership with our senior advisor Erika Seth Davies, CEO of Rhia Ventures and founder of the Racial Equity Asset Lab.

We’re also excited about partnerships with industry associations and networks to bring the cohort opportunity to their members, such as Asia Venture Philanthropy Network and Impact Capital Managers, and most recently, the recently-launched China Impact Investing Network. And in 2022, we’re excited to launch the next set of cohorts in collaboration with Cathy Clark and her team at CASE at Duke University’s Fuqua School of Business.

One thing that no cohort members have done is to chart their own efficient impact frontier! That’s not the goal. The goal is to support impact-informed or impact-driven decision-making, which, in an investment context, is made possible by impact-financial integration.

How is the field reacting to this model? Do you have any examples to share where impact management was put into practice?

The concept of impact for decision-making resonates with people. I think folks are weary of impact management as a performative, check-the-box exercise. There is a widespread desire to get past that phase to a more authentic engagement with the people and natural environment affected by our investments.

So there is demand. But it also takes work. Impact for decision-making implies changing how organizations make decisions, and that’s not easy. There is demand, but there is also inertia.

The concept of impact for decision-making resonates with people. I think folks are weary of impact management as a performative, check-the-box exercise.

Hopefully all cohort members pick up useful insights and practices along the way, but not all of them make it all the way to deep impact-financial integration. Those that do are the ones that invest in getting feedback and building buy-in across teams and at junior and senior levels. And that take the concepts and make them their own in ways that are more interesting and creative than anything I could have come up with. Impact-financial integration sounds very technical, and it can be, but actually a lot of our conversations in the cohorts touch on change management and communications, both internal and external.

There are a number of examples in the Handbook that came out of the first cohort. You can also check out our recent case study with WaterEquity, and the webinar with Calvert Impact Capital. We’re also excited about some of the success stories in the works with the current set of cohorts!

What is next on the horizon for Impact Frontiers? We know that the IMP has sunsetted. How will you continue scaling the Efficient Impact Frontier model?

Well, first of all, Impact Frontiers will host the norms and resources facilitated by the IMP going forward. And while we don’t envision making significant changes to what is there, it’s not that they’re written in stone. They are a living document that will evolve as consensus about impact management evolves. We’re grateful that Clara Barby and Olivia Prentice of the IMP are staying involved in advisory roles to ensure continuity.

Investor contribution is one area in which I think there is an opportunity to go into more detail than we have previously, both about the positive contributions that investors make to enable impact, but also recognizing that investors can also cause harm and contribute to systemic risk. We are looking forward to advancing sector-wide conversations on that topic in partnership with the Predistribution Initiative, and with the support of Omidyar Network. Readers can track progress and even weigh in on our discussion boards here.

For the cohorts, we have a few goals for the medium-term. One is to translate and offer the content and cohort model in additional languages and in additional geographies, probably starting with Spanish. Another goal is to develop an open-access online version of the curriculum that any investor can use on their own. In the long term, as a non-profit field- building organization, our goal is for any investor to be able to incorporate impact into their decision-making.

This essay is part of the “Why IM” thought leadership series — a set of perspectives and calls to action to mainstream the adoption of Impact Management. The series is an initiative of Impacting Together, a cross-sector network of practitioners aiming to break down silos across sectors and practice areas to share tools, solutions, and frameworks that can advance deep, durable impact. Previous articles in the series:

Jane Reisman bridges the worlds of impact measurement and management and the evaluation profession. As founder of an evaluation firm ORS Impact, Jane engaged in new frontiers to scale impact. Her current work as a social impact advisor focuses on field-building efforts that strengthen impact measurement and management practices.

This article was produced in collaboration with the Magazine's Content Partners.

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