By Ander Iruretagoyena and Priya Parrish

Welcome to our new series, "Elevating Impact.” As an investment firm committed to driving positive social and environmental change, we recognize that leaders in the field must be as intentional and focused about driving excellent impact as they are about driving excellent financial returns. Because we invest in both funds and companies, across early stage and late stage, and across three different impact themes, we are fortunate to see a very wide swath of examples of impact (inclusive of impact management and measurement, environmental-social-governance management, diversity-equity-inclusion, and more) efforts across the industry. We hope it will inspire and inform others in the industry to highlight and share them through this series.

Today, we will start by highlighting the concept and significance of Impact Advisory Councils (IACs). These councils, established by General Partners (GPs), play a pivotal role in shaping and guiding a firm's approach to impact. Typically comprised of experts, stakeholders, investment team members, and sometimes even portfolio company CEOs, the most important role of an IAC is to act as a sounding board on impact opportunities or challenges that could arise, such as in relation to: screening processes, due diligence, company metrics, deal terms, investor reporting, team member responsibilities, certifications, or market positioning. This could be in the context of a policy or program, or even a specific investment where there might be debate about how to approach impact or whether the potential impact meets the firm’s bar.

In addition to having a trusted body to turn to, the existence of an IAC can signal a firm’s commitment to continuous improvement in areas that are rapidly evolving, reinforcing to both investors and companies the importance placed on these issues. Furthermore, these councils provide LPs who are passionate about impact an opportunity to engage more deeply and build stronger relationships with the firm.

While there is growing consensus in the industry that IACs are a beneficial addition to impact investing firms, there is no universal agreement on the optimal structure for these councils. As an impact investing firm with a network of over 990 different GPs, Impact Engine has observed a wide variety of council structures tailored to meet the unique needs and resources of each firm. Typically, these councils consist of 3-5 members, often composed of LPs, and generally convene 2-3 times per year, primarily through virtual meetings, with some opting to meet in person around their Annual General Meetings (AGMs). The agenda for these meetings usually includes a review of the portfolio and impact report, discussions on new investments, and special topics or projects. While IACs do not typically weigh in on governance issues (this falls under the purview of the Limited Partner Advisory Committee (LPAC)), some do weigh in on compensation matters related to impact, such as tying impact performance to carried interest.

We currently serve on 12 IACs, and helped form 10 of them¹. While we don’t have a formal IAC ourselves, as a Public Benefit Corporation, our board of directors is legally bound to hold us accountable for both our financial performance and our impact performance. We also supplement the voices and accountability of our formal board with our Advisory Board, who we call upon regularly to weigh in on our plans and progress.

There are clearly many approaches that can be effective. The goal is to always be learning and looking outward for ways to improve, and to have others who can hold you accountable for that.

Spotlight: Lumos Capital Group’s IAC

Lumos Capital Group was founded in 2019 by Victor Hu and James Tieng as an independent investment manager focused on technology-enabled growth-stage companies in the human capital development sector that are bringing transformative products and services to improve the quality of and access to education and training, from early childhood education to workforce development. Lumos’ investment thesis is that the global status quo is unsustainable (most of the global workforce has less than a college degree, annual earnings of <USD20K, and is in danger of being left behind due to accelerating automation), that education is THE crucial lever for systemic change, and that purposefully investing in impactful private sector innovation will drive a more prosperous and inclusive future for everyone.

Lumos’ Impact Advisory Council meets virtually on a biannual basis, and consists of 4 LPs with deep experience in the sectoR (Strada, Steyn Family Office, American Student Assistance, Impact Engine) along with representatives of the investment team. There are three primary objectives for the IAC: 1) To provide an external feedback loop to hold the firm accountable on its impact commitment, 2) To help decide on which impact management and measurement practices to adopt, especially when LPs have different preferences; and 3) Create a trusted group where Lumos can have honest conversations about the numerous challenges of impact management.

Some of the recent topics discussed or considered at the Lumos IAC include:

Decision to join Impact Capital Managers (ICM) (a member network of private capital fund managers investing with a focus on impact)
Decision to implement the Impact Management Project’s five dimensions of impact framework throughout the investment process.
Drafting a theory of change framework with three core pillars to understand market gaps and drive meaningful systemic change through the business models of the portfolio companies.
Understanding the Sustainability Accounting Standards Board (SASB) and what is appropriate ESG management for a growth equity investor
Review of individual portfolio companies & potential new investments’ impact merits and risks. For example, Lumos was looking at a software tool used in schools to prevent bullying and was struggling with how to balance that outcome with the privacy concerns it entailed.
Discussion on how to increase the proportion of diverse founders at the top of the funnel.
Discussion on how to codify impact into term sheets with companies.

¹As of the date of this article Impact Engine has allocated capital to 17 different managers; having a formal active role in 15 of them. In firms where an IAC may not exist we find other ways of helping shape the IMM of that firm through other bodies like an LPAC.