Measuring impact in impact investing: an analysis of the predominant strength that is also its greatest weakness

Abstract

Compared to other forms of socially responsible investment, a prominent feature of impact investing is measurement of the social and environmental return (SER) that it aims to generate. Much effort has been undertaken to develop such measurements, but progress is patchy. This paper contains an overview of first principles, making explicit the subjective interpretation of SER by investors and outlining tensions around breadth of coverage; rigour in attribution of impact versus practicality and flexibility; and the very concept of ‘a return’. Interviews with impact investors covering environmental issues, social enterprises, microfinance firms, and Social Impact Bond contracts highlight three distinctive sets of practice – ‘System building’, ‘Case by case assessment', and ‘Intermediate outcome perspectives’ – as to whose gains should be counted, how to structure assessment, and what forms of assessment are viewed as legitimate. Of these, ‘System building’ approaches appear to be advancing most, but the challenges that it faces will be hard to overcome.

Keywords:

• impact investment
• impact measurement
• social returns
• social finance

Acknowledgements

The authors thank Uli Grabenwarter, Katie Hill, and Karin Malmberg for comments, and interviewees from Alterfin, Ashoka, Bank of America Merrill Lynch, Big Issue Invest, Big Society Capital, Bridges Ventures, DOB Foundation, Impetus – Private Equity Foundation, Nesta, Phi Trust Partenaires, Quadia, responsAbility, Social Finance, Social Venture Fund, Triodos Investment Management, and Triple Jump.

Disclaimer

The research of this paper was undertaken within the framework of an EIBURS project on measuring impact over the period 2013–2014. The content of this study, however, does not reflect the official opinion of either the European Union, EIB Institute, or European Investment Bank, and responsibility for the paper lies entirely with the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. www.thesroinetwork.org/home/social-value-international-uk, Social value networks join up to create ‘international force for change’, 11 September 2014.

2. Jed Emerson, in his blog of 10 February 2015, The Metrics Myth (www.blendedvalue.org/the-metrics-myth/), carries a lyrical warning on gaps between possible and ideal:

 … the reality is for far too many of us involved in impact investing actually attaining sustained metrics practice is, in truth, frequently seen as the dreamlike, mythical Loch Ness Monster, with flashing skin and scales so close you can almost touch them as it twists and turns and slowly descends out of sight, into the muddy murk of our investing waters.

3. Hence as Evans (2013) highlights, principal-agent theory is potentially applicable to analyses of impact investing practice, outlining the interplay between impact creator effort, observable outcomes, and rewards.

4. As occurs for the UK's SIB unit cost database – http://neweconomymanchester.com/stories/832-unit_cost_database

Additional information

Funding

The authors gratefully acknowledge EIBURS financial support from the European Investment Bank Institute.