ESG Investing

Using Impact Investing Metrics to Assess Investment Success


Measuring “impact” is one of the most difficult challenges faced by individuals and organizations interested in generating social or environmental returns while earning a financial profit.

Impact investments are usually plotted on a scale from “impact first” to “financial first.” Whereas the primary goal for “impact first” investors is to achieve positive social and environmental outcomes, “financial first” investors aim to earn market rate or premium returns on their invested capital. Measuring financial returns is relatively straightforward, especially compared to the opaque world of environmental and social returns.

Believing that the lack of standard impact investing metrics was hindering investments in the sector, in 2009 the Rockefeller Foundation helped develop the Impact Reporting and Investment Standards (IRIS), which consists of more than 400 standardized performance metrics for impact investing.

Impact Investment Metrics to Measure

IRIS covers eight sectors—agriculture, education, energy, environment, water, financial services, health, housing and community facilities—and measures such things as the amount of clean water produced by a project during a specific reporting period or the number of health visits accomplished by an organization. These numbers help investors compare the outputs of similar businesses.

In addition, IRIS has some “cross-sector metrics” to inform comparisons of businesses in different social sectors, which can be difficult to compare. This is useful if a single issue dominates an investor’s impact goals. For example, they allow an investor interested in sustainability to generate a sector-balanced portfolio.

One quick way to assess an investment’s impact is to look for B certification, which accomplishes for impact investing what Fair Trade certification does for consumer goods—attesting that it has been produced with respect for the environment and for the working conditions of employees. B certification is awarded by B Lab, a nonprofit based in Berwyn, Pennsylvania, that uses IRIS criteria to measure companies’ social or environmental performance. The certification primarily applies to private companies.

Metrics Serve Four Diverse Purposes

However, metrics are only useful when they efficiently and diligently accomplish investing goals. For investors motivated by social or environmental goals, impact investing metrics serve four primary objectives, according to a study by Harvard Business School. These objectives are:

  • Estimating impact: judging impact before a project begins, a form of due diligence
  • Planning impact: defining what metrics apply to the company
  • Measuring impact: collecting data to ensure that the mission is correctly aligned
  • Evaluating impact: understanding how the investment impacted society after the investment cycle is completed

The Harvard study states that one way to do this is to estimate the social return by different measures, such as Social Return on Investment (SROI), which uses cost-benefit analysis to optimize social returns; Benefit Cost Ratio (BCR), which estimates the total value of philanthropic good done per dollar spent; and Economic Rate of Return (ERR), which is the interest rate, discounted over the life of a project, at which the costs and benefits are equal.

Some investors use what’s known as a logic model to chart the links between a project’s inputs (such as startup capital), the project’s activities, the output, and the ultimate impact. Another method is to use randomized control trials, like those that test new pharmaceuticals, to assess the success of an impact strategy.

As technology makes the capture and application of data more and more feasible, investors can analyze their portfolios with increasing complexity. More than ever, investors are empowered to look at portfolio performance in holistic ways that take into account financial, social, and environmental benchmarks.

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