Measuring social impact remains an important consideration for both investors and investees, and for the legitimacy of the field of impact investing. While there has been important progress in recent years, the theory and practice of social impact measurement continues to surface new opportunities and challenges. Taking the measurement of social impact to the next level of maturity remains an important task in building the impact investing field worldwide. In this paper, we recommend that impact investing leaders take ten steps to make this happen.
1. Clarify the purpose of measurement
The motivations and objectives for measuring social impact are not always consistent among the stakeholders involved. Stakeholders must identify the role that social impact measurement plays for them, whether that be for valuation of potential investees, for accountability reporting, as a management tool, a risk management approach, or for monetization of outcomes.
2. Test and refine a theory of change
Developing a theory of change is key for both the investor and investee. All parties stand to benefit from a coherent and logical framework that shows how their investment and advice (inputs) can result in products or services (outputs) that, in turn, lead to the realization of specific social objectives (outcomes).
3. Make measurement matter to investees
As noted above, measurement can and should go beyond the needs of the investor. Investees often report on their social outcomes specifically to meet investor require- ments. This often involves selecting a series of metrics that focus on outputs (and increasingly, outcomes) to prove they are meeting their social mission. The best investees go beyond this, by embedding the output and outcome-based measures into all aspects of their business models, so that they can use this data for better product or service design, development and implementation.
4. Enhance utility and relevance
While the number of approaches and tools continues to grow, their proliferation and adoption is not occurring in a coherent manner. Indeed, this increased activity has led to more fragmentation in the social measurement arena, and created confusion among investors and investees. Generally speaking, the focus of measurement too often tends to be on the approach/tool as an end in itself, rather than as a means to an end. In the vein of the phrase “if you have a hammer, everything looks like a nail”, both investors and investees must adopt a more pragmatic approach to selecting and using specific tools and approaches.
5. Coordinate standardized and customized approaches
The past few years have seen an upswing in efforts to develop standardized approaches to measurement in the field of impact investing. Most prominent are the efforts to develop a common lexicon and classification of outputs through the Impact Reporting and Investment Standards (IRIS) framework, as well as a system for rating the social performance of funds and companies through the Global Impact Investment Rating System (GIIRS) ratings and analytics tools. It doesn’t need to be a choice between customized or standardized approaches; investors can and should use both.
6. Manage what you measure
The focus on greater data collection has not yet led to a proportionate effort in the analysis of such data, how the data are used to inform decision-making, and how they are shared. Not surprisingly, there are often significant time lags between data collection, analysis and the resulting action to improve product or service design and delivery. These challenges reduce the effectiveness of organizations using metrics to improve internal operations.
7. Share experiences with peers
While there is evidence of progress on the development of global standards, there has been less enthusiasm among investors and investees to have honest (and often difficult) conversations about how to address the challenges of measurement, as opposed to discussion of the challenges themselves. There is a dearth of information on how organizations have adapted their internal cultures, approaches and incentives in order to measure better. As such, it is important that industry leaders build spaces to allow them to share experiences with each other, and to be honest and collaborative around how to address these challenges.
8. Broaden stakeholder engagement
As discussed earlier, existing measurement ef for ts are largely driven by investors, and investees are accountable primarily to investors for demonstrating social impact. However, this relationship is only half of the equation – both forward and backward accountability among these partners are critical. Accountability should also extend to other stakeholders including customers, staff and local communities, among others.
9. Making it happen
The field needs to demonstrate that impact measurement is a worthwhile and necessary endeavour, by showing that it is valuable and relevant. Setting and managing expectations around social impact measurement will remain an important responsibility for all stakeholders involved. Important questions to consider include: How much time and effort should go into measurement? Who pays for it? And what are the opportunity costs of doing (or not doing) so?
10. Balancing measurement priorities
Ideally, social metrics can be embedded within promising business models in a manner that allows them to demonstrate over time that they are sustainable and resilient businesses. Our view is that in the case of early-stage ventures, the demands and expectations of social impact reporting are currently too high. The hard work of validating business models and building solid management teams can (and should) take priority over measurement in the short-term. Striking the balance between robust methodologies and realistic time and resource expectations is critical.