How impact investors can avoid the risk of mission drift and impact washing
As part of FASE’s Impact Fire Talks, impact investing experts share their tips on how to make sure investees don’t move away from their mission over time – plus our selection of more key insights from the week-long series.
A company that supports smallholder farmers pivots its attention to big commercial farms; a buyer with the wrong intentions takes over an impact tech venture; new investors put pressure on a startup to relinquish its purpose for profit – seeing a promising venture lose focus on its original impact-centred aim is a nightmare scenario for any impact investor.
No-one wants this to happen, so how to avoid mission-drift – and the associated risk of impact washing – as an impact venture matures?
In an event on 30 March, experts from across the spectrum of impact investing shared their tips on how to ensure their investees don’t shift away from their impact goals over time – both while they hold the investment and after they exit it.
The session was part of the Impact Fire Talks, a week-long series of online events organised by the Financing Agency for Social Entrepreneurship (FASE), gathering top experts to address today’s burning questions in impact investing – including impact-linked finance, blockchain solutions and avoiding investment biases.
There’s much more to impact investing than debt and equity, with a broad spectrum of instruments that can be tailored to each venture’s situation to maximise impact – from quasi-equity and revenue-sharing models to recoverable grants, and including the multiple opportunities of impact-linked finance.
Once the right type of capital is secured, the longer – and possibly harder – part of the job for an impact investor is to ensure the venture is able to stick with its mission. Here are five ways to do that.
Tip 1: Invest in steward-owned companies
Achim Hensen (pictured), co-founder of the Purpose Foundation – which helps companies establish a steward-owned governance system – explains why investing in companies with this structure can be a way to avoid mission-drift.
Steward ownership rests on two principles, Hensen explains. First, self-determination, meaning decision-making power lies with people closely connected to the company, usually the entrepreneurs, and voting power cannot be bought or sold – regardless of whether the company raises external capital. Investors only have low decision-making power, or none at all.
The second principle is the “purpose asset lock”: the majority of profits must be reinvested or donated. Those two principles must be enshrined in the ownership structure of the company in a legally binding way.
It is very unusual for investors to renounce power, but it helps protect against mission-drift. “If you keep the power with founders and with entrepreneurs who are the most connected to the core idea, it has a true potential,” Hensen says.
If you keep the power with founders and with entrepreneurs who are the most connected to the core idea, it has a true potential
The company will be less vulnerable to potential pressures from future investors or management teams that might want to prioritise profits over purpose.
Hensen gave the example of Wildplastic, a company that collects plastic waste from the environment to recycle it, which received advice from the Purpose Foundation.
The founders didn’t want to compromise on their mission in response to shareholder pressure and profit maximisation. So Wildplastic was founded directly as a steward-owned company, ensuring that purpose would always come first and that decisions would be made by people connected to the mission and activities of the company.
Since then, Wildplastic has successfully raised two rounds of financing aligned with its ownership model, enabling it to grow while remaining purpose driven.
Tip 2: Have an impact-drift clause in your contract with your investee
Zoe Peden (pictured), principal at Ananda Impact Ventures, explains that when Ananda invests in an impact venture, it sets up an ‘impact term sheet’ with the company. This term sheet includes a mission statement, which is agreed with the company, setting their impact goals and the kind of business that they want to build.
“It means that they can't suddenly pivot into something that's no longer as impactful as when we first invested,” Peden says.
In addition to this, a mission drift clause stipulates that, should the company move away from its mission, Ananda would be able to withdraw its investment in a very short period of time, Peden explains.
“We have that as the ultimate backstop,” she says, adding that the situation hardly ever arises.
Ananda also takes a board or observer seat, so it can “act as a steward around impact to make sure that everything is aligned”, Peden says.
Tip 3: Stay alert: mission drift doesn’t happen quickly
“Mission drift doesn't happen overnight,” says Tamer El-Raghy, managing director of the Acumen Resilient Agriculture Fund (ARAF). “It takes time. You need to see the signs and have ongoing, strategic discussion with your investees.”
He adds: “Also, you should not be shy of having those discussions early on, and if the entrepreneur or the management are discussing a drift, ask: why is that? And how can we collectively help avoid that?”
Tip 4: Ensure impact is integral to your investee’s business model
ARAF makes investments that support smallholder farmers in Africa to adapt to climate change. To ensure its investments don’t drift from this mandate, El-Raghy explains that ARAF looks at the business model of its investees to ensure it guarantees impact.
“We always make sure from day one that we invest in companies where the sustainability of the smallholder farmer is essential to the sustainability of the business model itself,” El-Raghy (pictured) says.
This will also prevent mission drift after ARAF exits the company – usually after a period of around seven years. “Even if there is no shift during our holding period, we always want to make sure that when we exit, the company continues on the same path,” El-Raghy says. “And the only guarantee for that to happen is to ensure that the focus on smallholder farmers stays an essential building block of the business model itself.”
Ananda, which invests in tech-based impact ventures, also highlights that the impact is “baked in, not a side job”, Peden says, so it remains after Ananda exits. She gives the example of Company Bike which Ananda exited last year. Company Bike leases bicycles and e-bikes to large companies’ employees to promote sustainable mobility and health.
“The impact is intrinsic, you can't extract it out,” Peden says.
Tip 5: Find the right exit partner
When exiting an impact venture, it is essential to find the right buyer, Peden explains. She suggests looking at the ethics of the buyer, and whether it fits in with the value chain the venture operates in.
As an example, Ananda exited the fast-growing school management information system provider Arbor Education in 2020. As many mergers and acquisitions opportunities emerged following the success of the startup, Ananda chose to sell its stake to a company (The Key) which was operating in the same area of education management systems – with similar ethics of improving education by enabling schools to work more efficiently.
“They were the right people because we knew their ethics and they were in the right value chain,” Peden says.
Things we learned at the Impact Fire Talks about…
- Before being able to effectively use impact incentives in deal structures, investors need to get their own impact thesis right. They should also firmly align on their goals with their future investees up front.
- Embedding impact incentives into financial instruments of any kind can be a powerful mechanism to preserve mission alignment and achieve additionality.
- Building strong coalitions between investors for impact and investors with impact in hybrid finance transactions is another powerful approach, once all agree on outcome targets.
- Read more on impact-linked finance: Better terms, better impact – but can impact-linked finance overcome a chicken-and-egg situation?
Blockchain and social impact
- The benefits of blockchain for impact include: transparency, integrity and quality of impact data as well as efficient and instantaneous payments for results/outcomes through smart contracts.
- A challenge remains regarding the availability of quality impact data, which requires impact ventures, companies, investors and intermediaries to have meaningful impact measurement systems in place.
Behavioural biases in impact investing
- Research shows that the lack of a formal and systematic impact assessment creates costly cognitive biases for investors – which have a heavy influence on decision-making.
- There is evidence that diverse teams make better decisions and diverse-led companies are delivering better outcomes.
This feature was produced by Pioneers Post in partnership with FASE. Explore more about the sessions, including a selection of pointers to deeper-dive resources here.
Top picture: Wildplastic collects and recycles plastic waste from the environment. The company received advice from the Purpose Foundation on steward ownership (credit: Wildplastic)
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