Investing for Outcomes and Returns

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The term "impact investing" often blurs the lines between philanthropy, concessional capital investing, and traditional investment. While we build on the pioneering work of impact investors who have championed the alignment of capital with positive social and environmental goals, the ambiguity surrounding the term can at times, we believe, hinder the investment category.  We believe it's time to move towards a framework focused on intentional outcomes and compelling returns.

Investing, at its core, is about deploying capital with the expectation of a return.  This fundamental principle shouldn't change when we consider investments aimed at positive social or environmental outcomes.  What should improve is how we target, define and measure those outcomes, and how we integrate them into the investment thesis and our investment process.  

Instead of leading with "impact," we lead with the specific, measurable outcomes we seek to achieve.  These outcomes should be directly linked to the business model and the potential for profitability. Sustainable outcomes, those aligned with societal needs and future trends, often represent the most compelling investment opportunities. Why? Because they are more likely to attract government support, consumer demand, and ultimately, greater returns. 

Consider a company developing innovative water purification technology addresses a critical global need (the outcome) while simultaneously creating a scalable business with high growth potential (the return).  The "impact" is a result of achieving those outcomes and generating returns, not the starting point.  This is not to diminish the importance of impact; rather, it is to recognize that impact is a consequence of a successful investment strategy focused on tangible outcomes.

This shift in perspective has several key implications:

• Return-Driven Approach:  Outcomes are not separate from returns; they are intrinsically linked.  Businesses that effectively address societal challenges are often better positioned for long-term profitability.  This approach emphasizes and underscores the business case for sustainable outcomes.
• Focus on Scalability and Sustainability:  Investments should be directed towards companies with the potential to scale their solutions and achieve sustainable impact over the long term.  This requires a focus on strong management teams, robust business models, and clear pathways to profitability.
• Clarity and Measurable Outcomes:  Instead of broad statements about "social impact," investors define specific, measurable, achievable, relevant, and time-bound (SMART) outcomes.  For example, instead of "improving education," an investment might target "increasing literacy rates among underserved communities by X% within Y years."
• Due Diligence and Measurement:  Just as financial due diligence is crucial, so is the rigorous assessment of the venture's ability to achieve its stated outcomes.  Investors need clear metrics and reporting mechanisms to track progress and measure success.

Learning from the Past: Examples of Outcome-Oriented Investments

History is full of examples of companies that, by addressing societal needs, positioned themselves for significant financial success, often with the support of forward-thinking government policies.  These examples serve as illustrations of the outcomes-returns nexus.  While we don't offer specific financial advice, here are some examples of investments we keep shortlists on:

• Renewable Energy:  Early investors in solar and wind energy companies benefited from government subsidies and tax incentives designed to promote the adoption of clean energy technologies.  These policies not only accelerated the growth of the industry but also created lucrative opportunities for investors who recognized the long-term potential of sustainable energy.  The outcome of reducing carbon emissions and creating energy independence drove the return.
• Electric Vehicles:  Government regulations and incentives aimed at reducing air pollution and promoting electric vehicle adoption have fueled the growth of the EV industry.  Early investors in EV manufacturers and related infrastructure companies have reaped substantial rewards as the market has expanded.  The outcome of cleaner air and more sustainable transportation has driven the return.
• Biotechnology and Healthcare:  Government funding for research and development, coupled with regulatory pathways for new drug approvals, has created a fertile ground for innovation in the healthcare sector.  Investors who backed companies developing groundbreaking treatments for diseases have often seen significant returns as these therapies have gained market acceptance.  The outcome of improved health and longer lifespans has driven the return.
• Sustainable Agriculture/Food Systems:  Companies focused on outcomes like increasing crop yields sustainably, reducing water consumption in agriculture, or improving access to nutritious food in underserved communities often attract both consumer demand and government support.  Investors in these ventures can achieve both financial returns and contribute to food security and environmental sustainability.  Think of companies developing precision agriculture technologies, vertical farming solutions, or plant-based protein alternatives.  The outcome of a more sustainable and equitable food system drives the return.
• Clean Water and Sanitation:  Businesses addressing the critical need for access to clean water and sanitation in developing countries or applying innovative water management solutions in developed economies represent compelling investment opportunities.  Investors can support companies developing water filtration systems, sanitation technologies, or water-efficient irrigation solutions.  The outcome of improved public health and water resource management drives the return.
• Education Technology (EdTech):  Companies focused on improving educational outcomes through technology, such as personalized learning platforms, online education resources, or skills development programs, can generate strong returns while addressing critical educational gaps.  Investors can support ventures that are demonstrably improving student achievement, increasing access to education, or closing the skills gap.  The outcome of a more educated and skilled workforce drives the return.
• Affordable Housing:  Developers and investors focused on creating affordable housing solutions can address a fundamental social need while also generating attractive returns.  This can involve projects utilizing innovative construction techniques, sustainable building materials, or community-focused development models.  The outcome of providing safe and affordable housing drives the return.
• Circular Economy/Waste Management:  Companies developing solutions for waste reduction, recycling, and the creation of a circular economy are well-positioned for growth as resource scarcity becomes more pressing.  Investors can support ventures focused on innovative recycling technologies, sustainable packaging solutions, or the development of closed-loop supply chains.  The outcome of reducing waste and promoting resource efficiency drives the return.
• Financial Inclusion:  Fintech companies expanding access to financial services for underserved populations, such as microfinance platforms, mobile banking solutions, or digital payment systems, can generate strong returns while promoting financial inclusion.  Investors can support ventures that are demonstrably increasing access to credit, savings, and other financial tools for those previously excluded from the traditional financial system. The outcome of greater financial inclusion drives the return.
   

The key to success in these sectors, as in any investment, is rigorous due diligence, a clear focus on measurable outcomes, and a strong business model that links those outcomes to profitability.  These examples serve to illustrate how aligning investment strategies with societal needs and focusing on tangible results can create a powerful engine for both financial returns and positive change.