Conversation with Bridgespan: A Non-profit Consulting Firm Helps Clients in Impact Investing

                                                                                                       Kate Collins, Manager of Bridgespan                               Stephanie Kater, Partner of Bridgespan

CASVI: How does Bridgespan build its impact investing team and its core capabilities?

Bridgespan: Our impact investing core capabilities are built-in an ongoing process of development. For the first 15 years, Bridgespan only worked with nonprofits and foundations to support social impact and acceleration to solve real-world issues. But we realized over time that all the philanthropic capital in the world combined would not be enough to advance us as a society towards sustainable development goals. Private market capital has to be part of the solution. This was how we shifted our direction in 2015 and began working with private for-profit investors.

To build our capabilities, we sought out a first client who was highly aligned with our mission. TPG Rise Fund was our first for-profit client, and we worked with them for four years to develop a strategy for an impact fund, figured out what the value proposition for investment would be, and developed an impact measurement system. We supported them in selecting the companies that had a high impact.

We are upfront with our clients about what we're good at and what we are not. We are distinctive in our mission-driven focus on impact, and we have found this can be helpful to a for-profit impact investor who has market incentives as well. As a nonprofit organization, we have zero financial incentives. We are truly an independent party that can help ascertain where there's impact and where there's not.

Bridgespan works upfront to assess and estimate whether there will be an impact. The International Finance Corporation has developed nine principles, with the last one is centered around impact verification – which happens in conjunction with accounting firms to audit and verify our work, giving us a more objective answer.

We have now worked with 25 different investors across the United States, Asia, Europe, and other parts of the world. We try to understand the obstacles across different markets as private capital enters impact investment. One of the obstacles is impact measurement and tracking, which is a hurdle that we are hoping to help the field overcome.

CASVI: How does Bridgespan connect with for-profit clients?

Bridgespan: So far, 90% or more of our clients have reached us through our website or by word of mouth. We don’t have the resources to conduct much client outreach, and we focus more on identifying the demands of the market and how to respond to them. There is a need for us to grow as an institution and to accelerate our effect. Our real philosophy is if we can find a way to help people in need, that would be the best way to define us.

Through broad landscaping, we are starting to seek investors with funds that we think are high impact and to whom we can be helpful. A challenge that surfaces is that sometimes our potential clients are considering but yet to announce the establishment of an impact fund, or other related activities. Under such circumstances, it is hard to locate these potential clients. However, it is also at this stage that Bridgespan can provide the most comprehensive assistance.

In the case of the TPG Rise Fund, I believe they came to us because they truly wanted to contribute positively to the world. As a for-profit fund, they needed the capability to ensure credible, measurable social impact. In addition, our team at Bridgespan are people with a lot of passion and a strong sense of commitment to the cause.

CASVI: What is the motivation for mainstream for-profit organizations to enter impact investment? When building an impact investing strategy for them, do you observe the potential internal conflict between financial targets and impact goals?

Bridgespan: There are investors out there, especially some institutional investors such as pension funds, which want to have an impact but have no flexibility around their financial return. This creates the market for mainstream, market-rate funds to enter the impact space.

Some private equity firms have found that setting up a dedicated impact fund can bring about incremental AUM (assets under management) because the impact fund product is sufficiently differentiated compared with the existing fund product and does not form internal competition with other funds. But from an impact standpoint, many of these PE firms also believe that they can utilize their experience and expertise in growing businesses to help impact companies expand and thrive.

A good example is Dodla Dairy, a South Asian dairy invested by TPG Rise Fund. The company itself doesn't think of itself as an impact company. But impact investment institution TPG Rise Fund saw that their competitive advantage was a huge network of small dairy farmers who were benefiting from contract farming arrangements with Dodla – so in addition to being a profitable company, they could have a positive impact. Therefore, compared with the pure commercial investors in the enterprise decision-making considerations, TPG was an impact investor focused on supporting this farmer network.

Evolving mainstream institutions to consider projects that combine financial returns and impact does require LP's concentrations, but once mainstream institutions hold the impact mindset, they will also realize that the range of impact assets that can generate market-level financial returns is much larger than they initially thought.

