At the recent Policy Innovation in Impact Investing conference in London, UK, a new set of guidelines for governmental impact investing was launched. Known as the London Principles, the main guidelines are as follows:
- Clarity of purpose
- Stakeholder engagement
- Market stewardship
- Institutional capacity
- Universal transparency
The organizers hope that these principles will become foundational practice for governments as they explore working with private investors to address public social needs. Given that the London Principles were developed by some of the most prominent thinkers in the social finance field, we were curious about what they could tell us about potential best practices in the nonprofit sector.
Clarity of Purpose
This, appropriately, means exactly what you would think it does: there must be a clear objective to any impact investing initiative, with well-defined social benchmarks to be met and proof that impact investing is the most efficient means of achieving them. There must be realistic expectations of results and plausible timelines.
As basic, even obvious, as this sounds, it is arguably the most complex part of the process. True “clarity of purpose” requires a sound analysis of the relevant market and social ecosystems, of the financial and working practices of the organization involved (governmental or nonprofit) and enough evidence to support a workable hypothesis. In our resource paper, Becoming Loan Ready, we strongly emphasize the importance of planning and reporting. Investors will consider reasonable risk if the financial and social return is sufficiently promising, but no responsible investor would enter such a proposition without adequate reportage from their potential partners.
The lessons to take from this are:
- There is no substitute for vision and long-term planning
- Nonprofits who don’t enjoy the services of a full-time accountant are strongly advised to seek financial coaching services
Governments must engage with the interested public, private organizations and investors in order to make their policy legitimate. As important as top-level research and strategic philanthropy can be, as Bill Schambra notes there is no substitute for going “down to the neighborhood [to] check it out, armed with common sense.” Taking the step of consulting the people that social financing is meant to actually help can vastly reduce misallocated time and resources.
Fortunately, nonprofits themselves, particularly community-based nonprofits of the type CFF is designed to help, are already in those neighborhoods. Nonprofits can take pride in their firsthand knowledge, and the more they can involve the communities they serve in their overall planning and resource allocation, the better they’ll be able to use their investments.
To quote from the London Principles themselves: “Market stewardship ensures a holistic vision for impact investing strategies and policies. It focuses on a balanced development of investor interest, investment opportunities, and mechanisms to deliver intended social outcomes.”
Delivering a business plan designed for impact requires organizational infrastructure – staff skills, financial resources and administrative systems. If any of these areas are lacking, all of the money earmarked for, say, program costs will result in negligible social impact and considerable waste. As we covered in our previous post on the myth of “overhead” costs, money must be invested in building the administrative capacity of nonprofits where it is lacking so that they can effectively deliver their services.
This principle also extends to development of real public sector leadership in the area of impact investing, a development which would surely be welcomed by Canadian nonprofits. In the meantime, more collaboration between nonprofits great and small in the form of conferences, partnerships and shared initiatives can do a great deal to advance our larger social goals.
If, as indicated under “Clarity of Purpose,” the goals are clear, the measures of success well-defined and the strategy well-articulated, transparency is the final step to ensure stakeholders and the public that the venture has been a success. This extends to all facets of nonprofit operations, from traditional donor fundraising to seeking further investment: if people can see your organization is doing good work, you will be rewarded for it. So let them see it!
Check out the Impact Investing Policy Collaborative’s website for more information on the genesis and application of the London Principles, and be sure to let us know what you think on Facebook or Twitter!