Impact investing has recently received renewed attention to address environmental and social challenges that traditional philanthropy frameworks alone cannot address. Impact investors generally aim to generate double or multiple returns, meaning that in addition to securing financial returns, they achieve positive social and/or environmental change. Examples of impact investors include development finance institutions, banks, impact investment firms, family offices, public charities, and private foundations. These companies typically invest in ventures that align with their mission, priorities, or sustainability goals, such as clean energy, health, education, financial services, sustainable agriculture, and gender equality. There are many examples of successful impact investments and ventures. One such success story is Patagonia's venture fund, founded in 2013, known as Tin Shed Ventures. The fund invests in “innovations that overcome systemic barriers to the adoption of regenerative agriculture on land and water,” with outcomes such as waste reduction and environmental impact. Agriculture.
Innovations in the field of impact investing have translated into creative legal innovations, including the evolution of new financing tools such as B corporations, revenue-based financing, recoverable grants and social bond structures. The impact investing industry is also leveraging innovative blended financial structures to better balance impact and financial goals.
Effective impact investing means considering the long-term, sustainable impact of an investment, including after liquidation. Therefore, achieving a “responsible exit” when selling is crucial. Exits must be structured from the outset to ensure that the liquidation of impact investments is held accountable to the communities served and with the intention of continuing to have a positive impact on society.
I. Considerations when investing and during the investment period
Planning for a responsible exit should start long before the actual sale. To accommodate responsible exits, when investing, impact investors can seek to invest in mission-driven founders and should understand the founder's growth plans and possible exit scenarios. Impact investors should look to influence policy and design ways to achieve specific impact metrics as a condition of, and during, their investments. When considering attracting additional investors, impact investors can also conduct appropriate due diligence to ensure co-investors are aligned with the company's mission, and align the investment's mission with Contractual mechanisms must be provided to protect them.
Mission-driven leadership. Impact investing also means investing in teams that embed mission into companies and their operations. Choosing a venture founder and management team that aligns with the impact investor’s objectives and is deeply committed to the mission is often the best way to create lasting impact. Founders will likely want to maintain some degree of control over the venture's mission (e.g., creating a separate class of voting stock and providing specific voting rights or by granting veto rights to the founders).
effective policy. Impact investors can also lay the foundation for a responsible exit during the investment period. Investors can promote effective policies related to environmental, social, and governance (“ESG”) and related issues, and codifying reporting requirements, compliance, and audit checks will ensure that those policies are enforced. We can ensure that it is implemented. Good governance and policy implementation should be a key focus of impact investing and should never be underestimated when considering and negotiating investments. Incorporating certain ethical principles and instilling ESG and equivalent policies and practices into your business is essential to responsible investing and should be integrated into your investment strategy. Depending on the industry, investors may be required to seek to ensure that the investee has the highest level of third-party certification available in that industry (e.g. B Corp certification, or customer protection certification in the case of financial institutions). , you can also take additional measures. It is from an institution approved by Cerise+SPTF, giving confidence that financial service providers are properly compliant with customer protection principles.
Investor collaboration and legal protection mechanisms. Structuring your investment with investors who share a similar philosophy can also impact whether your investment is able to grow sustainably and subsequently achieve a responsible exit. A mechanism for specifying a mission consistent with the above objectives should be included in the shareholder agreement (or equivalent document). Impact investors meet certain impact metrics in relation to their investments, such as number of lives impacted, progress in gender equality and the empowerment of women and girls, and alignment with specific United Nations Sustainable Development Goals. You may be asked to do so. As explained above, amendments to the mission statement for purposes of merger, reorganization, or stock transfer may require a supermajority vote or the consent of the founders. A put option or redemption right may be available and, in fact, may be used as a mechanism for exiting the investment if certain triggering events occur (e.g., if the company is unable to achieve or maintain certain impact goals or results). Often requested by investors. . Such provisions are also used by impact investors to protect against reputational risk, for example, when a company's activities diverge from the investor's mission, priorities, policies, or regulations.
II. Points to note when withdrawing membership
When the time comes to divest, several factors can complicate your ability to achieve a responsible exit. The time horizon of an exiting impact investor and an ideal future buyer may not always match, and compromises may need to be made depending on the availability of a suitable buyer. Additionally, in some markets it can be difficult to find the perfect buyer with a matched mission. Finally, it is difficult at best and impossible at worst to enshrine the principle of mission preservation in the legal documents upon withdrawal.
Timing the exit. In the impact investing space (as with any other type of investment), the timing of an exit can depend on several factors. Investors may have decided that their mission or impact goals have been achieved and now need to invest their money elsewhere. We may need additional capital to further our mission, which our current investors may be unwilling or unable to provide. The rarity of partner buyers is also a factor in determining the timing and terms of exit. For example, an affiliated buyer may want to invest at a particular time when there are no other affiliated buyers. This forces selling impact investors to be more flexible from a financial (i.e., pricing) perspective if they believe long-term impact can be created. Being flexible about timing may also allow for a more appropriate and responsible exit.
Buyer selection and mission alignment. Identifying buyers that align with a company's mission is usually the best way to ensure that that mission and its associated impact continues. Impact investors must conduct thorough due diligence on buyers to increase the likelihood of continued impact post-exit. In addition to the traditional Know Your Customer search for buyers, impact investors need to understand the potential buyer's track record of achieving impact goals, as well as the buyer's industry reputation. The purchaser must also have the financial ability to carry out its mission. One complicating factor, however, is that if impact investors are subject to financial constraints, they may not be able to attract multiple buyers at once. Identifying and vetting the right buyer and maintaining the financial health of your investment can sometimes be a balancing act.
Legal document protection. Through various covenants, legally enshrining the preservation of a mission in legal documents in the event of withdrawal is often difficult and can be subject to difficult negotiations. Central to maintaining our mission is ensuring that the divested company's employees are protected. Employees who decide to engage in impact investing often make that choice consciously and care deeply about their company's mission. After impact investors exit, you will need these employees to drive your mission and realize your purpose. Therefore, employee protection during exit should be part of negotiations both during investment and exit. This is especially important given that covenants in sale closing documents that require new owners to maintain post-closing influence are often difficult to negotiate and are almost always ineffective. It is generally very difficult to ensure that impact investors comply with these terms post-closing, and it is highly unlikely that an exiting impact investor will sue the buyer to enforce these terms. is.
conclusion
When a company reaches a level of maturity where new strategic investors are needed, or when resources need to be reallocated, impact investors take responsibility for mitigating mission misalignment. They may decide to exit and expect their investment to have a lasting impact. . Despite challenges (lack of suitable buyers, difficulty enforcing impact-related terms, etc.), trying to achieve a responsible exit is of paramount importance for impact investors. Simply put, it means we care about the people we serve and want to leave them in a better, more lasting position with new investors who share similar values. Failure to exit responsibly can have significant reputational consequences, which may result in impact investors being unable to obtain future funding or financing deals. In some industries, selling to the wrong buyer can have disastrous consequences (e.g., in the case of microfinance, selling a company to a predatory lender means that impact investors may (meaning that it has a negative impact on the people who are doing so). However, with careful exit planning throughout the investment, you can achieve a responsible and sustainable investment that aligns with your original mission.
This article was first published today's business law, Publication of the American Bar Association Business Law Section.
