Made to Measure? Understanding Investor Challenges with Social Impact Measurement
By Hilary Best
In a recent J.P. Morgan study, 70% of surveyed global investors identified impact measurement as important to the development of the impact investing industry. 96% of investors surveyed report that they use metrics to measure social/environmental impact. Standardized measurement systems like IRIS andGIIRS have taken off in recent years and more and more ventures are looking for ways to communicate their impact to investors. While there appears to be movement towards measurement on the global scene, are Canadian impact investors feeling similarly motivated?
In collaboration with Human Resources and Skills Development Canada, Purpose Capitalconducted a comprehensive literature review and interviewed more than 20 Canadian impact investors (and their intermediaries) to better understand their use of metrics and the challenges they face in measuring impact. The resulting Guidebook for Impact Investors: Impact Measurement and report Social Impact Measurement Use Among Canadian Impact Investorswere published today.
Guidebook for Impact Investors: Impact Measurement provides investors with a toolkit to enhance their use of social metrics. The guide provides investors with a basic overview of social metrics for impact investing, an outline of the issues and challenges of social impact measurement, a summary of existing social impact measurement tools and a description of how they are being used, and a set of diagnostic tools to help investors think through key questions and issues related to measurement.
Social Impact Measurement Use Among Canadian Impact Investors offers a broader audience an overview of the needs and priorities of Canadian impact investors as they relate to social impact measurement. The report covers Canadian impact investors’ knowledge of social impact metrics, the role that metrics play in investment decisions, the measurement tools used by investors, as well as, the challenges and opportunities investors face with regards to impact measurement.
Over the course of the investment lifecycle, metrics allow investors to define their impact goals and parameters, select investments that fit those goals, understand whether their goals are being achieved and communicate their impact with stakeholders. As in the traditional investment universe, impact investors vary in their motivations, assets, risk and return expectations, and social impact objectives. This diversity is reflected in the measurement approaches they use.
While investors are using a variety of measurement approaches including Theories of Change,GIIRS, IRIS, ESG Screens, Social Return on Investment, Cost Benefit Analysis, Sustainable Livelihoods and Case Studies, they are keenly aware of their limitations and challenges, including comparability and cumbersomeness.
As one investor put it, “We have yet to see something broad enough and smartly enough designed to take the end result seriously.” Investors indicated a preference for outcome and impact measurements, yet very few are able to collect this information and instead rely on outputs. Similarly, while many investors favour quantitative data, the importance of qualitative factors in decision making, like a venture’s narrative of social impact, was an ongoing theme. As one high net worth investor said, “I only select companies where the meaningful impact is an obvious part of their commercial offering. It’s so obvious that you don’t have to measure it.”
The use or lack of use of social metrics can make or break an investment decision. Many investors had previously chosen not to invest in an organization because it was unable to prove its social impact. That said, investors also stressed the importance of being flexible, particularly for early stage ventures that have not yet developed a track record.
Investors continue to struggle with the cost and resource-intensiveness of measurement. With limited resources available, many investors are reluctant to divert resources from operations to measurement. Some investors noted that they pick organizations that already view measurement as an intrinsic part of both the management of the organization and the monitoring of progress. They also want to see demonstrable evidence that investments made in the measurement of an organization’s impact are useful and cost-effective in the development of the venture.
On the basis of this research, the report offers several recommendations to investors and HRSDC to enhance the use of measurement amongst impact investors. Selected recommendations include:
1. Encouraging collaboration with other investors on due diligence, especially with a sectoral approach
Investors could collaborate with their peers to carry out due diligence. Such collaboration would also benefit ventures by streamlining measurement requirements. This collaboration is already happening to a certain extent. For example, Toniic, an investor-led network, carries out due diligence and syndication on behalf of its members, who include RSF Social Finance, KL Felicitas Foundation, and the Grassroots Business Fund. By working together and developing common standards where possible, impact investors could reduce the costs of measurement and develop harmonized metrics to enable greater comparability within a sector.
2. Supporting ventures as they strengthen their financial and social reporting
Government could support organizations as they develop and strengthen measurement systems. Through granting, training, convening and sharing of best practices, government could assist these organizations as they develop an understanding of what investors seek in terms of financial and social metrics and create robust measurement systems. Small grants to these organizations could assist with the upfront costs of creating measurement systems. One model for this approach is the UK’s Investment and Contract Readiness Fund which supports social ventures as they prepare to access new investment and compete for public service contracts that require proof of social impact.
3. Creating incentives for investors and ventures to work together on social impact measurement
Investors are keen to look for synergies between their measurement needs and those of their ventures. While these needs do not always match, there are mutual benefits that accrue when these parties work together. For example, aligning an investor’s frequency of measurement with a venture’s could reduce a venture’s monitoring burden. Government could facilitate this collaboration by issuing small grants for investors to help build the measurement capacity of ventures or by offering tax credits to ventures that are able to certify their social impact.
4. Enhancing the sector’s understanding of investment structures that incentivize the alignment of financial and social returns
Investors recognize the value of social metrics, yet this value is not always reflected in the incentive structures of investment management. HRSDC or other government agencies could support research into fund structures that incentivize the alignment of financial and social returns. By tying compensation or returns to social and environmental performance, an impact-based incentive structure [PDF] raises an investors’ financial stake in the non-financial performance of their funds.
Moving forward, the measurement-related challenges investors face are likely to be overcome through greater collaboration between investors and with ventures and through creative solutions which align measurement with financial and operational priorities. By giving ventures a mandate to measure and investors an incentive to support this mandate, actors in the social finance space will benefit from better information about the impact we are collectively achieving.
For more information on Guidebook for Impact Investors: Impact Measurement and report Social Impact Measurement Use Among Canadian Impact Investors, please visit www.purposecap.com.
Update: This post was incorrectly credited to Karim Harji, instead of Hilary Best. The error is regretted.
Image credit: Cover of report published by Purpose Capital.
Hilary Best is an Analyst with Venture Deli, where she coordinates a variety of projects with social entrepreneurs and investors. Hilary has worked extensively with social ventures and has a strong research background, having supported the development of a variety of knowledge products on impact investing for clients including TD Bank Group and HRSDC. Most recently, she led a study of the use of social metrics amongst Canadian impact investors for HRSDC.
Purpose Capital works with enterprises, investors, and governments to design and realize solutions that address humanity’s most pressing challenges. We work with investors – individuals, families, foundations, financial institutions – and their advisors to design and deploy customized impact investment strategies spanning sectors, asset classes, and regulatory regimes. We also work with governments and sector leading organizations to develop new products, platforms and markets for compelling financial returns and measureable social impact.