First, you as the investor need to articulate the goals of the capital you are using for sustainable development. There are several levels from which you can answer this question. One, what capital are you allocating for impact and what are the risk, return, and impact profiles for it? The impact investment handbook has a great analogy. If you consider your investment portfolio as a house, are you: cleaning your house, renovating your selection criteria, adding a room by adding specific impact criteria for a portion of the assets, or overhauling the way you manage and measure impact for all of your assets? Some possible answers to this question include: investing the total portfolio or fund for impact. A good example of this is the FB Heron Foundation, which in 2012 decided to move all of its assets to support its mission. Then President Clara Miller saw a financial investing as a direct means to enact strategy. So, she asked, what is the highest and best use of this asset for furthering our mission? By the end of 2016, Heron had moved the last unscreened piece of its endowment to a slate of impact aligned ETFs. Investing a specific portion of a portfolio or a fund, is sometimes referred to as a carve-out. Investing, philanthropic or charitable capital already designated through a donor-advised fund or private foundation, or as owned by a non-profit charity. Investing government or sovereign capital. Each answer has different implications for how you will define your risk, return, and impact profile. Two, how is the capital currently allocated? Is the capital you want to apply to sustainable development and SDGs in one asset class, or is it spread across several? What risk return and impact conditions or constraints does the capital currently have? Restate your financial objectives in terms of target returns for this capital and risk profile. What geographic, portfolio diversity, liquidity, or other goals does this capital currently have? Which of these will continue to apply as you make new allocations for sustainable development? Given those answers, do you need to carve out a new allocation for this purpose, or can you work within existing constraints? Three, what is the investment thesis for this capital? If you're a fund manager or an individual investor, what is the investment thesis that defines how your fund will create value? If you are a fiduciary for a larger institution, what is the current investment thesis for this capital? Is the thesis as written or understood, broad enough to incorporate your goals for sustainable development, or do documents need to be rewritten as part of the strategy-setting process? Are the waves that you've articulated your investment thesis in the past still accurate and relevant in the broader context of global sustainability. It's common for investment documents to be written once a decade or even less frequently, and they may need to be updated to reflect newer stakeholder interests in global trends such as climate change, social justice, or public health. Four, who are the stakeholders for this capital? Nearly all capital sources have some kind of governance mechanism such as investment committees, boards, or partners, which name the people, fiduciarily responsible for making decisions about the use of funds and who bear responsibility for the consequences. In addition, there are usually unnamed but relevant secondary stakeholders who may voice their opinions as well. What groups of people have responsibility for setting the goals for how this capital is invested? Which groups have fiduciary responsibility and which have current influence? You want to understand the governance structures for your capital thoroughly as you start to set your strategy for sustainable development impact. Some possible stakeholders to consider depending on your institution, if an individual, your spouse, and family members. If a private foundation, the living donor, the donor's written will or charter, the board members who might be related to the donor, the board as a whole, the president or CEO, staff, grantees, beneficiary groups. If a family office, the family members. If a university endowment, the board of directors, investment committee or other body that sets investment policies, faculty, staff and students, parents and others paying tuition, state accreditation boards, government agencies and other institutional donors and research sponsors. If a private fund manager, limited partners, general partners, investees, and staff. If a public fund manager, fund owners, boards of directors, investment committees, managers, staff, and press. Five, where are you in the investment cycle, and how does that affect your new allocations and strategy? Depending on the type of capital and how it's been invested, you may have natural points at which it's easier to revisit and revise your investment strategy. Consider the cycle of your capital, both from the point of view of the structure, For example, a 10-year limited partnership, and also from the point of view of the percent of the portfolio that is currently allocated. Let's look at our sample investors to see how these factors come together as they define key investment objectives for their capital. Akhil's investment capital comes from his limited partners, LPs, who are private investors and institutions investing capital according to terms set in his private placement memorandum or PPM for his private equity fund. Since Akhil and his team write those documents, Akhil can include his goals on impact in that PPM at the outset of his fund, or he can add more goals along the way as long as he's within the legal conditions and expectations set before he signed agreements with his previous LPs. If he can stay within those parameters and still has unallocated capital in his fund, he can start investing with his new strategy very soon. If he needs to go beyond those parameters, he'll need to engage his LP stakeholders and update his documents, and perhaps his contracts with existing investors. In practice, most fund managers who have defined 10-year limited partnerships stay within the parameters they have defined and wait to write new strategic goals into the next fund they might raise so as not to have to go back and revisit all contracts and agreements. For Paula as a Canadian pension fund manager, her funds come from the region's pension holders who are the primary stakeholders of the capitals she invests. There are strict conditions set by the government of Canada, as there are by most governments about how the funds can be invested for pensions and for what purposes. Paula needs to be aware of those legal and fiduciary conditions as she develops a new strategy. She will likely have a lot of flexibility in determining how to invest within the conditions of her capital type. But as a manager of her fund, she will need to be sure that the governing bodies of the fund are involved in the process of stakeholder identification, decision-making, and determining the relevant and material sustainable development issues to them. She can also look at how other pension funds like hers have interpreted these issues to balance risk, return, and impact and incorporate that into the strategy recommendations she makes to the fund's governing bodies. Making it real. Conditions of capital. Think about where the capital you intend to invest for impact comes from. What are the current risk, return, and impact conditions on that capital? Restate your investment thesis as it currently exists. Is it broad enough to include new sustainable development goals or does it need to be revised? Identify the stakeholders for this capital. Make a list of them. Who has governance responsibility, including fiduciary responsibility, and who has influence? What is the best way to engage with those with fiduciary responsibility at the outset of this process? Are you clear on which decisions along the way you're governance bodies need to make themselves? How can you organize a process for them that will serve up those decisions at the right time? How long will it take, what roles with different people take, and what parts of the process can be agreed on at the outset before you get to the content of the decisions? What regulatory structures do you work under? Many asset owners may be regulated, such as private foundations or pension funds, and their goals need to operate within regulatory guidelines. Where are you currently in the investment cycle? Flexibility to set new goals and make new investment allocations varies with the investment structure you are working within. At the end of this step, you should have a document that outlines the capital you're using for impact on sustainable development and the SDGs with clear details on investment thesis, current regulatory constraints, and a list of governance and other stakeholders that must be engaged to define or refine strategy. Even better, is a process guide and timeline for how information and decisions will be made by those with fiduciary responsibility.
