We try to understand which risk factors are significant and how likely the outcome is different from the expectation.

Who experiences impact risk?

When we set our financial goals, we always face the risk of not achieving those goals. The same is true for impact. For example, what is the likelihood that the employment outcomes for young people will not be sustained? What are the consequences of health outcomes not being delivered quickly enough?

Impact risk is the likelihood that impact will be different than expected, and that the difference will be material from the perspective of people (or the planet) who experience (or don’t experience) impact. This includes both the risk that people or the planet will not experience positive effects and that they will not avoid negative effects.

How do we assess impact risk?

There are a number of potential risks factors when assessing how confident we are that impact will be experienced as expected.

Risk@1.5x Created with Sketch. Input Activity Outcome Impact Output EVIDENCE RISK EFFICIENCY RISK UNEXPECTED IMPACT RISK EXTERNAL RISK EXECUTION RISK STAKEHOLDER PARTICIPATION RISK DROP-OFF RISK CONTRIBUTION RISK The probability that the evidence on which the strategy is based is not good evidence that the expected impact will occur. The probability that the expected impact could have been achieved with fewer resources or at a lower cost The probability that significant unexpected positive and negative impact is experienced by people and the planet The probability that external factors disrupt our ability to deliver the expected impact. The probability that the activities are not delivered as planned and do not result in the desired outputs The probability that the expectations and/or the experiences of stakeholders are misunderstood or not taken into account The probability that the expected change does not endure The probability that some or all of the expected impact would have occurred anyway, or at a higher quantity, quality or faster rate or cheaper cost. Risk of impact not experienced as expected for people and planet materially affected Legend: Risk of impact not experienced as expected for all people and planet

We consider the probability of each of these risks happening and the consequences experienced by all stakeholders if they do. As we collect information to understand the experience of people and the planet, we review our risk assessment and try to reduce the probability of risks materialising. This reduces the severity of the likely consequences.
Enterprises take financial risk seriously because, when performance is worse than expected, they suffer financially. The consequences of impact risk, however, are experienced by other people and the planet and don't necessarily cause enterprises to suffer financially in the near-term, even if they likely will in the long run. To manage our impact, we therefore focus on which risks people and planet find to be material, not just those that have an obvious financial consequence for the enterprise.
EXAMPLE: A manufacturing company which seeks to provide quality jobs for people with disabilities, targeting at least 60% of its workforce, might carry out its impact risk assessment as follows:
Impact risk is therefore assessed from the perspective of those likely to experience consequences. Where the consequences are material for the stakeholder, the risk should be managed. Materiality can be understood by looking across the dimensions of impact.

Stakeholder (2) v2@1.5x Created with Sketch. STAKEHOLDER RISK FACTOR PROBABILITY LIKELY CONSEQUENCES MATERIALITY TO STAKEHOLDER Employees Execution risk High - this is a new delivery team in a new geography High Medium A different – less underserved – demographic may be reached Less deep effects on outcomes may be experienced Enterprise contribution likely to be worse than what occurs otherwise The planet and suppliers may experience effects that relate to important negative outcomes Enterprise contribution likely to be worse than what occurs otherwise These effects may be significant Planet, suppliers Unexpected impact risk High – because the materiality of the effects on the stakeholders are not known

From the perspective of an investor in this business, additional risk factors may be material. In this example, the investor has a goal to achieve maximum impact per US dollar invested and to try and ensure the effects are better than what might otherwise occur for people and planet through relevant sector expertise. Read more here on assessing - and setting goals for - investor contribution.

Stakeholder (1) v2@1.5x Created with Sketch. STAKEHOLDER RISK FACTOR PROBABILITY LIKELY CONSEQUENCES MATERIALITY TO STAKEHOLDER Investor Efficiency risk Medium - there is little available evidence on which models deliver these outcomes most efficiently, but the market is small Medium Medium/ High Fewer of the target demographic may experience the effect, or the effects may be less significant when compared with what the best available comparable option could have achieved. This wastes resources that could achieve impact either for the same people or elsewhere The same effects may occur but, since the market would have delivered them anyway, resources have been spent that could otherwise have been used to achieve more impact either for the same people or elsewhere Investor Contribution risk Medium – these effects may happen without the specific investor’s engagement

Where risks are related to the inputs, activities and outputs of an enterprise, the consequences are likely to affect all outcomes. Where risks are related to outcomes, the consequences are likely to be unique to (or limited to) that outcome and the people or planet experiencing it.

