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Impact investments measurement best practices

Best practices for measuring the social impact of impact investments by impact investors for better decision making and social returns.
Category
Best Practices
Written by
Unmesh Sheth
Published on
January 2, 2021

Impact Investments Measurement involves assessing the social and environmental outcomes and financial returns of investments aimed at generating positive, measurable impacts.

Impact investors play a crucial role in maximizing the impact of impact funds. It is essential to adopt the right approach to ensure effective impact measurement and management. In this article, we will explore the approaches that work well and those that fail miserably in impact investment measurement.Impact Investors play a critical role in maximizing the impact of Impact Fund.

   KEY TAKEAWAYS  

Impact Investors must focus on increasing the portfolio's capacity to collect necessary stakeholder data by aligning to the Five Dimensions of Impact to make evidence-based impact decisions and then share insights and maximize the impact.

The focus of impact investors must be on your additionality rather than impact data acquisition to serve the right demographics.

Stages of Impact Investing 

To maximize the impact of an investee portfolio, impact investors must follow a simple yet effective engagement process. Let's delve into the four stages of impact investing:

  1. Pre-Investment Estimation of Impact: The impact investing process typically begins with estimating the potential impact of the investee. This stage helps assess the expected outcomes and align them with the investment goals.
  2. Planning for Impact: During the deal negotiation phase, impact investors must incorporate impact planning. This involves setting clear objectives and strategies to maximize the intended impact.
  3. Monitoring Impact: Continuous impact monitoring becomes crucial once the investment is made. Investors and investees should establish an agreement to monitor impact throughout the investment's lifecycle.
  4. Evaluation of Impact: The final step of the impact investing process involves evaluating the achieved impact when the investment reaches its completion. This evaluation provides valuable insights and highlights areas that require improvement.

It is important to note that impact investing and impact measurement go hand in hand. However, the current approach followed by asset managers and investors is often fragmented and inconsistent, despite the availability of various standards, frameworks, tools, and certifications.

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, tools, and 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 large and small firms 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.

Fig: GIIN Report about Impact Washing

Combatting Impact Washing

One of the challenges faced in impact investing is the prevalence of impact washing. How can you identify whether investors or investees are engaging in impact washing? Here are a couple of key indicators:

  1. Lack of Stakeholder Data Collection: If investors or investees do not actively collect data from stakeholders and only report output activities, it is a clear sign of impact washing.
  2. Superficial Comparison and Reporting: Another indicator is when results are compared based on selective stories rather than evidence. Adding the Sustainable Development Goals (SDG) icon to reports without aligning with the SDG goals and targets is a red flag.
Fig:Impact Washing

Improving the success rate of Impact investments 

To improve the success rate of impact investments, impact investors should focus on two key aspects: ensuring the sustainability of impacted exits and building internal capacity for impact learning.

The sustainability of impacted exits is crucial to optimize both social impact and financial profit. The impact is an iterative process that requires continuous learning and improvement. Therefore, impact investors should prioritize building the capacity of investees in each cycle, enhancing their ability to generate positive outcomes.

OPIM operation, or Impact Management, has developed nine principles for strategic intent in portfolio management and impacted exits. One vital principle is assessing the expected impact of each investment using a systematic approach. This approach emphasizes improving the capacities of investees rather than solely relying on metrics during reporting.

Fig:Operating Principles for Impact Management

Reasons for not measuring social impact

Several reasons contribute to the hesitation in measuring social impact:

  1. Insufficient Financial Resources: Limited financial resources hinder the implementation of impact measurement strategies.
  2. Lack of Knowledge: Inadequate knowledge of impact management and measurement leads to reluctance to pursue impact measurement.
  3. Insufficient Human Resources: The absence of dedicated personnel for impact measurement activities poses a challenge.
  4. Undefined Impact Goals: Without clearly defined impact goals, measuring impact becomes challenging.
  5. Lack of Appropriate Tools: The absence of suitable tools for impact measurement further complicates the process.
  6. Lack of Priority: Some investors do not prioritize impact measurement due to various reasons.

Maximizing the impact of Impact fund

To maximize the impact of an impact fund, consider the following steps:

  1. Collect Necessary Stakeholder Data: It is crucial to collect relevant data from stakeholders. The Impact Cloud by Sopact provides insights through qualitative and quantitative data analysis.
  2. Make Evidence-Based Impact Decisions: Base impact decisions on solid evidence and data analysis. This ensures the effectiveness of the investment strategy.
  3. Increase Entrepreneurs' Capacity: Focus on building the capacity of investees to enhance their ability to create impact.
  4. Share Insights: Share valuable insights gained from impact measurement with other stakeholders. Collaboration and knowledge sharing amplify the overall impact.    

 

By aligning data collection with the five dimensions of impact—What, Who, How much, Contribution, and Risk—organizations can better serve the demographics they aim to impact, such as race, ethnicity, socioeconomic conditions, and location.

It is crucial not to prioritize financial profitability over social impact. Neglecting social impact can lead to negative consequences and the premature discontinuation of investments. Instead, conduct impact experiments, optimize the process through the impact management cycle, and maximize impact throughout the journey.

Fig: IMM Cycle

Conclusion

Impact investors play a vital role in driving positive change through impact investments. By adopting effective impact measurement and management strategies, investors can optimize social impact, achieve financial profitability, and contribute to a sustainable future. It is essential to focus on aligning stakeholder data collection, making evidence-based decisions, and continuously improving investee capacity. By doing so, impact investors can maximize the impact of their investments and create a lasting positive change in society.

 Learn More: Impact Measurement

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