Impact Lender, Vancity Community Investment Bank
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A Primer on Impact Measurement
Putting the "impact" in impact investing.
Impact measurement is often included as part of the definition of what makes an investment an “impact” investment. Why is that? It’s because impact investments have the explicit goal to generate a social or environmental benefit alongside a financial return. Without some ability to understand what kind of benefits have been produced, we won’t be sure if we’ve accomplished our goal, or if a more effective solution could have been financed. Impact measurement, at its best, is a type of management information that you use to understand, engage with, and improve the businesses you work with. Ultimately, it’s about all stakeholders being confident that an intended impact has been meaningfully achieved.
Why do impact investors measure their impact?
As a starting point, consider the video below, where a cross-section of active and mature impact investors describe their own motivations for looking to measure the impact of their investments.
One thing I like about the video is that it speaks to how investors are using impact information across the investment lifecycle, whether it is about promoting the market, raising funds, or actively engaging in due diligence on an investment. One of the best guides I’ve found that looks at different measurement tools across the investment lifecycle is “Measuring the ‘impact’ in impact investing”. While providing detailed examples of how various leading organizations measure impact, some of the big picture findings are:
- Impact measurement has a role from estimating impact as you are selecting from different investment opportunities, planning impact in your specific investment strategy, monitoring investments to course correct and improve operations, and as an evaluative tool for accountability and proof.
- Some of the most foundational tools are to create a theory of change, which is a logical model of how different inputs are used to produce intended outputs and outcomes, and trying to create mission alignment by using criteria or scorecards in the rating of investments prior to investment.
- All impact measurement has measurement risk and error, and as investments grow larger and/or impact is a higher priority, there are increasing standards of evidence you might use to be confident that impact has occurred.
What should we measure?
Using a common language is important in any market so that we can efficiently communicate and compare different opportunities to try to make the most appropriate investment decisions.
At the highest level, an increasingly common framework is to seek alignment between investment portfolios and the United Nations Sustainable Development Goals, which are 17 global goals ranging from poverty alleviation to peace and justice. They provide a useful framework for categorizing investments at a high-level.
Going a level deeper, specific outcomes are increasingly being standardized through tools like the Big Society Capital Outcomes Matrix (from the UK), and the Impact Reporting and Investor Standards (IRIS, which are used globally). These are the metrics that give you an indication of whether an impact investment is performing as desired, and are usually gathered as data points at a regular interval, just like financial information.
Ultimately, just like financial performance, impact performance comes with risk. One way to mitigate that risk is to consider the quality of evidence underlying the metrics that is used to justify performance. NESTA’s “Standards of Evidence for Impact Investing” provides a really useful framework to think about this. They suggest:
A 5-point scale can be used to categorize different qualities of evidence, ranging from just the theory of why something should produce a positive benefit through robust, often statistical evidence that a product or service can produce those benefits repeatedly, in multiple locations, at scale.
The demand for evidence should vary as impact investments mature. Early-stage impact investments have high impact-risk and lower quality evidence, and that’s ok. The purpose is not to use too high a standard to stifle innovation, but to ensure evidence quality grows as an organization does.
Evidence standards help to clarify the types of impact risk that we hold as impact investors, including the risk of claiming something that didn’t happen, assuming that we were the cause of observed benefits, or creating other harm.
How are leaders measuring impact?
Given the emergence of some common types of tools, and increasing consensus around standards of evidence and metrics, how are investors actually applying this in practice? There’s a few instructive examples of impact measurement by impact investors in practice that are worth highlighting:
Some investors have created a framework to guide all their investments. As an example, HCAP Partners 2016 Impact Report illustrates how they think about investing to create high-quality employment among underemployed populations in the United States.
Other investors have explicitly evaluated their portfolio against the Sustainable Development Goals. As an example, Sonen Capital’s 2016 Impact Report links all of their investment strategies to their most relevant global goals and describes the impact metrics they use, mostly from IRIS, to monitor each investment.
Impact Measurement is ultimately management information. A great example this in practice is provided by Mark McCreless of Root Capital, a non-profit lender to agricultural enterprises, in “Toward the Efficient Impact Frontier”. By impact rating their existing loan portfolio and comparing it to the expected profitability of each loan they were able to ask important questions that will guide their future work, such as:
- Is there a trade-off between financial returns and impact in our operating sectors and geographies?
- Given that we blend philanthropic and commercial capital, how can we best allocate our lowest cost capital?
- What would be a more optimal portfolio in terms of impact, risk, and return?