Impact investing is all the rage right now, with socially sensitive investors able to put their dollars behind a diversity of causes ranging from gender equality in boardrooms to renewable energy in sub-Saharan Africa.
But measuring the impact of those socially aware dollars has proven a far trickier task than finding a worthy cause.
Increasingly, public and private entities in the impact investing space have put blood, sweat and data into measuring the impact of, well, impact investing – and moreover, demonstrating that that impact measurement has business value.
Impact investing, of course, is not exactly a new concept. The idea itself has been around for nearly 100 years and has taken on different shapes and strategies over time. Where once investors might have sought to avoid investing in companies that didn’t meet their particular moral sniff check, today’s investors can funnel their dollars specifically toward those causes they most wish to support.
M-KOPA, which provides solar products to low-income families in Africa, surveyed its customers to better assess where it could have the most impact.
“What’s different now is that it’s becoming much more of a mainstream idea and something that’s just not in the purview of a mission oriented organization, but something that all investors can partake in and pursue and not necessarily have to sacrifice financial returns,” said Jeff Finkelman, a research associate with Athena Capital Advisors in Lincoln.
And with trillions of dollars in wealth set to transfer to socially conscious Gen X and Millennial investors in the coming years, interest in the space is only set to ramp up.
Athena has been in the impact investing space for about 10 years, Finkelman said. The company recently introduced a model which seeks to measure the social returns of impact investing via a new approach to modern portfolio theory. Essentially, that means offsetting the risks sometimes associated with impact investing in other areas of a client’s portfolio.
“If a client is particularly interested in finding impact investment opportunities, a lot of that is going to be found in the venture capital or private equity space,” which are often inherently riskier than other investment strategies, he said. “Rather than just doing those on a one-off opportunity, the portfolio works to identify an asset allocation that allows them to pursue those objectives … while thinking about how to offset the risk in other parts of the portfolio.”
While Athena has focused on rolling out a model by which investors might measure their impact, the Global Impact Investing Network (GIIN) wants participants in the space to know that impact measurement is worth it in the first place. The organization recently produced a report seeking to demonstrate the business value of impact measurement.
“It demonstrates that there’s added motivation for investing in impact measurement,” Research Director Abhilash Mudaliar said of the report. “It can have business value. This can attract capital from new sources of investors to the impact investing space and it demonstrates a management tool for achieving your social and environmental goals.”
The organization outlines five basic ways in which impact measurement can boost business value: by increasing revenue, informing operational efficiency, improving investment decisions, building reputation and mitigating risk.
Mudaliar gives the example, which is also cited in the paper, of M-KOPA, a company that provided solar lighting to low-income families in East Africa who didn’t otherwise have access to energy. The Bill and Melinda Gates Foundation, a GIIN member, provided a loan to M-KOPA and asked the organization to survey its customers. The solar provider eventually found that while it was reaching a fairly substantial segment of its target population, it wasn’t reaching the very poorest of the poor. As a result, M-KOPA designed a cheaper version of their flagship product and wound up reaching an even broader demographic.
“They managed to increase their revenues, but also increase their impact,” Mudaliar said.
Easier Said Than Done
Measuring the impact of socially conscious investing is easier said than done, however. For one thing, it can be difficult to identify and appropriately assess the right data to gauge social return, Finkelman said. Beyond that, even those investors committed to the space might run into some challenges.
“Traditionally, we’ve heard of two broad challenges,” Mudaliar said. “The first is that there is a perception that impact measurement can be costly or resource intensive. And I think what this research shows is that good impact measurement need not necessarily be high cost. In fact, impact management can be quite efficient as well.
The second challenge is the lack of standardization in the impact investing space. GIIN attempts to solve this problem with its IRIS metrics, which measure the social, environmental and financial performance of an investment. In the public sector, the Sustainability Accounting Standards Board attempts to do the same.
“I think the one things that’s true about impact investing is that it’s important to just get started,” Finkelman said. “We’ve had clients start with a screening approach and once they see that implemented, it leads to the next step. That’s how you learn and that’s how you figure out your comfort zone.”
