The authors of this article argue that place-based impact investing is still an emerging area without a complete set of established best practices, so those who implement this strategy are pioneering new paths.

This article examines impact investing in specific parts of the world, and the difficulties of managing this area of investment correctly. The authors from Aon are Daniel Ingram, Aon Investments’ North American head of responsible investments, and Eric Friedman a member of Aon Investments’ investment policy services team. (Both pictured below.)

The editors are pleased to share these insights about an important topic; the usual editorial disclaimers apply. To comment, please email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Daniel Ingram

Eric Friedman

Impact investing – pursuing dual goals of making money while having a positive impact on the world – is hard to do well. (1) Place-based impact investing, which aims to target the impacts in a specific local area or geography, is exceptionally hard to do well. While it may be the right approach for certain investors, especially private foundations with missions focused on local areas, they should go in with their eyes wide open about the potential challenges and have a plan to address them. Place-based impact investors should consider assessing whether governance changes are needed, partnering with others pursuing similar impact investing goals, and starting small.

The role of place in impact investing
“Place-based” impact investors are impact investors that seek financial returns alongside positive social and/or environmental impacts in a specific geography. Typically, these are non-profit endowments and foundations, as well as family offices and high net worth individuals, that may focus their impact on the city or region in which they operate or direct grants. 

For example, a place-based impact investor may seek returns from financing affordable housing in their target region or lending money to local startups that provide health or educational services, revitalise neighbourhoods or create jobs. 

The challenges associated with place-based impact investing
Impact investing is hard because investors must consider the change caused by their decisions – their “contribution to impact.” (2) For example, an investor that loans money to a non-profit organisation that may have received the same financing with similar terms elsewhere probably isn’t having much impact –even if the loan is financing activities with impact – because the investor’s actions aren’t changing outcomes on the ground. For an impact investor to have a positive impact, they typically need to be financing activities that wouldn’t otherwise happen. 

Place-based impact investors tend to be “impact-first” in that they prioritise impact over returns – though they seek both – and thus may have a very specific set of guidelines for asset selection. Place-based investments are usually in private markets, as buying securities in public markets is unlikely to contribute significantly to impact outcomes that wouldn’t otherwise happen. 

There are several reasons why place-based impact investing is so much more difficult than broader impact investing mandates. For instance, broadly speaking, there is a small universe of potential investments that could be considered for this kind of allocation. Identifying opportunities in certain regions can be very demanding for several reasons such as finding capable partners to vet opportunities because of its specific set of guidelines for asset selection in a particular area, and further because place-based investments are usually in private markets with smaller allocation sizes (under $50 million). 

Furthermore, there are few investment funds that have scale, strong track records, and attractive fees, especially for narrowly-targeted geographies. This makes it more difficult for impact investors to outsource asset selection to fund managers. Some place-based impact investors diligence specific security purchases themselves and/or have undiversified portfolios within their place-based portfolio sleeves, but that requires a level of resources and skill that most asset owners don’t possess. 

Given these challenges, we’ve found that most impact investors are better suited for broader impact investing mandates that are designed to be flexible across geography, theme, and sector. While this approach may not be suitable depending on the specificity of the objectives, a global approach would be less susceptible to major trade-offs than more niche, place-based investment strategies. With such global impact investing mandates, there are more implementation options for funds and securities, so there are greater opportunities to be selective about expected financial performance and diversify the portfolio, while also incurring less effort from the asset owner. 

Those not willing to do place-based investing well might want to think twice about doing it at all. Otherwise, the mission may be best served by seeking to maximise returns and using those assets to further the organisation’s mission.

Best practices in implementing place-based impact investing
If an investor wants to pursue place-based impact investing, we often recommend three key steps: 

1. Consider whether changes are needed to the governance procedures: While we recognise that boards are often stretched, ensuring that there is a solid governance structure is key, and there are often different governance implications for place-based impact investing because the investment opportunities that are sourced are often not sourced through traditional asset managers. Ideally, the roles and responsibilities for sourcing, due diligence, and execution of place-based impact investments should be clearly documented, including whether to appoint an independent place-based impact investment advisor. 

To mitigate any real or perceived conflicts of interest, board or committee members should not be responsible for sourcing these investments, or if they are, they should remove themselves from the decision-making. Because place-based impact investments often have a different selection criteria and risk/return profile than the rest of the portfolio, many investors prefer to have a separate portfolio carveout for them in the investment policy and performance monitoring. A separate committee or sub-committee of the investment committee is also an attractive solution for many foundations with place-based impact investments. 

2. Partner with others pursuing similar impact investing goals: Collaborative groups of place-based impact investors already exist in many areas, often anchored by one large asset owner, a community development finance institution, or a community foundation. Asset owners interested in place-based impact investing may want to consider reaching out to others with shared objectives to partner. Key potential benefits to this approach include: 
-- Sharing the workload and costs; 
-- Pooling assets for increased scale to facilitate access to larger opportunities and increased diversification;  
-- Exchanging ideas and accessing expertise at other organisations; 
-- Participating in investment opportunities sourced by others; and 
-- Achieving greater impact through all the advantages.

3. Start small: While every situation is unique, a common approach might be for the foundation to start with a small pilot allocation of about 5 per cent carved out from the portfolio. In practice some may start even smaller at 2 to 3 per cent with a likely maximum allocation of 10 per cent if the pilot phase is successful. (3) Private real estate is a common asset class for implementing place-based impact investing. Early phases of the pilot should involve testing the quality of the governance model, getting to know partners, and reviewing the sourcing pipeline and speed of execution.
  
We have observed that place-based impact investors tend to learn a lot from their experiences, causing some to want to pull back and others to push forward. Place-based impact investing is still an emerging area without a complete set of established best practices, so those who implement it are pioneering new paths.

Footnotes

1, “Impact Investing is Hard: Here’s How to Do It Well” Aon, July 2023.
2, ”Investor contribution, “contribution to impact”, “contributions to solutions”, and “additionality” are terms that may be used interchangeably to describe similar concepts. A longer discussion of this concept is in Paul Brest and Kelly Born’s “When Can Impact Investing Create Real Impact?” at https://ssir.org/up_for_debate/article/impact_investing.
3, Client experiences will vary and may differ from described allocation.

Disclaimer

The opinions referenced are those of Aon Investments USA Inc. (“AIUSA”) as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. This document is intended for general informational purposes only and is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice, or investment recommendations. Any accounting, legal, or taxation position described in this document is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice, and is based on AIUSA’s understanding of current laws and interpretation. AIUSA disclaims any legal liability to any person or organisation for loss or damage caused by or resulting from any reliance placed on that content. AIUSA reserves all rights to the content of this article. AIUSA is a federally registered investment advisor with the US Securities and Exchange Commission. AIUSA is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor and is a member of the National Futures Association.