Inside the quest to measure the impact of impact investing

How do you measure the impact of reliable weekly milk purchases on the lives of small-scale Indian dairy farmers? What if you need to compare that with the impact on American college students of courses about dating violence and sexual harassment?

This is the kind of valuation challenge impact investors have been grappling with for years. Purely financial investments come with an accepted methodology for measuring return on investment. But with investments in projects or organizations working to deliver social or environmental impact, there’s no shared accounting framework for measuring the value of what’s been achieved.

Attempts have been made for years to systematize and popularize various flavors of impact measurement, but no single method has achieved mass adoption. The latest move toward standardization comes from one of the industry’s biggest investors and is built around calculating impact in dollars. The $2 billion Rise Fund, managed by $72 billion private equity giant TPG Capital, spelled out the methodology behind its new measure, the "impact multiple of money," in an article in Harvard Business Review in January.

Using the new measure, Rise calculated that its investment in EverFi, the educational technology company that produces the dating-violence course, was delivering $1.1 billion in social value and a 5X impact multiple of money (IMM), or $5 for every $1 invested.

"We spent two years and millions of dollars working with BridgeSpan to develop our Impact Multiple of Money framework, and we pressure-tested it with 80 organizations," Bill McGlashan, founder and CEO of the Rise Fund, told ImpactAlpha in an on-stage interview in February. "What it creates is a map of the derivative and second-derivative impact effects of really sophisticated, complicated, scalable businesses that deliver measurable real outcomes."

There’s a lot of money at stake. The Global Impact Investing Network puts the size of the impact investing market at $502 billion (PDF). Corporate participation wasn’t broken out, but a separate report from Chief Executives for Corporate Purpose found that a third of large companies are active in the impact investing market, and they’ve invested an estimated $2.4 billion. That’s dwarfed by the $2.7 trillion in cash corporations have on hand that could be put to use in this market.

Corporations should be a bigger part of the impact conversation, said Cary Krosinsky, a professor of sustainable investing at Brown University and co-founder of Real Impact Tracker, which rates fund managers based on their impact. "Impact investing doesn’t typically look at public companies; I wish it would look at it more," he said. "The impact that business has is much larger when you’re bringing public companies into the equation because to really have the global impact that we want, we can’t just look at small-scale investments."

Early efforts to measure impact

Some investors and fund managers focus their deal making on projects that have an impact on the United Nations’ 17 Sustainable Development Goals (SDGs), said Krosinsky, but part of the problem with valuing impact investments is that definitions of what qualifies as an impact investment vary.

"How do you actually do impact measurement?" he asked. "It’s not really the right question, because some of the SDG issues you can invest against directly, and that you can quantify, but some of them you can’t. Some of the problems are systemic. [With] some of the problems you can invest toward solutions but you can’t quantify the benefits."

Krosinsky co-founded Real Impact Tracker, which rates fund managers based on their impact but doesn’t try to measure impact directly. For that purpose, the Rise Fund’s IMM approach is "the best methodology I’ve seen," he said.

An older approach is the Social Return on Investment concept popularized in the 2000s by the Roberts Enterprise Development Fund. The key innovation of this method, which was rooted in cost-benefit analysis, was to include social as well as financial costs and benefits when measuring an investment’s returns.

The framework also incorporated a set of principles that included involving stakeholders, understanding what changes, valuing what matters, including only material information, avoiding hype, being transparent and ensuring independent verification. The approach gained acceptance, was taught at universities and spread to Europe and the United Kingdom.

However, SROI has been critiqued — even by the fund that promoted it — for being too resource-intensive and time-consuming as well as unable to account for unquantifiable factors, such as improved mental health or family relationships. Jed Emerson, part of the team that introduced SROI, in 2015 wrote that "impact metrics remain ephemeral, a force living in some deep wood, visions of which are obscured by branches, brush and bullshit."

A collaborative approach

The Impact Management Project worked with 2,000 organizations to develop a five-point framework for measuring impact. The Rise Fund’s methodology was built in part on the IMP’s work. The five points are: what; who; how much; contribution; and risk. What outcomes do people and the planet experience and who experiences them? How much change do people experience, how many are affected and for how long? What contribution do investors make to outcomes, and what is the risk stakeholders won’t achieve the expected impact?

Answers to those questions are assessed through three levels of impact. The first is an investment or project that acts to avoid harm, while at the second level a project actively benefits stakeholders, and at the third it contributes to solutions. Where this approach differs from the Rise Fund’s methodology is that IMP "doesn’t go that final step of translating [impact] into a dollar value," said Mike McCreless, investor content lead at the IMP. 

At Root Capital, where McCreless led impact assessment before joining IMP, he said, "We felt the assumptions we’d need to make to be able to do that would make the numbers sort of arbitrary."

The Impact Multiple of Money, in contrast, is a six-step methodology that does sometimes require making assumptions but that is also focused on getting as concrete and specific as possible about each element included in the mix. It starts with figuring out how many people will be affected by an investment, and by how much. Next is clarifying which social or environmental outcomes will be targeted, calculating the economic value of those outcomes and adjusting for risks. The penultimate step is estimating what’s known in finance as "terminal value" of a program or service, which is its estimated value at the end of the product or service’s projected lifetime. The last step is calculating how the investor’s ownership stake affects the final valuation.

Spreading the impact

Other groups are working on their own strategies for measuring impact, and it’s too early to say whether one methodology eventually will gain widespread acceptance, the way Generally Accepted Accounting Principles did for business accounting, or how the sector will handle factors that are unquantifiable. "There’s a danger of a false sense of rigor in virtually any impact measurement," McCreless said.

Still, he said, the effort is worthy. The ultimate goal for the impact sector, McCreless said, is to eliminate itself as a separate discipline by spreading its approach and principles throughout the entire financial industry.