How to Measure Impact Investing
Impact investors make their investment choices, because they want to maximize their possible social impact as well as their financial returns. Being able to measure both is important not only so that investors know about their possible returns, but also for the purposes of communicating value and leading to better decision-making in investors and investees alike. With traditional investments, concrete numbers can be found about financial returns: however, with impact investments that also have a social component, this is much more of a challenge.
Looking at how to measure social impact can get complicated just because of the nature of impact, but there are some tools and methods that can be used to examine a business’ social and environmental responsibility. Here are some qualities to consider.
Things to Consider There are more things to measure in impact investments than simply how much money was made or how many units of a product were sold, so metrics can be confusing. How impact is measured depends on the nature of the organization: everything from their objective to their maturity to the resources that are available to them, could influence how their impact is measured and even the methodologies that are used. Addressing the limitations of these metrics, either by adapting the existing tools used by nonprofits or developing new methods, can help more investors and financial managers access this part of the investment universe.
Depending on an organization’s circumstances and the metrics being used, investment impact can be determined in a few different ways:
Weighing the expected costs and benefits;
Determining the link between costs, benefits, activities, and risks;
Using the organization’s mission as a baseline against which their activities can be judged;
Trying different strategies and analyzing the impact afterward while considering what would have happened without the application of the strategy
What’s also important to remember in impact investing is that it’s not always about what can be measured. Financial and social returns are of course important, but impact often comes back to the investor and how they feel about the investment and their impact.
When investing with the goal of achieving social and financial returns, it’s important to know exactly what you’re looking for and what you’re comfortable with. The following are some of the tools and methods that can help impact investing move forward and give investors something to consider when measuring their impact possibilities.
B Impact Assessment A for-profit business can get B Corp certified. This is a demonstration that the company not only meets social and environmental performance standards, but does so in a way that enables accountability and transparency. These certifications help identify which businesses are best serving shareholders and society alike.
Global Impact Investing Rating System Focusing on for-profit organizations and drawing a lot of its criteria from B Impact Assessment, GIIRS looks at the social and environmental impact of companies and funds without focusing on financial returns. Investors who value their portfolio’s impact on workers, customers, communities, and the environment can find that conscientiousness in this system.
Impact Reporting & Investment Standards IRIS was developed by the Global Impact Investing Network and is a catalog of performance metrics that are generally accepted. It not only describes organizational performance on social, environmental, and financial fronts, but also provides standard language to talk about results. This allows for easier comparisons of investments and aggregation across portfolios. It incorporates third-party measurement standards where possible.
Demonstrating Value This method is geared toward social ventures and improving their value to their communities. It focuses on their operations, planning, and communication, especially how to use resources and process information. This enables them to think in the long term, both for themselves and their communities.
Global Reporting Initiative GRI’s Sustainability Reporting Framework represents some of the global best practices for reporting on the areas that impact investors care about. It’s a widely-used set of reporting and disclosure standards that enables communication and understanding of the impact that businesses have on social, environmental, and economic areas. Sustainability and transparency are at the heart of GRI and, in the future, in business itself.
Social Return on Investment This is a method based on accounting principles, but focused on social returns. It lays out a set of guidelines for assigning monetary value to an organization’s social, economic, or environmental impact. By putting even an estimated number on these outcomes, it provides a bit more of a concrete metric to all outcomes, regardless of whether they were intended or not.
Sustainable Livelihoods This approach focuses on poverty reduction—originally in low-income countries, but it has been adapted to other settings as well. It aims to approach developing solutions from a variety of angles, including from a stakeholder’s perspective. By looking at what assets are needed to achieve its goals, this method hopes to shed light on what is required for positive change.
Measuring Your Impact with Prophecy Impact Investments All changes start with small steps: impact investing is all about taking that step toward the changes your contribution could lead to. Prophecy Impact Investments wants to help people like you who are determined to make changes in the world. There are assets that fit your desired social and financial outcomes, and we can match you with the ones that work best for you and your future. Learn more about our process and get started on those changes.