Impact Investors Seek Better Ways to Measure Change
Half of the world’s impact investors say that measuring and managing investment outcomes is a “significant challenge” across the variety of approaches that currently exist, according to a new study. Many new investment funds have been created with a vision to bridge the US $2.5 trillion gulf in investment needed to achieve the UN Sustainable Development Goals (SDGs) by 2030. But there are a number of interesting initiatives underway by leaders in the field to create guiding principles for impact investors, ensure depth of impact, and build operational tools to better evaluate impact and inform day-to-day decisions.
A Harvard Business School study, Measuring the ‘Impact’ in Impact Investing, underscores the diversity of this work, finding “a number of methodologies and players emerging” around measurement. The authors note that a tactical approach is required from investors to “deepen understanding of specific practices and methodologies investors are using to measure the social impact generated by their investments.”
Decision makers need to be equipped with tested, data-driven tools backed by research and evidence for the efficacy of capital allocations in the impact arena
To ensure the long-term impact of their investments, decision makers need to be equipped with tested, data-driven tools backed by research and evidence to evaluate the efficacy of capital allocations in the impact arena. One key factor is measuring not only breadth of impact – the number of people or areas that benefit – but the depth of the outcomes. Assessments of social and environmental impact must correspond to the same rigorous procedures that ground capital allocation: identifying opportunity, executing due diligence, measuring and managing results throughout the investment, and evaluating investment outcomes upon exit.
The Rise Fund was launched with a commitment to applying the same rigor to impact assessment as financial diligence, in an effort to build on the decades of work by others to effectively predict and evaluate impact. They worked for over 18 months with non-profit organisation The Bridgespan Group as well as other third parties, including fellow impact investors and academics, to develop an operational approach to impact measurement that brings to life sound principles and can be used to inform decision making at scale. The collaboration entailed a systematic embrace of evidence in impact allocation to create a unique methodology, the Impact Multiple of Money (IMM).
The most important piece of the working methodology is using academic research grounded in extensive field work to gain a frontend understanding of the positive social and environmental outcomes of a business’ core products and services. Rise investors then forecast how those outcomes will correlate to business growth over time. Then, diving deeper into the peer-reviewed research, they seek to understand how those outcomes correlate to long-term impact, such as higher earnings, cost of carbon, or household consumption.
When correlated to the size and stake of the investment, this allows Rise to calculate the social impact value returned on the investment, the IMM. The process enables the fund to manage, measure, and drive impact outcomes throughout the life of each investment. One of The Rise Fund’s investments is Fourth Partner Energy, an innovator in distributed solar power in India. Fourth Partner enables solar energy to be delivered in flexible ways that yield notable reductions both in cost and emissions, a business model that allows investors to evaluate the company’s environmental impact over time. With more than 1,500 installations in 22 Indian states, Fourth Partner will help avert more than 16 million tons of atmospheric carbon over the projected lifetime of The Rise Fund’s $70 million investment. Vivek Subramanian, Co-Founder and Executive Director of Fourth Partner Energy, says the application of rigorous metrics on environmental impact is a critical dimension of the business: “We think that this is very important and core to working with The Rise Fund”, said Subramanian.
It is important to open up a global conversation about evidence, valuation and impact assurance, as well as new areas of investment opportunity
The Rise Fund’s methodology builds on decades of work done in the impact space to develop effective measurement systems. Understanding the positive and negative externalities of investments is extremely challenging, and it is vital to open up a global conversation about evidence, valuation, and impact assurance, as well as new areas of investment opportunity. Operational tools themselves will only be useful if they can continually be refined and enhanced through both a feedback loop of outcomes from a variety of investors and a continuous dialogue and ability to learn from one another.
The UN SDGs provide a concrete, globally endorsed framework for promoting social benefit, economic inclusion and environmental sustainability. Establishment of quality tools to measure impact, endorsed by the investment community, will supply the required diligence to unlock new investment and turn these objectives into reality.