How do Investors Move From IMM Theory to IMM Practice?

By providing capital to companies, investors support products and practices that impact on people and planet. The aim of a growing number of impact investors is to be more intentional in maximising positive – and minimising negative – outcomes associated with their investments through well defined impact measurement and management practices.

At the heart of “impact investing” is the desire to cause change. This is different to the broader fields of “sustainable investing” (supporting companies with sound ‘sustainability’ related practices) and “responsible investing” (mitigating financial risks through ESG integration). Impact, therefore, is the difference actually made.

Alongside the intention to contribute to improved outcomes, a distinguishing feature of an impact investment is measurement – the desire to assess and report on impact.

Measuring Impact to Manage Impact

As the field of impact measurement has become more established, its focus has shifted. Measurement is no longer just a question of selecting metrics, collecting data and reporting on impact performance. The challenge is how to embed impact considerations into decision-making throughout the investment cycle (see the Rockefeller Philanthropy Advisor’s Impact Investing Handbook).

Such ‘impact management’ is a means to an end – the ultimate goal being to improve impact performance moving forward, not just describe what happens to appear in the rear view mirror.

If all this sounds good on paper, the challenge is how to translate this theory into practice. The Good Economy‘s experience working across the impact ‘value chain’ – from institutional investors to asset managers to enterprises – has shown one size does not fit all.

Investors have diverse impact goals, and strategies employed to deliver impact will be different across asset classes. And just as there is no single impact metric to compare and contrast impact performance, there is no single blueprint for a ‘best practice’ approach to impact management.

Some basic building blocks need to be in place – an ‘impact architecture’ like the one set out in the Operating Principles for Impact Management. But the core task is to adopt a ‘best fit’ system, deciding on contextual issues, such as desired levels of rigour; the extent to which outcomes are directly measured or modelled; and how to embed impact considerations into investment processes.

As such, impact management is as much a project of culture and strategy – as it is a technical task involving tools, metrics and data. We believe a good impact measurement and management (IMM) system must be underpinned by three “i’s”: intentionality, integration and integrity.

Impact management is a means to an end – the ultimate goal being to improve impact performance moving forward, not just describe what happens to appear in the rear-view mirror

Three Principles of IMM

1. Intentionality

First, investors need to articulate their impact intentions from an investment and measurement perspective. The Impact Performance Reporting Norms (Reporting Norms) led by Impact Frontiers is building consensus on how to classify impact performance and goals through its impact classes, as well as a common language to describe how enterprises can shape the depth, duration and scale of outcomes. This includes how investors can contribute to impact creation based on the volume, type and timing of both financial and non-financial support.

The Reporting Norms help to cut through the jargon to real-world implications. Are investors contributing to less of a bad thing (avoiding harm), more of a good thing (benefiting stakeholders) or improving outcomes where they are most needed (contributing to solutions)?

But investors also need to be clear about the why of measurement. A common refrain is measurement helps both “prove” and “improve” impact. Yet in practice, investors will not place equal weight on these two goals – and the relative emphasis will influence the choice of measurement methods. Venture funds, for example, may be looking for more agile measurement processes that help early-stage investees gather data to iterate and improve their products and services. On the other hand, investments where the pathway to impact is more established, or already at scale – such as in affordable housing – may be looking for more robust evidence to ‘prove’ outcome achievement.

2. Integration

Second, investors need to be able to integrate impact considerations at each stage of the investment process. The aim is to elevate the analysis of impact performance to the same level as the analysis of financial performance so impact creation goes hand in hand with financial structuring. Widely used frameworks to articulate impact goals, such as the UN Sustainable Development Goals, need to be fully integrated with outcomes, targets and impact metrics – not just used as a badge or a labeling exercise that sits in parallel to, rather than driving, key decisions.

At The Good Economy we help investors define ‘Impact Objectives’ to set expectations for portfolio impact performance. Typically these objectives fit between outputs and outcomes on a Theory of Change, and provide a yardstick against which progress can be measured and investments can be managed. Here, the aim is to focus attention and action on how investors can optimise the achievement of tangible goals within their sphere of influence, which makes objectives easier to align with decision-making processes.

3. Integrity

Third, investors can maintain impact integrity by holding themselves to account about whether impact is meeting intentions: Are impact funds doing what they say on the tin? This is where the growing role of impact assurance and verification can bring improved levels of transparency into the industry. Impact data can be imprecise and imperfect due to the complex nature of social change, so impact reporting need to clearly state the evidence-base used to make conclusions about impact performance – including flagging any issues with data quality or proxy measures used.

Maintaining high standards of impact management practice, such as those outlined in the new Reporting Norms, allows all stakeholders to be able to interpret an investor’s impact performance – both in terms of processes (systems in place) and results achieved (systems in use).

Connecting Positive Impact to Social Value Creation

Ultimately, impact management is about helping organisations shift from passively measuring their impacts (usually after key decisions have been made) to actively managing towards achieving more positive impacts (where evidence and impact data is integral to designing and executing investment strategies).

A good system – built on impact intentionality, integration and integrity – can help investors make decisions and take actions that enhance – rather than erode – social and environmental value, and support enterprises to deliver improved outcomes for people and planet.

Further Reading

• • The concept of “impact” is unpacked in Alnoor Ebrahim’s recent book Measuring Social Change – in our opinion a must-read for those involved in impact measurement and management

• • See the Rockefeller Philanthropy Advisor’s Impact Investing Handbook

• • For a useful overview of impact as an investment style, see The Investor’s Guide to Impact by The Center for Sustainable Finance and Private Wealth at the University of Zurich

To find out more about The Good Economy’s Impact Management and Measurement services, please get in touch.