Assessing Impact Investing: Five Doorways for Evaluators

Demand for evaluation services is growing in the impact investing industry. Yet, much of the evaluation community remains unaware of the industry and its performance assessment requirements. This paper proposes five channels, or doorways, through which professional evaluators can learn about and engage with the field of impact investing.

The imperative of evaluation

As new instruments for impact investing are tested and then, if merited, replicated and scaled-up, it is essential that the stakeholders involved – banks, investment funds, foundations, development finance institutions, governments, corporations and civil society organizations – commission evaluations that not only examine the technical design and appropriateness of the instruments used, but that also especially examine the downstream social, economic and environmental results achieved for individuals, households, communities and enterprises. Beyond evaluating impact investment in- struments and results, there is also a need to examine how the field as a whole is evolving. Such evaluations must be well-informed, professionally designed and independently conducted. They also should emphasize accountability and learning at the same time.

For professional evaluators, this can open up a world of opportunities – but also of challenges. One challenge relates to the unique culture and practices of the field of finance and investment. An array of specialized technical terms, complex regulator y environments, complicated deal structuring, and agile and aggressive marketing are only a few of the characteristics of this industry that evaluators need to understand. Moreover, there are few traditions in mainstream investment and finance that are concerned with and accomplished in achieving social and environmental objectives. This means evaluators must systematically “tool-up” in many ways in order to participate in the impact investing industry.

So, where should evaluators start? Here we briefly discuss the five “doorways” which evaluators can enter in order to learn more about impact investing and about participating in the conduct of evaluations in this industry. These doorways are: industry-wide systems, theory of change, policy influence, sector interventions and outcomes-based financing instruments’.

1. Industry-wide systems

Much of the energy and creativity in performance assessment in the impact investing industry has been animated by two industry-wide initiatives. The development and refinement of these systems will take more time. In addition, many institutions in the field maintain their own customized and decentralized measurement systems. Any evaluation work undertaken in the field of impact investing should be informed by and linked to these industry-wide systems.

2. Theory of change

Theory of change offers another doorway into impact investing for evaluators. Theory of change has been applied to assess the design and performance of impact investing at multiple levels, including: the industry as a whole; industry platforms such as networks and social stock exchanges; investment funds; companies; individual investments; investee enterprises; employees in those enterprises; and their households and communities.

3. Policy assessment

In recent years, the pace of work on developing policies that enable impact investing has picked up momentum. Measuring policy influence and effectiveness is a specialized area of evaluation.10 Assessing the performance of policy initiatives aimed at enabling a larger volume of more effective impact investments requires a thoughtful mix and utilization of evaluation frames and methods.

4. Sector-based approaches

The impact-investing strategy of interventions in entire business sectors within a country or region has seen increasing visibility. Their contributions and effectiveness should be evaluated differentially. Moreover, the social impact of these actors should be measured not only at the firm level, but also as part of the aggregate social impact of the sector as a whole – which, in successful cases, should be greater than the simple sum of its parts.

5. Outcome-based financing instruments

In North America and Europe, outcome-based approaches – such as social impact bonds (SIBs) or “pay for success” (PFS) bonds – have emerged as a focus of considerable government interest and experimentation. While outcome-based financing approaches of this kind are still at an early stage of design and implementation, the need for their careful and professional evaluation is already clear. In particular, “upstream” and “downstream” components, sustainability of outcomes and counterfactual evidence will all be important in the evaluation of outcome-based financing approaches.