Over the last decade there has been a surge of interest in impact investment with new analysis putting the size of the global market at $502bn. However, if the market is to continue its fast-paced growth one key issue needs to be addressed: the lack of a universal standard for measuring the social impact of investments. This would give investors added confidence that their funds were doing well and would also help to minimise ‘green-washing’ – a recent Global Impact Investing (GIIN) survey found it was a key issue for investors. There are a number of competing approaches to measuring social impact and below we review some of the most widely discussed as well as putting forward our own suggested solution to this issue.
Greenwashing is a growing global problem
The lack of a globally accepted definition of ‘impact investment’ has led to some high-profile cases of ‘green-washing’, or more specifically ‘impact-washing’. For instance, last year, Goldman Sachs announced a partnership to help socially conscious investors support “just business behaviour”. However, its critics have claimed Goldman Sachs was simply laying claim to the impact label when it was in fact investing in companies that have suppressed global climate research and underpaid workers, a direct violation of the principles of ESG. Given cases such as this it is perhaps no surprise that when GIIN asked 229 investors for their views on how to address the problem of impact washing as part of a broader survey, some 80% of respondents said more transparency was needed around impact investing strategies and 41% said “third-party certification of what qualifies as an impact investment” was essential.
UN Sustainable Development Goals are a valuable starting point
The UN Sustainable Development Goals (SDGs) are a valuable starting point in providing a common framework for impact investing. They were launched in 2015 by 193 member states of the United Nations who committed to 17 global goals, which range from hunger to stopping climate change. These are used to drive public and private money towards creating a sustainable economy and society, and now the business potential associated with the Goals is starting to be understood. In 2017, the Business and Sustainable Development Commission estimated that SDGs would open up $12 trillion in market opportunities.
Although SDGs are helpful in providing the basis of a common framework, goals such as ‘Zero Hunger’ run the risk of being too broad, and a more targeted, focused approach would provide clearer guidance on how to properly measure and implement these goals.
Social Return on Investment (SROI) is a respected method
Social Return on Investment (SROI) is a long respected method of measuring impact. It first emerged as a way for charities and social enterprises to demonstrate the success of their mission with its comprehensive step-by-step guide on how to attach a monetary value to the social change achieved. The method was developed from traditional cost-benefit analysis which produces a narrative of how an organisation creates and destroys value, and a ratio that states how much social value (in £) is created for every £1 of investment.
Unfortunately, there has been a limited uptake of SROI and it has failed to become a universally adopted methodology as the impact market has grown. The method has been critiqued for its resource-intensive nature which may not always be appropriate for young impact seeking businesses. If adequate data collection systems are not in place, it can be time-consuming to conduct an evaluative SROI analysis
International Finance Corporation (IFC) approach is not a measurement solution
Recently, the IFC, an arm of the World Bank, has taken note of the need for an impact-investing framework with their nine principles which are grouped under five elements. A coalition of 60 asset managers and institutional investors have signed up to the new standards which are designed to accelerate the growth of ‘impact’ investments which deliver positive benefits to society.The five elements include: strategic intent, organization and structuring, portfolio management, impact at exit and independent verification.
While the IFC principles are a strong starting point, they are not measurement solutions but a reference point against which impact management systems of funds and institutions may be assessed. The principles do not dictate which impacts should be targeted or how they should be measured and reported.
Impact Management Project focuses on impact management
The Project is an open-source effort by over 700 organisations (including asset owners, intermediaries, entrepreneurs, and end-users), to agree a common convention for understanding and managing impact. It aligns to the UN goals and there are 15 categories of data for enterprises and investors to assess their impact performance against.
This method slightly differs in the sense that it is based on the premise that there has been a strong focus on impact measurement, but impact management has been neglected. The former is the practice of understanding what impact is delivered, and the latter is the on-going practice of understanding each other’s impact goals, trying to meet them and then improving performance as one understands the impact they are having.
Triple Point’s proprietary approach
Our investment ethos is based on the 17 UN Sustainable Development Goals and focuses on the four themes of health, environment, children & young people and inequality. We invest in companies that meet our impact threshold and measure their impact on an on-going basis using our Monetary Value of Impact methodology (outlined below). Our aim is to provide an estimate of a company’s impact that is measurable, comparable and is delivered at an appropriate level of resource.
• Step One – Identify potential impact. As part of our pre-investment impact process we identify the key societal benefits that we believe an investee company will generate.
• Step Two – Establish Key Performance Indicators. KPIs are data points that reflect activities of a company. Our KPIs relate to the key societal benefits that a company generates. We select KPIs in consultation with our investee companies, to ensure data can be collected without undue burden on the business.
• Step Three – KPI tracking and quantification. After a period of time KPI data provides the starting point to confirm the existence of a measurable positive social change and its scale.
• Step Four – Quantity. We establish what would normally have happened, versus the positive change the product has created, to assign a quantity of positive change.
• Step Five – Value. We calculate an initial monetary value of social Impact by using reference data or making reasonable data assumptions.
• Step 6 – Adjustment. We adjust the initial monetary value for factors that contribute or detract from the positive impact being measured. They include duration (how long the impact will last) and depth (the level of change the impact creates).
• Step 7 – Accountability. – A further adjustment is made to reflect the stake we have in the company and over the reporting period.
• Step 8 – Result. – The estimate of Monetary Value of Impact is produced in pounds and pence as a result of the investment.
As we have outlined, there are many varied approaches to assessing the value of impact investments and we hope our proposed approach will provide a positive contribution to the debate. Measuring impact is important as progress in this field has the potential to deliver significant positive benefits to society.
Julian Pickstone is Head of Social Impact Investing at Triple Point.