I applaud Paul Brest and Kelly Born’s thoughtful approach to measuring the impact of impact investments. In their article, they highlight three ways that an investment can make an impact: enterprise impact—impact created from a company’s products, services, and operations; investment impact—impact created from the investment itself through deal terms and formats; and nonmonetary impact—impact created through the advice, perspective, and networks of the investor.
Much has been written on enterprise impact, but very few have attempted to define either the impact created by the investment itself or the impact that an investor can have on an enterprise through nonmonetary advice or activities. Kudos to the authors for identifying this deficit, broadening the dialogue, and providing a clear framework for what it means to measure the full impact potential of an investment.
The authors define the practice of impact investing as “actively placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits such as creating good jobs, with expected financial returns ranging from the highly concessionary to above market.” The authors further assert, “Whatever an investor’s intention, the fundamental question is whether an investment actually has social impact.” For too long the conversation about impact investing has focused on intent rather than impact. I would push this position further and say that you can’t call something an impact investment unless you are measuring its impact.
Brest and Born encourage impact investors to measure not only the outputs generated by their investments, but also the outcomes. They say, “a particular investment has impact only if it increases the quantity or quality of the enterprise’s social outcomes beyond what would otherwise have occurred.”
Outcomes measurement is clearly the gold standard for the space and an aspiration that investors should aim for. In my experience, outcomes measurement in many cases unfortunately is not feasible today for two main reasons. For-profit entrepreneurs and investors who are trying to create an attractive financial return for their investors may be unwilling or unable to invest the time and human resources it takes to conduct a true outcome study, which typically includes a control group, covers a multi-year period, and is custom designed for one particular venture. And, as noted in the article, the typical impact investment is smaller than similar private equity or venture capital investments. The cost of an outcomes-based study may be prohibitive for a small entity.
For those who do want to pursue outcomes-based measurement, investors should wherever possible leverage foundation and academic support and share their results broadly so others can learn from the process. For investors who are not quite ready for an outcomes-based measurement strategy, I encourage you not to let the perfect become the enemy of the good in impact measurement. While aiming for true outcomes measurement, all investors should start where they can in measuring impact.
The authors note that the current “absence of data and analysis makes it difficult for impact investors to assess the social impact of their investments.” Platforms such as IRIS and GIIRS/B Analytics are standardizing the process of data collection and analysis of social impact data. If investors start to measure impact as they can today, using industry-accepted measurements, in time the sophistication of the field of impact measurement will improve and the amount of data available for benchmarking will multiply, enabling investors to improve their own impact measurement practices.