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Impact investing: Measuring the subjective

Impact investing: Measuring the subjective

The goal of impact investing is to make a long-lasting change on social and environmental issues.

However, measuring impact can be challenging, as there is often no ‘big-bang’ moment in which the social or environmental issue is ‘resolved’. Measurement based on impact alone places too great a weight on the end result, discounting necessary and tangible progress made along the way.

Progress is less glamorous but no less important (maybe more so). Behind the scenes, people invest significant time and energy in activities and initiatives to support progress towards major goals. While strong progress may not lead to a significant impact, that doesn’t mean tangible successes haven’t been achieved along the way.

Impact investing, and investing for impact

Organisations are established with a core purpose. They may be profit-driven or philanthropic in their pursuit of this purpose. While an organisation may establish goals that seek to achieve a positive impact, those goals need to first satisfy, or at least not impede, its core purpose.

Impact investing has become a worthy investment pursuit and a global investment trend. A positive environmental or social impact can be achieved and may be a requirement for investment but will only be pursued where that investment meets a threshold return on investment (ROI). In this context, though, the financial return retains primacy – fund managers have a fiduciary duty to their investors to target satisfactory financial returns based on their mandates. An example here might be a fund manager seeking investments in wind or solar farms but only where the forecast returns exceed a hurdle rate.

Impact investing has received both business and political support, as highlighted by the recent annual World Economic Forum conference in Davos, where attendees pledged to act to use their financial clout to improve humanity.

Investing for impact as the primary purpose may mean an investor is willing to take a material financial loss against the capital invested to achieve a non-financial ‘return on investment’. An example here might be a not-for-profit (NFP) organisation established with the purpose and aim of eradicating a disease; a satisfactory ROI may be achieved if the desired impact is met, despite a 100% loss of capital (i.e. the grant), where the NFP’s grant was able to fund the scientists who found the cure and reduced new instances.

Impact-driven decisions are still investment decisions

In seeking to measure impact, you are seeking to measure a return on investment. Having determined the longer-term impact you wish to make, define the outcome you believe will deliver that longer-term impact (perhaps funding medical research leading to a breakthrough). Borrowing from the well-established investment process of strategic asset allocation, how much of your capital are you willing to risk in achieving the desired impact? Will a complete loss of capital but a successful medical breakthrough be considered a successful ROI?

Measuring your impact: Success is in the eye of the beholder

There is no universal standard for measuring and demonstrating investment impact. However, academic organisations have established a range of methods for measuring social and environmental positive impact. Global ESG analytics firm, Sustainalytics, notes 400 methods that they are aware of, perhaps reflecting the array of impacts sought.

Unlike traditional investment types, measuring the impact or progress made by your investment is open to interpretation. So, how do you measure the subjective?

There will be measurable criteria for success: Define the impact you are seeking to make

Your organisation should define as clearly as possible the impact it is seeking in order to establish a set of criteria for success. This will involve the relevant base statistics against which this impact can be measured over time, such as the number of cases reported in a calendar year or your organisation’s net carbon emissions reduction.

Thankfully, while measurement is a developing area, the public reporting of progress and impact is being increasingly standardised, with many organisations globally couching their impact and ESG progress in terms of the United Nations’ Sustainable Development Goals.

A sound process will assist sound measurement

As you can see, knowing the result you are seeking will help define the actions you will take to achieve it. The following presents how a Logic Model template may assist in both achieving and measuring your impact. While the steps and considerations below are presented chronologically, your organisation may find each step intertwines with both precedent and dependent steps:

  1. Inputs: what are the resources at your disposal?
    This primarily comes in the form of the skillsets of your people and capital. And knowing this, what constraints does your organisation have? Are there specialisations it is missing?
  2. Activities: what are the things your organisation does?
    What does your organisation do that can generate the outputs that will drive the outcomes and deliver the ultimate impact you want to make? For example, are you builders, scientists or fundraisers?
  3. Outputs: what is it that your inputs and processes generate?
    In the example used earlier, this would be the physical school that your organisation built. In the field of medical research, it may be a targeted research trial that has been selected for support by your organisation.
  4. Tangible progress: what is the effect of the output?
    This is the main measurable result of the inputs, activities and outputs of all the work you have undertaken. Has the output led to the outcome originally envisaged? This may be in the form of decreased unemployment rates and increased incomes in a community, or a medical breakthrough in the examples referred to earlier.
    Note: Reporting on your iterative successes should provide stakeholders with the confidence to continue to support your organisation.
  5. Impact: Has the desired progress on the social or environmental issue been achieved?

There’s no silver bullet for measuring impact – linking cause and effect

A final challenge – and important consideration – is assessing whether it was your investment and outcome (the cause) that ultimately lead to the achieved positive impact (the effect). Were there extraneous factors that drove the positive impact? This will help you to determine whether you ultimately achieved the desired ROI.

Your positive impact is a long-term commitment that should be achieved on the back of incremental tangible progress. If you are finding that the anticipated shorter-term incremental outcomes are not being met, you should reassess where your organisation’s outputs are being invested and consider a new path towards your desired outcomes. And ultimately, impact.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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