The risks involved with impact investments

June 25, 2015       The NonProfit Times      

Such innovations as mission-driven enterprises, social impact bonds and social value franchising have proven to be helpful ways to address social problems while satisfying the needs of investors.

Like all aspects of nonprofit operations, however, such practices carry risk, and in these cases that includes risk to potential investors, who, regardless of their desire for social good, expect some return on their outlay.

In his book “The Mission-Driven Venture” Marc J. Lane cites a report from Bank of America Merrill Lynch and Bridges Ventures LLP that proposes minimizing or eliminating the risk in such a market by addressing the following:

  • Provide downside protection through collateralization, or pledging pools of assets (real estate or securities) in the event of default, and providing third-party guarantees.
  • Reduce the risk of being able to exit the investment by building trading platforms and increasing the numbers of brokers participating in the market, making the assets more liquid.
  • Reduce the transaction costs of impact investments by bundling investments, selling investment opportunities as a combined unit.
  • Make evidence of impact more robust and supported by a credible methodology for verifying impact.
  • Compensate for the lack of a track record by luring well-established managers to partner with impact investors.