The pandemic has accelerated a host of trends that had been in evidence before covid upended lives across the world, one of which is the rise of impact investing. The coronavirus has ravaged health, exposed inequalities and environmental damage, and the need for social distancing and lockdowns has decimated economies. Yet businesses, investors and policymakers appear to be coalescing around the idea that this is the moment to ‘build back better’: to intentionally reimagine economies and social systems in ways that value quality of life and the environment as much as financial returns.

This clearly creates an impetus around impact investing. “We already had engagement from some of the gigantic allocators and financial institutions,” says Amit Bouri, chief executive of the Global Impact Investing Network. “When the pandemic first hit, many were just digesting what was going on. We’re now seeing investors that weren’t engaged in this previously look at how they can make a difference in areas as diverse as public health, the economy, racial justice and the climate crisis. Further, those that were already on board are now looking to invest more quickly in impact.”

Nevertheless, impact investing has a problem, which is reflected in the GIIN’s 2020 annual survey of those involved in the sector. When asked what were the greatest challenges for the market over the next five years, two-thirds of investors surveyed cited ‘impact washing’. Meanwhile, around a third cited the inability to demonstrate impact results, the inability to compare impact results with those of their peers and the lack of a common language to describe impact performance. It is clear that the latter challenges could well result in the former: impact washing.

The issue is not that there is a shortage of frameworks, metrics and tools to measure and manage impact. The GIIN, for example, reports that 10 years ago, 85 percent of investors relied on their own systems to measure impact, whereas nearly 90 percent now use some form of externally created tool or framework.

The frameworks used by the largest number of investors (73 percent in the survey) were the UN Sustainable Development Goals, mostly to set objectives. This was followed by the GIIN’s IRIS Catalog of Metrics (46 percent) and IRIS+ (36 percent), which were mainly used to measure impact, and the Impact Management Project (32 percent), which was used to both set objectives and measure impact.

The challenge is more around the fact that there is an alphabet soup of frameworks that fund managers can use, and the quality of measurement varies between firms. “There is a whole spectrum of ways to measure impact,” says Vikram Gandhi, senior lecturer in business administration at Harvard Business School and founder of impact investing platform Asha Impact. “This can range from highly sophisticated randomised control trials, based on the operations of a company and its outputs, through to the other extreme of a firm saying, ‘This feels like impact, so it must be.’ And there’s a lot of variation in between.

“Private markets clearly need to be aiming for something in between because RCTs are expensive and can really only be done by large foundations and governments, while the other end of the spectrum clearly lacks any rigour.”

Room for cynics

As Shami Nissan, head of responsible investment at Actis, says: “Impact measurement is very nascent – it’s still in the early stages of being developed.” One of the issues is that, even where certain frameworks are being used, the way results are often communicated gives investors and other stakeholders little clue as to whether impact objectives have been met.

“I see a lot written about impact achieved, but with no reference to what the starting point and intention was”

Shami Nissan

“Impact investing is hampered by a lack of standards and agreed frameworks,” she says. “There is a lot of room for everyone to communicate in their own way about impact. Impact measurement really comes down to intentionality. You need to be able to demonstrate, first, that you intend to deliver specific objectives around social and environmental impact – so you have to have a forecast of what your impact will be, then what your roadmap is doing to achieve that, and then report how you did it. If you don’t know what success looks like, how do you know whether you are on track?”

This is where credibility issues can creep in, she adds: “I see a lot written about impact achieved, but with no reference to what the starting point and intention was. There is no cross-reference to original targets. That plays into the hands of the cynics, who can say that the information has been cherry-picked and that any impact is more incidental than intentional.”

In an attempt to quantify impact and to be able to compare the impact of different investments, Actis has developed its own impact scoring methodology, which it has made open source.

“We wanted to go beyond a series of metrics and apply a measurement system to our investments,” explains Nissan. “We wanted to be able to answer the question of whether, for example, a renewable energy company in India is more or less impactful than a healthcare investment in Africa or an education business in Brazil. All our investments use different metrics, but measurement is about being able to compare.”

