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23 Oct SOCAP Recap: Why Impact Investing Is Still Hunting for the Holy Grail of Measurement
Impact investing has made significant strides in recent years in harmonizing measures of impact and building community standards. However, the panelists in SOCAP’s session “Building Trust in the Impact Label” suggested that the industry still has a hunt ahead to achieve the elusive goal of “measuring” impact. The panel included Bart Houlahan (Co-Founder of B Lab), Elizabeth Boggs Davidsen (Director, SDG Impact at UNDP), Andrew Lee (Managing Director, Head of Sustainable and Impact Investing at UBS), and Ommeed Sathe (Vice President, Impact Investments at Prudential Financial), and moderated by Christina Leijonhufvud (Managing Partner at Tideline).
Interest in impact investing has reached unprecedented levels. Bart noted that it took nearly five years to get 25,000 companies to deploy B Lab’s tools for improving social and environmental performance standards. During the first nine months of 2020, this number rose to 37,000. He ascribed the interest in the B Corp movement to mounting threats to traditional capitalism, including climate change and increasing inequality. Andrew echoed the importance of the scale of capital flowing into impact investing as a signal that broader industry change is required.
Investors now generally understand the importance of investing for impact. The question is, how can they be sure they’re achieving that goal?
Common systems of measuring impact have generally focused on either practice standards or performance standards. Practice standards take an ex-ante approach that focuses on building an organization’s internal systems to achieve impact. Led by Elizabeth, the UN SDG Impact Initiative uses this approach, as it creates actionable guidance for firms. The Initiative employs the common language of strategy, management, transparency, and governance to design standards that organizations can use to map their internal management systems and identify gaps, assess the transparency of their impact marketing claims, and design future initiatives, among other goals to build credibility in their approach to SDG impact.
On the other hand, performance standards take an ex-post approach by measuring outputs of firm investments. A number of common metrics have become available in recent years to try and standardize the measurement of performance outputs across impact investors. Ommeed noted the value Prudential placed on GIIRS, its measurement system of choice, which provides an instrument to consider investments across a range of industries, geographies, and scales. Nevertheless, he forwarded that the idea of “universal” metrics is no panacea. First, he noted, such metrics come with a trade-off: the more universally applicable a metric is, the less likely that metric is to have sufficient rigor and depth to capture impact. Second, universal human values don’t exist, making impact measurements considerably more challenging to standardize than financial performance. The panelists broadly agreed that harmonization of metrics is necessary but insufficient for achieving impact.
Even if the industry has made progress on standardizing internal best practices and measuring the output of investments, the panel highlighted the continued lack of a rigorous approach for translating the measure of outputs into a measurement of outcomes and ultimate impact. After all, Elizabeth noted, a lot of activity tagged as “enabling SDGs” hasn’t necessarily led to capital achieving those goals. Because outputs are a function of scale and ability to grow the business model, outputs by themselves are comparatively easy to achieve. As Ommeed stated, “the Holy Grail we don’t have is a measure of context.” How difficult would it have been to achieve those same outputs without assistance? How much positive impact do those outputs have on communities? An example Ommeed highlighted was serving subprime borrowers, which, when done ethically and transparently, has a positive impact, but the outcomes depend on far more than just output metrics, like the number of loans made or homes secured.
Measuring the quality and sustainability of impact, which is considerably harder to measure but matters more for outcomes, deserves more attention. Until impact investing begins to move backward from clear problems to designing and measuring solutions to those problems, the panelists agreed it will continue to be difficult to assess the true level of impact that the industry is having.