The Role of Impact Metrics
How IRIS, PULSE, and GIIRS can further impact investing.
This is the first in a four-part series on impact investing and the role of metrics.
In 2008, a diverse group of leaders, including investors and philanthropists, met in Bellagio, Italy to develop the blueprint for an industry that could unlock trillions of dollars in pursuit of positive social and environmental impact as well as financial return. Several important things emerged from that meeting: the term impact investing, the origins of a global network of individuals and institutions that shared a vision for its growth, and a set of coordinated activities designed to underpin its rapid acceleration around the world. Those activities included, importantly, standardized definitions, rating systems, and performance management tools for measuring the social and environmental impact of these investments.
Four years later, impact investing has gained greater traction than we could have anticipated. A new report by E.T. Jackson and Associates with support from the Rockefeller Foundation cites analysis from approximately 2,200 impact investments totaling $4.4 billion. (And that is from a small subset of the industry: 42 investors, who self-identify as being engaged in impact investing!) This capital is taking its place alongside philanthropic and governmental funding in finding and scaling solutions to challenges that range from climate change to youth unemployment to malnutrition. As the market grows, the need and role for market-building activities evolve. We need to keep up with it. The present moment is an important, and necessary, time to take stock of what has been accomplished and what challenges might lie ahead.
Impact metrics—a catch-all phrase that means many things to many people—will be more important than ever as impact investing continues to grow and mature. Metrics play a critical role in distinguishing good companies from good marketing, and thus enable management, investors, and other stakeholders to judge performance and inform decisions on the basis of social and environmental impact in addition to profitability. This is particularly critical for impact investments (as opposed to, say, negatively screened investments) as they are, by definition, designed to generate impact beyond financial return.
In Bellagio, a triumvirate of distinct, but related, needs was identified in relation to metrics in order to build an industry that is defined not only by risk and financial return, but also by social and environmental impact:
- management information systems for fund managers and other data aggregators, who otherwise often rely on a patchwork of Excel spreadsheets to track impact data on their portfolios;
- impact ratings (performance standards) for asset managers and owners, who reported lacking the tools needed to assess their pipeline and active portfolios on the basis of non-financial performance;
- standardized definitions of impact performance measures that serve as building blocks for the above as well as enable benchmarking.
This type of basic market infrastructure exists for purely commercial investors (GAAP, Moody’s, basic portfolio management tools), but had yet to be built for the “impact” dimension of impact investing. This gap gave rise to three distinct but complementary tools: IRIS, PULSE, and GIIRS. This sounds to many people like a confusing alphabet soup. I am often asked which of those tools most effectively serves their impact measurement needs or obligations, so they can check the box and be done with it. The answer is that a growing and dynamic industry needs all of the above, and more. Moreover, individual investors stand to gain a lot from their use. IRIS serves as the taxonomy, or set of terms with standardized definitions, that governs the way companies, investors, and others define their social and environmental performance. Housed at the Global Impact Investing Network, it incorporates sector-specific best practices, is updated regularly based on user and expert feedback, and produces benchmark reports that capture major trends across the impact investing industry. PULSE is a portfolio management tool, administered by Application Experts (App-X), and is widely available to clients and comes pre-loaded with IRIS metrics. GIIRS is an impact ratings tool and analytics platform that assesses companies and funds on the basis of their social and environmental performance. It is based on IRIS definitions, and generates data that feed industry benchmark reports.
This alphabet soup is perhaps irritating to some, but can and should ultimately enable impact investors to do their jobs much more efficiently. These tools are also critical if the impact investing industry is to mature and have integrity around its dual value proposition. The tools are also a necessary reflection of the diversity that exists in the industry. There is a broad range of philosophies (“impact and profitability are zero sum”; “the only impact that matters is financial return”), of appetites for nuance (“can’t you just boil it down to one metric?”; “social change is inherently complex and multifaceted”) and functional requirements (data capture, articulation of impact thesis, performance evaluation) related to impact performance management. A growing impact investing industry must make room for all of these, and more.
IRIS, PULSE, and GIIRS, like the industry they are designed to serve, have evolved substantially over the past few years. They now sit at an interesting crossroads. Many of the early adopters, like the Rockefeller Foundation’s PRI portfolio, were willing to pilot these tools during their early development in the spirit of building the industry that had been envisioned in Bellagio. As a result, the tools have steadily improved. Many more investors are now entering the market, and are just beginning to formulate their need or approach to impact metrics. IRIS, PULSE, and GIIRS, like the broader industry, are now poised to cross a chasm from engagement by a limited number of early and motivated investors to adoption at scale.