Centre for Social Impact Learning: Click here to read the report.
This report summarises the state of impact management and provides readers with shortcuts to the resources most relevant to their purposes.
The report provides a snapshot of current practices at the impact due diligence, monitoring and reporting stages among self-identified impact investors based on a scan of 257 publications, interviews with 17 firms in the impact investing arena chosen at random, and SVT Group’s empirical experience in the field over the past 15 years. The report also summarises the history of impact investing, key terms and concepts in impact measurement, and trends.
Key takeaways detailed in the report are the following:
Advice from impact investors to those new to the field:
Establish an industry-wide definition of “impact” to avoid diminishment of the movement by those who would exploit it for cynical purposes.
Walk the talk from the beginning since there are several benefits: marketing, reputational risk reduction, and impact performance.
While some custom metrics are necessary, use standard metrics when possible because it allows investors to make much needed comparisons across asset classes and individual investments.
Seek to understand beneficiaries, since, like walking the talk, it delivers risk reduction and improves impact.
Know your own values, which is something conventional investors are not asked to do to the same extent, and is often an ongoing discovery process.
Educate others, particularly those entering the field, about why understanding and managing impact matters.
What the “Impact” in Impact Investing Means
Thus far in the relatively brief history of impact investing, consensus has been attained about the definition of impact investing, but not about the term “impact” itself.
Impact investing has been definitively defined as an investment approach that is:
Intentional about creating both financial returns and positive social impact; and
Active in the measurement of it.
The term impact technically means long-term, sustained change experienced by stakeholders that would not otherwise have happened. Since there is no strict standard or enforcement mechanism for the term’s correct use, however, it is often associated with investments for which no long-term sustained changes are measured, investments that may be associated with changes of which they are not the actual cause, and/or investments that cause significant negative impacts that are not acknowledged. This is causing some impact investors to despair that the phrase and underlying concept of impact investing will pass as a fad, and others to rally for a higher standard of scrutiny of the impact of investments. The report looks at practices, issues and recommendations at three stages of investment: due diligence, ongoing monitoring and reporting. Specific examples of the practices currently used by the investors interviewed are detailed in the body of the report.
Practices During Due Diligence
For both funds and portfolio companies, providing estimates of future social impact during the due diligence process builds a stronger case for investment to impact investors. Discussion of social impact at this stage also provides the opportunity to build understanding around shared impact goals, and to establish both parties’ expectations around metrics, reporting, and impact targets, which reduce the risk of conflicts about these matters later. Investors note the difficulty of comparing investment opportunities during due diligence, and that a tool to compare investment opportunities based on projected units of impact per unit of capital invested would be particularly useful.
Impact Measurement and Ongoing Monitoring
Once the investment has been made, ongoing impact measurement and management practices employed by investors range from simple to complex. At the simple end are outputs, which - though generally easy to track (indeed, often they are tracked in the course of regular business operations) - do not provide information about social or environmental changes that matter.
At the more complicated end are more sophisticated measures that demonstrate change for target beneficiaries, and that take into account other material changes (whether positive or negative), additionality (change that would not otherwise have occurred), and cost-effectiveness. Tension remains between the adoption of standardised indicators (which many investors feel would be useful and cost-effective in theory, but which in practice tend to limit understanding of a particular investment’s results), and of more flexible, context-specific indicators (which many investors see as necessary due to the need to measure what matters, but are both incomparable and costlier to implement, and thus not fit for managing investments at scale).
Some in the field are now advocating for skilled impact analysts who can intermediate between investors and disparate, non-standardised information about impact. Recommendations also include tools that facilitate reporting by portfolio companies and funds to investors, and mechanisms to enable audit or verification of the information that is reported.
When investors and investees make use of transparent, consistent and clean reporting, the investment is more likely to generate greater impact for a variety of reasons that have been documented by practitioners. Although there are elaborate guidelines for reporting on environmental, social and governance issues for publicly-traded corporations, the literature has been fairly non-specific when it comes to what an impact report should include in the context of private equity and debt (impact) investing. What is typically included varies quite a bit, based on the fact that impact reports are often tailored to different audiences. Broadly, reports for private investors, who often invest in niche areas of interest that are values-informed, tend to highlight the particular kind of impact that the investor is after. Reports for impact funds should align with the fund’s theory of change and supporting metrics. Likewise, reports to government entities should provide the impact evidence necessary to show compliance with the governmental investor’s set of impact objectives. Recently, professionals in the impact management field have begun to work on defining the content and qualities of good impact reporting for these purposes as well as in grant-making and nonprofits, and more specific guidance is likely to come on the scene in the near future.