How can a strategy be developed to minimize potential conflicts between financial goals and impact goals? The key, in Bridgespan's view, is an investment where the business model and impact develop at the same time. In other words, companies selling more products or providing more services can have a positive impact, which minimizes the risk of having to choose between financial and impact returns.

TOMS Shoes, for example, used to have a business model of selling a pair of shoes and donating one pair, which was a good charity way. But in this model the two were inevitably in direct conflict, resulting in the creation of impact and the reduction of financial returns. Therefore, such projects are generally bypassed by impact investors who seek more alignment between profit and impact.

Having said that, we must admit that it is probably rare to have a completely free trade-off. For example, would a company cut prices if it could increase sales and thus serve its target audience more broadly? Cutting prices is sometimes the economic logic of doing exactly the right thing to boost revenues and profits, and sometimes it isn't.

Bridgespan believes that if investors have tools that can be used to measure profit and impact separately, at least they can see more clearly where the trade-offs are. In addition, in terms of impact measurement, we find that matching impact measurement to profit measurement makes it easier to persuade companies to further reinforce the impact they are already doing.

CASVI: Thematic investing strategies are more popular among impact investing institutions, how do you see them, especially using the UN SDGs as a guiding framework to design a theme?

Bridgespan: The majority of the funds that we've worked with do use an SDG-anchored framework. We think the SDGs are a good starting point for an impact framework, although they are not specific enough to be your entire impact framework. Bigger funds are able to invest against a number of different SDGs, but we generally recommend a strategy that tailors to specific ones.

CASVI: What is the importance of building an Impact Thesis for impact investors?

Bridgespan: Bridgespan thinks that it is critical to developing an impact thesis because that's the criteria by which you can then send a team of people to find deals that are likely to materialize into good impact investments for the world. No matter which sectors our clients focus on, we would advise them to identify some of the specific areas and types of companies they believe in and help figure out if they can drive social impact. In the absence of a clear impact thesis, there would be too many in the pipeline, and would be inefficient to filter them.

CASVI: How do Bridgespan clients balance between the rigor and cost of having impact measurement?

Bridgespan: We want to help our clients find the right type of impact measurement. There are academically oriented philosophies that are very rigorous, but with our clients’ day-to-day constraints, we need to right-size. There are some principles that we recommend that everyone adopts. And then beyond that, we help make the decision on what's the right size for them. For example, one of our principles is, before you make an investment, you should figure out whether you think there's impact. You should then have a quantitative assessment to integrate it with your existing processes and commercial diligence. In other words, we suggest that you talk about the commercial potential and its impact at the same meeting. With such principles, you can then decide on the type of tools and how often you should quantitatively track impact based on the most practical way.

CASVI: What are some of the common impact investing services requested by clients?

Bridgespan: The most requested services are developing an overall strategy and impact measuring framework for a fund and doing impact underwriting.

We are seeing more demand these days for impact reporting support, especially for funds who believe that they may already have a social impact in their existing investments but want to better communicate that to their investors or to the world.

A new area that we are keen to explore is to better support racial justice outcomes in the U.S., or ethnic minority outcomes in other countries. We want to figure out how we can be most helpful to organizations trying to build those outcomes because these are some of the hardest to measure.

CASVI: Is Bridgespan concerned about impact washing?

Bridgespan: Yes, very much. Core to our work is a sense of responsibility to do is to set a very high bar. We know that we will only work with a small fraction of impact investors around the world. But if we can help them set a very rigorous bar for what impact looks like, we're hopeful that the market can follow this trend. Investing is both a blessing and a curse that poses an opportunity, and it is also a risk because there's a temptation for impact washing.

CASVI: How is the Asian market (including China) different compared with other markets that Bridgespan has served?

Bridgespan: We are really impressed with just how much energy there is in the Chinese and Asian markets, and that more organizations are beginning to develop with the intention of trying to support a nascent field. We see great potential for the ecosystem to organize and develop in the next 12-18 months, especially with organizations such as CASVI.

The difference we see between the US and Asian clients, at least so far, is just that our Asian clients have been more focused on investing in Asia, whereas our US clients tend to be interested in investing globally.