A social impact fund exists to catalyze positive impacts through strategic capital allocation. Identifying investment opportunities (the change creators) is what they need to be good at. But they also need to be good at making sure they measure impact.
In this brief article, we’ll share why we think this last point is so important, making the case for both investees and investors to take impact measurement seriously.
For impact investing stakeholders, the reasons we will lay out can be used as strategic ammunition to either revamp those impact measurement processes or begin that important journey.
What is a Social Impact Fund?
It is worth first defining what we mean by social impact fund. Put simply, such entities use pools of capital (sourced in different ways) to make impact investments in change-making organizations.
Funds have differing levels of risk aversion, both on the financial side and on the impact side. But generally speaking, they will look for some spread of returns on both sides, and may even measure impact at not just asset level, but also at broader portfolio and investor levels.
Often, funds will have some sort of thematic focus to their investment strategy (for example, align with one of the Sustainable Development Goals).
Why Measure Impact?
The following three strategic reasons shouldn’t be taken as the only three. We feel they are three of the most important, in addition to the most basic reason of all: an impact fund need to know the extent of its impact returns.
With that in mind, here are the reasons why we think that measuring impact can and should form a core part of the strategy of impact funds.
1. Make impact investments more successful
Put another way, empower investees to really understand the impact they are creating (and therefore, the impact your capital is helping generate).
There are some social impact funds that won’t even make investments unless those potential assets measure impact. In any case, working with assets to make sure they have an understanding of impact measurement, and also the tools and resources (e.g. talent) to do so will make those assets better at creating that impact in the long run.
Because in managing impact data efficiently and effectively, assets are not only able to pass that data and those analyses along to their social impact funders, they are also able to use the insights to improve intervention design and outcomes for beneficiaries.
2. Increase credibility to attract impact investors
Social impact funds also need to attract individual investors and other sources of capital so that they can carry out those allocation strategies.
How might those interested parties who have money in their pockets gauge whether such a fund is worthy of those dollars? As with any investment, they will assess how likely is that the fund will achieve its objectives.
It’s quite simple -- if you and your fund can demonstrate, through transparent and authentic impact measurement processes, that the capital previously deployed has yielded impact then more impact investors will be interested in putting their money into your hands.
That means going beyond showing number of dollars invested or number of social enterprises invested in, and really showing the impacts that those dollars have generated.
What has changed in beneficiary lives because of it? That’s where impact is and where credibility lies.
3. Mitigate impact risk
In traditional investing, a core part of the due diligence phase includes the assessment of financial risk. Therefore, for any impact investment, assessing the level of impact risk should also be a fundamental piece of the process.
However, doing so without data is virtually impossible, essentially defaulting the answer towards high risk because there is little to go on to determine an impact profile.
If you and your fund is considering further investment of an existing asset in your portfolio that impact data needs to be clear, accessible, and timely.
Otherwise, making “impact bets” becomes more of a gamble, as opposed to being the strategic, methodic process that any investment should be.
Social Impact Funds Have to Step Up
If we are to bring impact investing and social impact funds into the mainstream across the world, impact measurement needs to be a core part of that journey.
Demanding impact accountability, when done in a collaborative and supportive manner, helps assets step up as well. If they are better able to report on their impact, they are also better able to use those insights to improve how they deliver impact to beneficiaries.
This also helps social impact funds mitigate risk and attract more capital themselves. This is the beauty of impact data. You can put it to work to help make better funding decisions and improve investment outcomes across a portfolio.
We can help you get there by using our cloud-based platforms to work hand-in-hand with assets in the management of those important impact data. Click the button below to get started for free today.