Making Impact Investible: Measuring the "Impact" of Impact Investment

January 21, 2014

By Dr. Maximilian Martin & William Burckart

Originally written for and published on CSRwire's Commentary Channel Talkback. CSRwire is a digital media platform for the latest CSR, impact investing and sustainability news, views and reports.

Part two of a new series on growing the impact investment market introduces the need for greater transparency and forms of social impact measurement that are able to achieve industry consensus.

The pursuit of impact—social or environmental—is difficult. It is complicated, expensive, and sometimes counterintuitive; regardless of whether a public institution, a private enterprise, or a philanthropic entity is the one facilitating it. One key question is also the level of impact: populations on the ground are often times hard to reach, difficult to penetrate, and at the mercy of megatrends and changing circumstances.

Authored by Dr. Maximilian Martin of Impact Economy, the report Making Impact Investible is the companion to a Primer commissioned by the U.K. government and covers a great deal of ground concerning the emerging market of impact investing—from defining the basic concepts of the approach, to the megatrends influencing its development, and how all actors involved can contribute to and benefit from the growing market—and signals a need to return to first principles and actually build (or improve in some cases) the market infrastructure needed for greater effectiveness and ultimately scale.

One of the most important findings of Making Impact Investible points to the trickster of impact investing: impact measurement, both a key blocker, and potential enabler, of future market growth.

Promising Efforts, But No Breakthrough Yet

Creating a truly robust impact measurement system is easier said than done. Yet, efforts in the impact investing industry have attempted to increase transparency via the creation of a few notable, leading measurement systems, including the Impact Reporting & Investment Standards (IRIS) and the Global Impact Investment Rating System (GIIRS).

Both systems indicate to what the impact investing industry in general, and impact measurement specifically, have quickly been characterized by: an alphabet soup of acronyms, tools, and metrics.

While these individual systems show great strides in allowing investors to measure the nonfinancial performance of their investments and, in some cases, the opportunity to compare the relative nonfinancial performance of one investment to another investment, or aggregate benchmark of investments it is neither lack of effort or competence that hampers the industry’s ascent into the financial mainstream.

Yet, for all the progress thus far achieved, key limitations persist.

A lack of transparent and coherent methodologies, benchmarks, widely accepted third-party verification, longitudinal data, and publicly available reporting all impose high costs on serious impact measurement and lead to suboptimal comparability of results with mainstream investments (which all entail often unintentional, and in any case, largely unmeasured impacts as well).

Impact Measurement: Key Findings

Addressing these limitations and increasing overall transparency will be challenging, but the report offers a number of key findings that can serve to help the process, including: 

1. Disclosure of reliable, credible, and comparable performance data is a critical dimension of traditional investment. A similar level of transparency must become a part of impact investment.

One need only contrast the amount of capital thus far mobilized in the market against early field projections to see the widening gap between reality and expectations. While a number of variables play into the creation of this gap, the inability to convincingly demonstrate social and environmental performance is increasingly cited as one of the pivotal dimensions inhibiting the flow of capital into the market and the definition of its boundaries. Moreover, with convenience as the name of the game, in the near future, impact measurement should become a standard feature of banking software, for example.

2. The creation of impact is the central element that distinguishes impact investment from traditional investment. 

As the report states, if the creation of positive impact “…is not demonstrable, the entire concept of impact investing becomes moot.” To increase the attractiveness of measuring impact, the process must become simpler and cheaper while also being useful for managing enterprises activities. In the absence of credibly and consistently captured social and environmental performance, we lose the “impact” of impact investing; as well as the whole point of the market.

3. Alignment between ESG reporting standards and impact investment measurement systems can be closer and clearer.

Impact performance measurement needs to become more reliable, convenient and affordable. The systems and tools used by impact investors are in many ways distinct from broader (and more widely) used impact-oriented systems—such as ESG standards, the UN Global Compact, UN PRI and the Global Reporting Initiative (GRI). There is a natural convergence that will increasingly occur between ESG-minded corporations and impact-oriented investors as impact investing continues to reach more meaningful levels of scale. Closer and clearer alignment between how these two groups measure and report on impact would go a long way toward speeding up this convergence, and potentially improve both. 

The current state of impact measurement leaves us at a paradox: If investors want to make money and do good, they are not able to make a consistent choice between investments based on projected social and financial impact because there is no universal standardized measurement system.

Nor can they easily apply impact logic to an entire investment portfolio. But investors think in terms of portfolios, and viable impact measurement will emerge to meet this need eventually.

To grow the impact investment market, we must focus on leveraging action around impact measurement. The basics are already laid out; what we need now is credible data, clearer alignment and the willingness to make an impact.

Next: We explore how impact investment can provide access to non-traditional sources of growth and business innovation.

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