How should impact investors think about the impact measurement of the portfolio? What approach works well, and what approach fails (miserably) for impact investments measurement?
Impact Investors play a critical role in maximizing the impact of Impact Fund.
Stages of Impact Investing
To maximize the impact of the investee portfolio, an impact investor must adopt a simple but effective engagement process. There are four stages to impact investing as shown diagrammatically :
The Impact Investing process typically starts during the pre-investment period by estimating the impact of the investee. The next step is planning for the impact, and this process is ideally done during the deal negotiation. Once the investment has been made, the third step begins, during which the investors and investee agree on monitoring impact throughout the lifecycle. Finally, when the investment is complete and the investor exits, the impact is evaluated, and this is the final and the last step of the impact investing process. It is quite possible that the evaluation might highlight fundamental things that are not working. It can be concluded that Impact investing and impact measurement and management are two sides of the coin. However, this approach is quite fragmented and incoherent. Despite the prevalence of various standards, frameworks, and tools, as well as certifications, the approach adopted by every asset manager/investor is quite inconsistent.
According to GIIN, the trend shows that the impact investing industry is experiencing significant momentum as many firms - large and small, enter the impact investor markets every week. The industry has received immense support from governments and academics too. But the biggest challenge is that 66% of investors are concerned about impact washing, and only a mere 35% of investors are concerned about combating and validating impact results.
Read More: Attribution Vs Contribution
How do you find out whether investors or investees are impact washing?
It's very simple to identify, first is not collecting stakeholder data and only reporting the activity of the output. Later adding the SDG icon in the report without even aligning to SDG goals and targets. The second is only comparing the results based on other comparable results with reports which can be based on selective stories and not evidence.
Read More: Seven Steps to Build IMM Maturity For Your Impact Portfolio
Improving the success rate of Impact investments
So how can impact investors improve the success rate of the investments? First, to ensure the sustainability of impacted exit while the second, to build an internal capacity for impact learning.
This is the most significant point to focus on to optimize social impact and financial profit. It is important to note that impact is not a one-time process whereas; it's a continuous iterative process, and with every cycle, you're going to be learning from the impact dimension of stakeholders that will continue to improve every year after year.
OPIM operation can also be considered as Impact Management has developed the nine principles for strategic intent or origination and structuring portfolio management and impacted exit.
One of the key principles is to assess the expected impact of each investment based on a systematic approach. This can only be achieved by improving the capacities of each investee and not simply by demanding metrics during the reporting.
Reasons for not measuring social impact
So why are the investors not measuring the impact?
First, and foremost reason is there are insufficient financial resources, lack of knowledge on how to manage the impact, insufficient human resources, no set impact goals, no right tools, and lastly, the impact is not the right priority. It can be any of those reasons that can really throw off the whole impact bandwagon.
However, there are a lot of benefits to the investors by impact management. The most important is that by impact management, they are likely to achieve the fastest Product-market fit for investees. Impact measurement is not different than product-market fit (PMF) as you will not be able to achieve PMF without engaging stakeholders in an outcome and maximizing it. And to do that, you have to ensure that you have created access to market opportunities. You must connect with the stakeholders by enhancing and scaling the operations, gather insights from the clients and design the product and services with the brand that can give you a long-term scalable business model.
Unfortunately, Impact measurement is complex - if you use the traditional approach. Oftentimes we see people creating Theory of Change of their enterprises with a 15-plus outcome making it resource-heavy. The theory of change with many, many outcomes is an ABSOLUTE NO - A red flag. So stop doing that, make sure the theory of change has one simple goal, which is focusing on impact experiments, which we have talked about in several other videos on how to maximize it.
Read More: Beyond Theory of Change
Maximizing the impact of Impact fund
So here's how you can maximize impact as an impact fund.
It can be done by making sure that it is collecting necessary stakeholder data, making evidence-based impact decisions, increasing entrepreneurs' capacity and sharing your insights with others, and finally maximizing the impact.
And we've been sharing a lot of examples from many entrepreneurs on how to maximize impact, and the key to that is impact experiments. Impact Experiments are designed as small short, frequent experiments with a key immediate outcome then designed toward stakeholder survey.
Collect stakeholder data by aligning it with the five dimensions of impact. The Sopact's Impact Cloud can help you with further insights based on qualitative and quantitative data analysis.
So the important point is that you focus on investees and do not aggregate data results across the portfolio, instead, focus on your additionality and not impact data acquisition. Secondly, make sure that your data collection process is aligned towards Five Dimensions of Impact - What, Who, How much, Contribution, and Risk. This makes sure that your organization serves the right demographics and achieves the mission by aligning with the demographics that you want to serve -Race, ethnicity, socioeconomic conditions, location, etc.
Still, suppose you continue to focus on financial profitability. In that case, there are high chances that you are likely to end up creating negative social impact, and you may even have to wind up your investments quite early. To avoid this risk, keep doing this kind of experiment, again and again, and optimize the process. Manage the process through the impact management cycle and maximize throughout the journey.
- Design Effective Impact Experiments
- Impact Management