As interest in impact investing grows, there is a growing consensus that measurement of intended project results must be at the very core of “real” impact investing. Thought leaders no less than Bill Gates and the Mulago Foundation’s Kevin Starr have recently called attention to the necessity of measuring in order to create positive social and environmental benefits through investments. Verifying these measurements through monitoring allows investors to confirm they are in fact accomplishing the intended financial, social and ecological — or triple bottom line — results they set out to achieve.
Impact measurement allows us to answer two key sets of questions that every fund manager should be asking:
- Are we doing our deals right? Have we set up the structure of each deal so that it both maximizes profit and achieves the desired environmental and social benefits?
- Are we doing the right deals? Are our deals the right size, in the right location and in the right industry to have impacts that catalyze real change?
At the Verde Ventures Fund, an impact investing fund managed by Conservation International, we have embedded impact measurement within the management structure. In coordination with our clients and stakeholders, every deal that goes out our door is vetted with respect to potential impact through a process that goes from due diligence, to target setting, to baseline establishment and endline assessment.
Through working on developing measurement tools as the monitoring officer at Verde Ventures, I have come to believe that there are certain key ingredients that should be considered when building measurement systems into our deals. These include:
Conceptual models. Also known as “theories of change” or “results chains,” these are an articulation of the cause and effect relationship of the investment. Conceptual models allow an investor to understand how the intervention (i.e., provision of capital) functions to reduce or mitigate the underlying causes of the problem we hope to solve. Understanding the context of our investment and its potential effects permits the identification of relevant metrics which will be used to monitor and communicate impacts.
Standardized metrics. These are essential for communicating impact created by any investment. A common language and method for data collection create an even playing field, which allows for comparability and benchmarking across sectors and impact investing funds. These metrics are selected based on the conceptual model in order to track the expected changes in the cause and effect relationship that ultimately lead to impact.
Time series analysis. This is used to understand the magnitude of impact by comparing a client’s pre-impact investment (i.e., baseline) to its impact at repayment (i.e., endline) and sometime in between (i.e., midpoint). However, to provide a robust analysis of the real contribution of any investment, it’s necessary to understand the larger context and general trend of change over time. This brings us to constructing the “counterfactual” or control group.
- Counterfactual analysis. Answers the question: "What would have happened without our investment?" This allows us to understand the “problem of attribution,” or to what degree our investment was responsible for generating changes we observe. Much like in the way the pharmaceutical industry conducts clinical trials using a control group, we have to ensure that some other factor unbeknownst to us wasn’t in fact the cause of the changes that we observe. Often the costs associated with constructing the counterfactual analysis cannot justify its use on a comprehensive portfoliowide basis, but as a key ingredient to measuring the real impact of an investment — all efforts should be made to include this step.
Next page: Not just checking the box
Verde Ventures is not the only fund that recognizes the critical importance of monitoring; Acumen Fund, one of the biggest impact funds in the world, also gets it. Acumen, among others, was instrumental in creating the Impact Reporting and Investment Standards, the industry standard for impact measurement that has been adopted by more than 50 impact investing funds worldwide, including Verde Ventures. IRIS provides a standardized lexicon for defining, measuring and comparing impact across sectors, including agriculture, environment, health, education, energy and financial services. This is essential if funds are to be accurately benchmarked according to impact generation, which is inherently more difficult to measure than revenue.
As a result of the establishment and adoption of the IRIS metrics, B Lab — a nonprofit that supports entrepreneurs to solve social and environmental problems — has developed a system for benchmarking funds based on IRIS called the Global Impact Investing Rating System. Like Morningstar ratings, GIIRS gives investors the tools they need to analyze the impact of their investments with the same rigor as they analyze their financial risk and return.
The momentum is moving toward measuring impact. The Aspen Network of Development Entrepreneurs, another important player in promoting impact monitoring, host an annual “Metrics from the Ground Up” conference to discuss common challenges and solutions for metrics and evaluation. Scheduled for June 12 to 13, a diverse group of investors, capacity development providers, researchers and entrepreneurs will debate and share experiences about the forefront of innovation and rigor in impact evaluation.
Although measuring impact has been historically seen as a “check the box” activity and a drain on the bottom line, the aforementioned initiatives seem to indicate there is a shift afoot that integrates measurement of impact within the core business model of would-be impact investors. As more investors begin to realize that good impact measurement goes beyond just attracting capital investment from potential partners, and allows investors to effectively allocate resources to achieve maximum potential impact, this nascent industry will be better able to deliver upon its lofty promises.
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