Interrogating the theory of change: evaluating impact investing where it matters most

Abstract

How is impact investing evaluated? How can and should it be evaluated? Over the past 5 years, there has been solid progress in developing social impact metrics at the industry-wide, firm and investment levels and the industry is becoming increasingly data-rich. Nevertheless, evaluation practices still tend to focus on counting inputs and outputs, and telling stories. Moreover, an important element is too often underdeveloped, invisible, not explicit or missing altogether. That element is theory of change, an approach and tool drawn from the field of program evaluation. This article reviews cases where theory of change has, in fact, been used to good effect at various levels of the impact investing industry. It also discusses a range of qualitative and quantitative methods which could be usefully blended with the theory of change approach, and affirms the equally important imperatives of accountability and learning across all combinations of methods. The article concludes that a more comprehensive application of theory of change to all levels of the field is required – and especially to the micro-level of individuals, households and communities, where the results of impact investments matter most. Such an approach can help build an impact investing industry that is adaptive, transparent and self-sustaining. To this end, creating an ongoing dialogue between the development evaluation field and the impact investing industry, and designing and launching new education and training initiatives, are key tasks in the years ahead.

Keywords:

• impact investing
• evaluation
• theory of change
• mixed methods
• accountability
• learning

Acknowledgements

In addition to thanking Tessa Hebb, the editor of this special journal issue, and two thoughtful anonymous reviewers, the author recognizes the important leadership in evaluation and impact investing by Nancy MacPherson, Antony Bugg-Levine, Margot Brandenburg, Eme Essien, Laura Fishler, Brinda Ganguly, Sulley Gariba, Heather Grady, Karim Harji, Penny Hawkins, Zia Khan, Justina Lai, Zenda Ofir, Kelly Teevan and Ben Thornley, and also thanks Jennifer DeBien and Sonja Vanek for their assistance.

Notes

This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The moral rights of the named author(s) have been asserted.

This article is especially concerned with micro-level results from impact investments that reduce poverty and improve the social and economic wellbeing of the poor and marginalized in other ways. Theory of change also applies to impacts related to environmental sustainability, often at a very large scale, but such impacts are generally beyond the scope of this article.

The assignment of these actors to these particular categories can, of course, be debated. For example, some analysts might place pension funds and sovereign wealth funds in the asset owners’ category. Others might include credit unions in the list of asset managers.

A case study of this kind of approach profiled by the GIIN is that of Mtanga Farms Limited in Tanzania, an agricultural business for small holders in which the Tony Elumelu Foundation, Calvert Foundation, Rockefeller Foundation and Lion's Head LLP have jointly invested, in the process also setting up a common social impact measurement framework (Bouri et al. 2011b).

It should be noted that there is an extensive set of methodologies that has been developed for evaluating the ‘sustainability’ outcomes of a range of environment-related programs (see, for instance, Bell and Morse 2012). Future research on theory of change and impact investing should tap this important pool of knowledge.

In one case, a Nicaraguan cooperative financed by Root Capital created a fund for health after two women coop members had died of cervical cancer. The new health fund paid for the screening of 140 local women, more than 90% of whom were found to have human papillomavirus. Complemented by better household incomes, the health fund is helping local women to address this health issue.