A recent article in Harvard Business Review provides an illuminating discussion of a new impact investing metric called the “impact multiple of money” (IMM). Developed by TPG Growth’s Rise Fund and the Bridgespan Group, the IMM entails a multi-step process whereby investors quantify and then monetize the predicted social and environmental benefits of an investment. The method’s applicability to different sectors and incorporation of various nuances, such as an “impact realization index” that adjusts impact projections by quality of evidence, make it a valuable addition to the impact investor’s toolkit.
Yet those eager for closure on the enduring challenge of quantifying impact may feel a bit discouraged by the IMM. At first glance, the metric evokes the “multiple of money invested” (MoM), a ratio of returned capital to invested capital that is typically reported as a straightforward (even oversimplified) fund performance indicator. Unlike the MoM, however, the IMM calls for much more than scanning financial statements and doing some basic division; it requires secondary research, expert consultation, economic valuation, and hedging—lots of hedging.
It’s also worth emphasizing that the IMM does not measure impact retrospectively but rather predicts future performance based on existing evidence, which varies in precision and generalizability depending on the issue area. Of course, investors are already familiar with the vagaries and liberties of forecasting, but financial analysis is far more concrete when it shifts from forward-looking projections to backward-looking accounting. The IMM offers no such ex post conclusiveness. Rarely will investors have the data to verify their IMM projections after making their investments.
Let me be clear—it is to the credit of the developers that the IMM is more complex and tentative than conventional valuation multiples are. A clear-cut equation would necessarily neglect the unavoidable difficulty and subjectivity of impact forecasting. The authors of the Harvard Business Review article avoid pretensions of hard objectivity (an all too common conceit in the industry) and acknowledge that published research does not provide simple instructions for calculating impact. They recognize that interpreting research findings requires debate, judgment calls, and often substantial investments of time.
Most would agree that all of that trouble is worthwhile, because impact investors should anchor their predictions in as much rigor as feasibly possible. I want to add, though, that investors who are just beginning to wade into the seemingly foreboding waters of meta-analyses and systematic reviews should feel encouraged by more than just the prospect of better impact estimation. Reviewing evidence can also be critical for sound impact management.
The Global Impact Investing Network defines impact management as “the process by which impact investors can understand the effects of their investments on people and the planet, and set goals to adapt processes and improve outcomes.” Whereas impact estimation is a relatively passive process of accounting for what a company is expected to accomplish, impact management is a more active effort to steer and maximize a company’s positive impact. Strategies may include providing technical assistance for product development, underwriting third-party sustainability audits, and incorporating impact goals into legal agreements to preserve mission fidelity. Because impact management requires familiarity with complex social and environmental processes, building domain-specific content knowledge through secondary research (including but not limited to academic publications) is essential for maximizing positive outcomes and minimizing negative ones.
Consider, for example, the evidence that Chris Addy and the co-authors of the article cite in support of AlcoholEdu’s positive effects. Randomized controlled trials indicate that participants in the alcohol abuse prevention online course show a significant decrease in self-reported negative “alcohol-related consequences.” Projecting avoided fatalities and drawing on the Department of Transportation’s “value of a statistical life,” the authors demonstrate how we can use the IMM method to convert AlcoholEdu’s benefits into economic value.
But what about the fact that the most rigorous evaluation of the program shows that reductions in alcohol-related problems do not persist after the first semester? The IMM methodology can accommodate this drop-off risk by applying a high discount rate to AlcoholEdu’s monetized impact estimate, a neat and logical adjustment. In terms of management, however, the finding on drop-off invites a number of questions above and beyond estimation and monetization. Are the program designers aware of the issue? Are they studying possible solutions? Is there evidence of other types of interventions that have mitigated drop-off? It’s also worth noting that the authors of the evaluation advise that “all such programs should be offered in conjunction with environmental strategies, such as those recommended by the National Institute on Alcohol Abuse and Alcoholism Task Force ... .” In light of this recommendation, it would be wise to consider whether EverFi (the company that offers AlcoholEdu) communicates to its customers that complementary resources may help sustain the course’s benefits.
There’s nothing particularly novel about this approach; any good investment shop will attempt to gain at least a basic understanding of a potential investment’s underlying technology, whether it’s growing synthetic meat in a lab or developing a curriculum to change college drinking culture. This is a point we underscore in the impact investing experiential learning programs we offer to students at the Wharton Social Impact Initiative. Acquiring content knowledge is integral to assessing prospects for optimizing profitability, competitive position, and social impact. At the very least, if we assume that a serious impact-oriented management team should be familiar with common pitfalls and best practices identified in relevant research, then bringing up the types of questions mentioned above is a useful way to recognize high-quality leadership during due diligence.
In sum, impact investors should know that the significant work required to derive an IMM can pay off in more than just impact estimation and economic valuation. It can also inform more thoughtful strategies for the active promotion of beneficial impact. Hopefully, dissemination of the IMM method will inspire more reflection on how investors can use secondary research not only to calculate but also to cultivate positive social and environmental returns.