Although the proliferation of frameworks can be cause for confusion, the fact that a variety of tools exist is not necessarily a bad thing, says Stephanie Kater, partner at Bridgespan. “We are at the point now where there are a lot of tools,” she says. “That means we have moved on from asking the question of which is the best tool. Now, it’s more a case of: which is the best tool in this situation and in this context?

“You do need to use a number of different frameworks, but actually, the most important question in all of this is whether you are rigorous in how you measure and whether you can explain the logic of what you’re doing to an investor or the general public.”

Kater believes the way forward will be for firms to take existing tools and frameworks and adapt them to their own circumstances – much as Actis and others have done. This reflects the views of a survey of the Impact Management Project’s community of businesses and investors, published in July. Although 62 percent of respondents felt that most impact indicators and metrics could be standardised, many also said that organisations may need to complement these with more bespoke measures.

Tougher questions

That said, some aspects of impact are still difficult to quantify. “If you think about racial justice, for example. How do you measure the value of not being afraid to walk down the street?” asks Kater. “And if you look at, say, financial institutions, you can measure how many loans are being made to black-owned businesses and that will clearly have an impact on the local community, but that can be difficult to measure.”

Yet some progress is being made in other tricky areas. Bouri points to work that the GIIN is doing on how to measure employment quality. “We planned to do this pre-pandemic,” he says. “But it’s even more timely now because covid-19 has highlighted the fragility of employment for many people. Where previously, the focus has been on quantity of jobs, we’re creating a tool kit for investors to help them measure the quality of jobs they are creating – it’s an encapsulation of the role impact investment can have in our recovery.”

Although it is becoming increasingly possible to measure a whole range of impact outcomes, it seems clear that not all methods can be 100 percent scientific. “We have to recognise that, while we can agonise over a whole range of metrics and measurement, you can’t eliminate the qualitative,” says Nissan. “There will always be a need to look at and communicate the human stories – you have to make it real for people.”

What matters, say the experts, is that you identify what you are seeking to do, are transparent about what you are doing and have done and – where possible – seek third-party validation. “It’s clear that good progress is being made,” says Gandhi. “But remember, it took 100 years to develop accounting standards – and we still debate these. The sceptics may always want to see hard numbers but, for now at least, qualitative information will have to sit alongside the quantitative.”

Impact measurement tools

The variety of frameworks, metrics and methodologies around impact can be highly confusing for the uninitiated, and even for those further along the knowledge curve.

This is in part because each tool or framework is designed for a slightly different purpose. Here’s a round-up of some of those most commonly used.

United Nations Sustainable Development Goals
The GIIN annual survey suggests that some investors use these to measure impact. However, this set of 17 high-level goals for the world – encompassing areas such as quality education, eradication of poverty, gender equality, decent work, economic growth and reduced inequalities – is perhaps better used as a framework around which to identify investment opportunities and as a starting point for seeking out appropriate metrics.

Collated and curated by the GIIN, IRIS+ (the 2019 upgraded version of IRIS, which was launched in 2008) is a catalogue of 600 standardised metrics that can be used for measuring impact and have been developed in collaboration with around 1,000 stakeholders. Consisting of a set of core metrics sets in addition to the full catalogue of IRIS metrics, it offers guidance on advancing impact measurement and management practice and is aligned with more than 50 other standards, metrics sets and conventions, including the UN SDGs.

IFC Operating Principles for Impact Management
Launched in 2019, these high-level principles provide a framework for impact investing to ensure impact considerations are integrated throughout the investment lifecycle. The IFC is now working with the nearly 100 signatories to develop common impact measurements and impact performance measurements, with a view to potentially creating standardised impact reporting.

Impact Management Project
This network of more than 2,000 practitioners aims to build a global consensus on how to measure and manage impact. It has put together a set of impact management norms – including the types of data that would be expected in any good impact framework and impact report. It has also launched a handbook on impact-financial integration that seeks to bridge the gap between impact and financial performance methodologies.

And then, of course, we have frameworks and systems including the UN Principles for Responsible Investment, the Sustainability Accounting Standards Board, Aeris CDFI ratings and the Global Reporting Initiative, among others, plus firm-led initiatives that are being shared, such as the Actis impact score and TPG’s impact money multiple.