Demystifying Impact Measurement and Management in Impact Investing
February 7, 2023
Author: Joy Warimah-Otto
Motivation
Social innovation and impact investing can be a powerful instrument for addressing societal problems and engendering economic and social benefits for communities. For example, Zipline, a company operating distribution centers in Rwanda, is tackling persistent disparities in maternal and reproductive health in SAA with the help of autonomous electric drones to deliver life-saving medicine and blood to rural clinics and hospitals by reducing the delivery time from hours to minutes.
However, given that most of my experience has been in the mainstream financial sector having worked in venture capital in Sub-Saharan Africa, I found it challenging to make sense of the term “impact”. What does “impact” really mean? It seems to be thrown around in different reports, board rooms, webinars and blog posts without reflection. As I recently moved to Canada and have been working for an impact investment firm, I had an interest in adding clarity to the term by writing an article on Impact Measurment and Management (IMM).
As a new member of the Canadian Forum for Impact Investing and Development (CAFIID), I am keen to gain a better understanding of IMM. The article builds on IMM as outlined in CAFIID’s 2021 State of the Sector Report.
Impact Investing
To better understand “impact”, we need to begin by defining impact investing. CAFIID draws from the Global Impact Investing Network (GIIN) to define impact investing as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”[i] Capital must be allocated intentionally to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Seems simple enough. Investors must be intentional in addressing societal problems with their capital allocation, or in other words motivated by achieving impact. The issue is that people disagree on what is and how to measure impact. It’s even more confusing when the term is juxtaposed with to other terminology used by the mainstream financial sector such as Sustainable and Responsible Investing, which employ Environment, Social and Governance (ESG) criteria in their “impact” framework.
Understaidng the Jargon
There is so much jargon emerging within the financial services industry speaking of social and environmental “impact” that it can be confusing. A question I have is how substantive is the work being on impact measurement and how much of it is labels and a public relations exercise. To me, the goal to develop useful and effective tools, frameworks or strategies to meaningfully integrate sustainability, ESG and development impact considerations into the investment decision making and management process.
Impact considerations should be integrated throughout the investment process including sourcing, due diligence, approval and portfolio management. Issues of greenwashing, Sustainable Development Goals (SDGs) washing, or gender washing are well known withing sustainable and impact investing industry. Gaining an understanding of the different terms can increase transparency and reduce these types of issues.
Clarifying terms such as “sustainable”, “responsible”, “ESG” and “impact investing” which are often used interchangeably, but have different meanings is important. Here is a quick overview.
Sustainable investing serves as an umbrella term that includes many associated ideas. It is an investment strategy centered on one or more environmental, social and/or ethical factors. It seeks to focus investments and the movement of capital towards companies and funds that further these causes.[ii]
Socially Responsible Investing (SRI) entails screening investment options to exclude businesses that conflict with the investor's values. SRI dates back to John Wesley, the founder of the Methodist movement, who urged his followers to avoid investing in "sin stocks" that generated profits through alcohol, tobacco, weapons or gambling. Common SRI exclusions in modern times include fossil fuel producers and firearms manufacturers. SRI is the simplest (and often the least expensive) values-based investing approach.[iii]
ESG focuses on three foundational pillars that are crucial to today’s corporate management and investors alike. (1) Environmental issues can include energy use, pollution, climate risk, exposure to extreme weather, carbon management, and use of scarce resources. (2) Social issues can include product safety, human rights, worker safety, customer data protection, and diversity & inclusion. (3) Governance issues can include factors such as accounting standards compliance, succession planning, anti-competitive behavior, and a strong ESG management process.[iv]
Impact Measurement and Management Resources
Impact measurement and management is a core characteristic of impact investing. Some consensus is emerging among impact investors on general impact themes and metrics. Two IMM resources which have established credible impact themes and metrics are the GIIN’s Impact Reporting and Investment Standards (IRIS+), and the Impact Management Platform.
IRIS+ is a generally accepted framework for “measuring, managing and optimizing” impact, provides and easy access and user-friendly platform for determining an investment fund’s impact themes and metrics.[i]
The IRIS+ framework was created as a response to the broad array of terminology and themes plaguing the impact investing landscape. The framework was designed with investors in mind—the GIIN worked with global stakeholders such as asset owners, asset managers, and service providers to create metrics. It incorporates how investors, and the enterprises they invest in, develop strategic goals, portfolios and business models. Below I provide examples of some of the IRIS+’s impact themes and some sample metrics.
Impact themes and sample metrics
Sustainable Agriculture
Area of cultivated land with reduced water use from high-stress regions.
Area and percent of land managed using resilient soil health practices.
Biodiversity and Ecosystems
Area and percent of area directly controlled with improved biodiversity footprint.
Area and percent of marine area directly controlled with improved biodiversity footprint.
Gender Lens Investing
Change in revenue and profitability of women owned or led businesses.
Percentage of women in leadership positions including C-Suite or equivalent (e.g., Managing Directors, Partners, Board members).
Financial Inclusion
Percent change in client transactions.
Number of clients provided new access who are actively using the products and services offered by the organization.
The IRIS+ platform align impact themes and metrics with the United Nations (UN) SDG indicators. The UN SDGs are important since they an agreement between all United Nations’ Member States to make progress towards a greener, healthier, more peaceful and equal planet. They contain 17 ambitious objectives with 232 unique indicators for measuring progress toward 169 targets.[vi]
The SDGs were not designed solely with investors’ needs in mind—rather, they are meant to guide the efforts and resource allocation of governments, businesses and philanthropic organizations. In addition to investment capital, achieving the SDGs will require public policy innovation and philanthropy, which are a better fit than impact investing to meet certain public objectives. At times, public private partnerships are needed and much has been written about the multi-trillion dollar funding gap to achieve the SDGs. Despite not being specifically designed for investors, the SDGs have seen widespread adoption among many private market participants, leading more investor-centric standards to map their taxonomies to them.
The IMP is a “system map to help organizations, investors and financial institutions manage their sustainability impacts”. It provides impact investors and other impact oriented organizations a platform that was built out of a consensus on how to measure, assess, and report impacts on environmental and social issues.[vii]
The IMP emerged out of a practitioner community of 2,000+ organizations who debated and found consensus on impact management techniques. The community coordinated efforts to provide complete standards for impact measurement, assessment, and reporting.
Conclusion and Recommendations
My hope is that this article provides some clarity for non-impact professionals on the common jargon used in impact investing and encourages CAFIID members to take the opportunity to lead the way as a group, by reporting against impact metrics and encourage non-members to do so.
The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis. We find ourselves at a defining crossroads – we are facing unprecedented social and environmental challenges. The private sector and more specifically impact investors can play a major role in addressing some of these challenges. We ought to work together to rebalance our world for the benefit of all and impact data is critical for providing the context that stakeholders need for their journey towards sustainable value creation.
References:
[i] Global Impact Investing Network. “Impact Investing Need to Know”. Accessed Feb. 6, 2023.
[ii] US SIF: The Forum for Sustainable and Responsible Investment. “Sustainable Investing Basics.” Accessed Feb. 6, 2023.
[iii] Ibid.
[iv] Ibid.
[v] Global Impact Investing Network. (2019). IRIS+ Core Metrics Sets. GIIN.
[vi] United Nations Development Program. (2022). The Sustainable Development Goals Report. UNDP.
[vii] Global Steering Group for Impact Investment. “Impact Management Platform”. Accessed Feb 6, 2023.
Author: Joy Warimah-Otto is a member of the CAFIID Thought Leadership Committee and Venture Fellow at BKR Capital.