(Illustration by iStock/designer491)
It’s a $1.6 trillion question: Which impact investment practices and characteristics truly generate the positive outcomes that investors and stakeholders want to see?
With a 21 percent compound annual growth rate from 2019 to 2024 driving impact investment assets under management to a level roughly on par with Spain’s GDP, the right answer is crucial to ensuring this opportunity to unlock immense good with immense wealth doesn’t go to waste.
The Impact Lab at the Global Impact Investing Network (GIIN) is far from defining a clear way forward, but the early results of our work to identify effective impact investing should inspire everyone working in the field to explore regression analysis and to get more serious about standardizing and sharing their investor- and investment-level data.
Doing so could mean the difference between wasting money on unclear routes toward positive change versus maximizing the impact of every dollar.
Crunching the Numbers
Rather than relying on assumptions that an investee’s good intentions and standards will lead to successful outcomes, the Impact Lab’s analytical work used actual impact performance data to evaluate the effectiveness of investor practices. More specifically, we performed regression analysis on a limited sample of 1,052 investment-level observations of impact performance, mostly in the financial inclusion sector. We controlled for external factors like region, asset class, stage of business, and revenue changes.
This approach not only began demonstrating a way for investors to home in on the indicators that matter but also demonstrated that applying systematic mathematical analysis of impact investment data on a larger scale is feasible. Two key findings emerged.
First, investors who engage with their investee companies on impact guidance, rather than only financial support, tend to see an increase in job creation at those companies. This could encourage investors who regularly provide their investees technical assistance, such as local infrastructure, advisory support, and investments in a pool of resources for capacity building.
Second, companies tend to create fewer jobs when investors occupy their boards seats. If future studies confirm this finding, it could eradicate the widespread assumption that investors can achieve better outcomes by joining their investees' boards and encouraging them to focus more on impact.
Considering the positive and negative correlations shown by different activities, impact investors must be intentional about where they focus their time and effort. If it is possible to use regression analysis to pinpoint the factors that drive the best possible impact results, investors should embrace the option. However, a few factors stand in the way of widespread adoption.
Barriers to Better
Effective impact tracking, analysis, and prediction rely on sharing investment performance data to compile diverse data sets across geographies, asset classes, and sectors. Gathering this data has proven challenging. It can be expensive for investors and companies, and there is not sufficient agreement on which sets of impact-relevant metrics and data types matter for this type of analysis.
To grow future impact and returns, we need a substantial increase in data gathering and convergence. Though much remains to be done, there are some promising signs that the industry is moving in this direction. Organizations like GIIN, Novata, BasisPoint+, Proof.io, NetPurpose, 60 Decibels, Leonardo Impact, and ImpactableX are increasingly drawing in investor- and investment-level data. Still, efforts to collect data in innovative ways cannot fully address the challenges of data convergence, an effort which requires standardization and industry agreement. Impact investors must dedicate themselves both to consistent data collection as well as collaboration with standard-setting and information-gathering organizations.
If you are an investor looking to better understand your contribution toward impact, you can start by standardizing how you collect impact performance data. That translates to gathering data on a consistent timeline and aligning it to metric sets like GIIN'S IRIS+. Investors should also aim to use similar metrics across their portfolio. And collaboration is important — routinely sharing impact data with industry groups, academics, coalitions, and others for analysis will advance the field. Finally, asset owners have a role to play, too. They should encourage and support their asset managers’ contributions to improving data for the entire industry.
Maximizing the Power of Every Penny
The Impact Lab’s early analysis is an essential step toward predicting impact performance and making more effective investment decisions. If further refined and widely adopted, investors may be able to move away from the assumption that good intentions, standards, and practices necessarily lead to positive outcomes. Instead, they can rely on rigorous and validated methods to make high-quality predictions about the potential impact of the capital they invest.
We plan to continue this analysis as the dataset grows and to share more comprehensive results. We believe it will help achieve the goals we’re all pursuing—improving people’s lives through greater access to clean energy, housing, affordable health care, education, quality jobs, and many other outcomes that impact investing generates. In the near future, those who care about building a better world will evaluate impact investment managers not by familiar but flawed yardsticks—their ability to time the market, time in the market, or financial performance alone—but by how effectively they use data to drive and predict real-world impact.
Read more stories by Dean Hand & Jacob Tate.