EXAMPLE: If a supplementary after-school education programme has high External Factor Risk due to a high likelihood of government policy change reducing funding in this area, the consequences are likely to affect all outcomes. If, conversely, there is high Drop-off Risk that one demographic within the group of participants is less likely to sustain the outcome for a long duration, these effects are limited to this outcome and the people experiencing it.

Resources

How do we manage impact risk?

We manage impact risk by making decisions, based on our risk assessment, to either reduce the likelihood of a risk occurring, or reduce the consequences for people and planet. These decisions involve allocating or reallocating resources, changing the nature of activities, or collecting new information. For example:

  • Should resources be allocated to an investment already made, or re-allocated to a different investment?
  • Should an activity be changed?
  • Should an activity be stopped?
  • What information do I need in order to understand what effects are (or are not) occurring?

In practice, we collect data to understand the material effects experienced by people and planet. Managing those effects can reduce the likelihood of many risks.

In this section, we bring the dimensions to life through examples of how of a number of enterprises work to deliver employment outcomes for young people with different needs in different geographies. The examples are drawn from specific organisations but illustrate useful approaches for any enterprise or investor - big, small, for-profit or non-profit - managing impact across the five dimensions.

Meet Impetus PEF, an organisation who seeks to transform the lives of economically disadvantaged young people aged 11-24 years.

In order to mitigate the risk of not achieving its expected impact, Impetus PEF conducts a thorough due diligence process. This comprehensive process seeks to ensure that it is investing in the right businesses to meet the needs and aspirations of its target group of people. Reviewing this due diligence data helps Impetus PEF to understand the various risks they would take on if it decided to invest and work with an business. This process does not mean that Impetus PEF is a risk-averse funder, but rather it attempts to recognise the level of risk from the beginning in order to effectively mitigate it as it builds a business’s impact management capacity.

When a risk’s consequence is significantly reduced, it may be possible to take on more risk. We can do this by collecting new information, or by changing our activities.

For example, Impetus PEF partnered with the Social Research Unit to study what randomised control trials exist for youth employment programmes and what they show. To do this, they reviewed hundreds of programmes to establish which had been sufficiently well-evaluated to produce learnings, and what those learnings might be. Findings included learning that work experience likely produces no effect on employment outcomes on its own, but is more likely to generate material effects as a secondary component on a training programme. Impetus PEF shares what it learns with its investees, as contributes to public evidence bases, in order to improve performance and reduce risk across the sector in a way that many businesses may not otherwise have the resource for.

We continue to revise our risk assessments at different stages of the impact management cycle as we collect and analyse data to learn what our effect is, and then increase or change our effect.

For example, Impetus PEF conducts an internal review across all investee partners every 6 months. The review returns to the criteria used in due diligence and assesses, for each business, where progress is being made, and capacity built, as well as where action or support is needed. This ongoing measurement against the co-developed impact goals then enables Impetus PEF to understand whether goals have been achieved and if the risk(s) previously identified have been adequately mitigated.

Even if our decisions do not change as a result of this re-assessment, it’s valuable to revisit the discussion and debate.

How do we communicate impact risk?

We communicate information to those we are working with (at varying degrees of detail and frequency) to enable them to make impact management decisions to improve their positive effects on people and planet, and prevent negative effects. When communicating information on risk, it helps to be as clear as possible about who is assessing risk, when, and for what purpose. Not all actors in the capital chain will have the resource, control, or access to data to reduce risk. We can also ensure those taking on higher risk are not at an unfair disadvantage by sharing information about all steps taken to mitigate and manage risk.

If there is a shared understanding of common risk factors and we are transparent about the methodology we use to assess their probability and consequences, then the risk processes and frameworks we use can be bespoke to each enterprise.

Give me some examples

See how the risk dimension has been helpful to Acumen and NPC to understand the risks they are willing to take, which risk factors matter most to them and how they manage to risk. If you are an investor or funder you may be interested to see how risk can be managed at a portfolio level

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