In a world with many social and environmental problems, impact investing is more important than ever. Corporate, philanthropic, and government investors seek an impactful investment return.
Understanding the type of impact you seek to develop and implement an effective measurement strategy is crucial.
Measuring Impact
Regarding impact investing measurement, it is an essential aspect of the investment process. Not only does it help investors gauge how well their investment is working, but it also provides a basis for accountability and transparency.
One of the most common ways of measuring impact is by conducting randomized control trials (RCTs). These studies use two random groups from a population and study the change in outcomes and outputs over some time. It is a relatively well-respected method that is less susceptible to bias than other methods.
Another type of impact measurement is the theory-driven approach, which aims to estimate impact using well-selected indicators and a good theory of change. It can be done through various methods, such as surveys and other data-based measures.
Finally, some impact investors take a more socially conscious approach to measuring impact.
While it is still an early-stage process, impact investors increasingly recognize the importance of having a strong framework for impact measurement. These frameworks typically identify a theory of change and are developed to support the implementation of a project or investment. They may also help benchmark and track performance over a more extended period.
Measuring Performance
Impact investing has emerged as a significant opportunity to mobilize capital into investments that target measurable positive social and environmental impact alongside competitive financial returns. But it is also a new and developing field that faces a lot of uncertainty, including measuring impact.
For example, investors are often frustrated by the need for robust evidence about impact. They may need help collecting data about service volume, customer demographics, hiring policies, and sourcing standards. They may also be disappointed to learn that reporting environmental, social, and governance (ESG) issues are frequently limited to information about commitments and processes and rarely scores actual impact on customers or society.
There are several ways to measure impact, including randomized controlled trials (RCTs) and difference-in-differences (DiD). RCTs use carefully selected groups of people who are then impacted by an investment. This method effectively measures impact and is less susceptible to bias than other methods.
Another well-regarded method for measuring impact is a meta-analysis that reviews previous studies on a given topic. However, it can be time-consuming to conduct a meta-analysis.
Despite the challenges, impact investing has become increasingly mainstream as more investors seek to align their investment goals with Sustainable Development Goals and other societal priorities.
Measuring Sustainability
Increasingly, impact investors demand that fund managers have a system to measure their portfolio’s non-financial performance. It includes a need for reliable sustainability assessment methods. However, these methods often need to be completed more. They are largely limited to self-reported data from companies, which can be inaccurate and unverifiable. Moreover, they tend to be only available at the industry level and do not reflect the specific context of individual companies.
For the impact investing movement to be successful and grow, mission-driven entrepreneurs, governments, development finance institutions, researchers, and philanthropists must adopt the impact measurement practice. They all need to be able to reference a trusted, credible set of metrics that document and track the social, environmental, and financial impact of their actions.
Managing Impact
Impact investing is a promising new investment approach that aims to direct capital to ventures expected to produce social or environmental benefits while also earning a profit. These investors include private equity funds, insurers, pension funds, and foundations.
But despite the rising appeal of this investment approach, there is a growing concern about its ability to prove its worth. A recent survey found that over 75 percent of respondents deemed “sophistication of impact measurement practice” a moderate or significant challenge and that many impact investors have been frustrated by the lack of standard metrics.
Fortunately, key industry players have recognized this analytical shortcoming and have stepped up their efforts to develop measurement and management standards for impact investing. For example, several have worked with the Impact Management Project, an organization that brings together foundations and prominent investment managers to develop tools for impact management best practices.
As impact investing is an evolving field, it is essential to develop a consistent framework for measuring and managing its impact throughout the investment process. It includes establishing objectives, setting targets, and using impact data to assess progress toward those goals.
An excellent way to start is to determine what information is needed for the investments that you’re making, then select a set of relevant output, outcome, and proxy metrics to track and manage your portfolio toward those goals. Ideally, the metrics will provide meaningful insight into the various dimensions of an investment’s impact, such as who benefits, what effect is created, and how long it lasts.