The Look before the Leap
“The art of decision making includes the art of questioning.” – Pearl Zhu., Decision Master, The Art and Science of Decision Making
In other words, look before you leap! This metaphorical “look” is due
diligence. Simply put, due diligence is the research you do before making a decision.Most likely, you have done due diligence in the past and not realized it. For example, when you look at the ads for the best Black Friday deals, you are doing due diligence by researching where you can get the best deals for your holiday list. With the rise in impact investing, it is easier than ever to find investments that will impact the social or environmental causes that you already value. You may already support these causes through your charitable donations or volunteering. But how can you tell if an impact investment has the potential for a financial return and measurable impact? The answer: due diligence.
What are the stages of Due Diligence?
Typically, the overall due diligence process for impact investors includes:
First look
Financial Assessment
Impact Assessment
Final Decision
While the first two steps are typical for any investment due diligence, the third step is more commonly found in impact investing. Generally this third step includes:
Determining impact goals
Establishing the strategies to achieve the intended impact
Selecting the impact measuring method
(“Impact Measurement & Management (IMM) | The GIIN,” 2008)
Remember,
“…due diligence should strike a delicate balance, collecting enough data for rigorous analysis and providing value while not exhausting the entrepreneur in the process. Your due diligence should focus on information that will get you to a decision and be commensurate to the size and type of capital you are planning to deploy.” -Toniic, The Impact Assets Handbook for Investors, p. 164-165
What are some of the challenges of Due Diligence?
For financial investments, there are industry standards to measure financial risk and return. But, the same is not true for impact investing. Currently, there are no industry standards to measure the potential impact of an investment. However, there are many methods to measure impact.
What’s my role in the Due Diligence process?
Here are questions you can ask when considering adding impact investments to your portfolio:
What impact is the investment expected to have?
How is the company measuring impact?
Who is ensuring that the investment is having an impact ?
What happens if the impact is significantly less than predicted?
What will keep the investment on track to achieve the intended impact?
Look Before You Leap
All things considered, impact investing is a valuable tool. With it, you can support social or environmental causes important to you today while leaving a legacy for tomorrow. Whether it is through impact investing, a donor-advised fund, a split-interest gift, or a combination of all three. With proper due diligence, your impact can withstand the test of time.
Contact Legacy today to see how we can help you leave a lasting legacy!
Sources
Impact Measurement & Management (IMM) | The GIIN. (2008, January 1). Retrieved December 19, 2018, from https://thegiin.org/imm
Osborne, S. (n.d.). The Impact Assets Handbook for Investors. Assessing Your Opportunities: The Challenge and Key Practices of Engaging in Investor Due Diligence. Retrieved from https://www.impactassets.org/files/Handbook-Ch-07-Assessing-Your-Opportunities.pdf
For more information, check out the e-book The ImpactAssets Handbook for Investors: Generating Social and Environmental Value through Capital Investing here.
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