4 objectives and methods of Impact Measurement
There is an old saying — “What get’s measured, get’s managed”. So, there is this notion in the world of impact investing that we need to measure the impact of our capital so that we can manage it well. There’s also almost an underlying existential desire to know that the investment is indeed making some positive change on the society and it this is not merely based on testimonials of a few individuals. So, let’s get to know a bit more Impact & its measurement
What is Impact Investing?
Impact Investing can be defined as financial investments made by organizations with the intention of generating social & environmental impact alongside a financial return. Since the coining of the term in 2007, “Impact Investing” has captured the interest and imagination of the business world, governments, and social sector organizations alike. In 2009, the Monitor Institute estimated the size of the impact investing market to be $500B over the next decade, with some analysts believing that this is a conservative estimate. A key focus area for impact investors is really the impact that their investment creates. This is done through the process of measurement of impact.
What is Impact Measurement & why is it important?
Impact Measurement is a process or an activity carried out by organizations that evaluate, report or determine the social change generated by means of the impact investing. Measurement of impact can help organizations make better decisions, understand and communicate the value of the investment or even monitor the progress of a program.
The key drivers for measurement of Impact can vary from one organization to another. These objectives can, however, be classified into four main groups-
Estimating Impact- Impact investing organizations are interested in estimating the impact that a potential investment may create. this measurement need may arise as part of pre-investment or as a part of their due diligence process.
Planning Impact- During deal negotiation and/or shortly post-investment, impact investors use tools and methodologies to devise a plan to measure impact. For example, developing a data collection plan to monitor and evaluate impact during the life of the investment.
Monitoring Impact- Some impact measurement methodologies are used to monitor progress. This may supplement financial data to inform whether the investee’s performance is on track, and may compare target vs. actuals on specified impact metrics. This may be done on a continuous cycle throughout the life of the investment.
Evaluating Impact- At the end of an investment cycle, investors may be interested in evaluating the impact created by the entire investment. Similar to the continuous improvement cycle of plan — do — check — act, these objectives feed into one another.
A fifth objective behind impact measurement that cannot go unmentioned is the reporting impact, which uses the measurement activities as a part of the four objectives noted above to communicate impact findings with various audiences; these include beneficiaries, service providers, or funders.
So, how can we measure impact of our programs?
There are a range of different measurement methodologies that can help accomplish the objectives of impact measurement. We shall look at following broad categories-
Expected return methods — This method weighs the anticipated benefits of an investment against its costs; social return on investment (SROI), in particular, it provides a framework to calculate an investment’s present social value of impact compared to the value of inputs. For example, the Robin Hood Foundation’s benefit-cost ratio (BCR) estimates the poverty-fighting benefits of a program compared to the costs to the foundation in order to determine which grants would yield high impact. Robin Hood computes its BCR on an ongoing basis, and during the re-investment or re-granting process it may increase investment in programs with high BCRs, though the foundation does not make decisions on the basis of these calculations alone.
Theory of change methods — Such methodology outlines the intended process for achieving social impact, often using a logic model, a tool that maps the linkages between input, activities, output, outcomes, and ultimately impact. When estimating impact, Acumen uses a logic model to identify assumptions in an intervention’s theory of change that may need further review (for example, would x output really translate into y outcome?). Logic models also help assess impact risk, the factors that could jeopardize the expected social impact of an intervention. For each of their investments, the Acumen team outlines what they think the biggest impact risks are and then comes up with risk mitigation strategies to monitor and manage any potential challenges. LGT Venture Philanthropy also uses a logic model, though in their case to identify specific metrics for input, activities, output, outcomes, and impact.
Mission alignment methods — This method measures the execution of strategy against the project’s mission and end goals over time, using rubrics such as scorecards to monitor and manage key performance metrics on operational performance, organizational effectiveness, finances, and social value. Meaningful analysis often compares current key performance indicators to a historical baseline, to an original forecast, or to those of industry peers. Bridges Ventures developed its Impact Scorecard for such purposes.
Experimental and quasi-experimental methods are after-the-fact evaluations that use randomized control trials or other counterfactual approaches to determine the impact of an intervention compared to the situation if the intervention had not taken place. Where possible, Bridges Ventures draws on such data from previous studies when assessing a new potential investment’s impact risk. Various social impact bonds have also employed quasi-experimental and experimental methods to evaluate a program’s impact, which determines the financial return on investment.
*Note- Excerpts taken from “Measuring Impact” research paper from HBS