Resources created and curated to support the growth of impact investing, for those new to the field and for experienced practitioners.
Though it would be logical to think that impact measurement begins after investments are made, many fund managers incorporate impact metrics as early as their initial screening and due diligence process. They integrate financial and impact assessment throughout their engagement with portfolio companies in order to evaluate tradeoffs and synergies between financial returns and impact. Defining impact with accurate and relevant metrics helps to inform data-driven investment decisions, and to communicate the blended value of an investment both internally and externally. Integrating impact reporting from the very start of a relationship also enables investors to understand the baseline against which to evaluate outcomes and track changes over time.
From due diligence through to stakeholder reporting, Global Partnerships integrates impact reporting into their process for building a portfolio:
“Prior to investment, Global Partnerships conducts a field visit that entails rigorous analysis of a partner’s business model. During these visits we evaluate the social profile of the organization, whether they are serving people living in poverty, and whether they are innovating in one or more of our impact areas. If we identify an investment opportunity, we develop a social impact case for that investment and document the qualitative and quantitative data to support that case. We then take an active role working with the partner to define success and to understand what is measurable and what isn’t. We then engage in ongoing monitoring and evaluation to determine whether or not we are meeting our impact objectives...The findings of these activities are disseminated via progress reports and meetings with key stakeholders ranging from implementing partners to the GP board and investors.”
Establishing key impact criteria for the due diligence process can serve to both screen out undesirable practices and encourage early articulation of how that organization is expected to create positive social outcomes that align with an established theory of change. At a portfolio level, understanding the integrated financial and impact profile of each investment allows for more variety and thoughtful curation for the fund’s overall objectives.
Yet another reason to begin impact assessment at an early stage is that there is increasing data to show that social performance is positively correlated with financial performance - the idea that an investor needs to choose whether they are “impact-first” or “finance-first” is a false construct in many cases. Filtering for demonstrated social impact may actually improve financial results. Incofin IM conducted a study to analyze the correlation between financial and social performance. They found evidence against any need to trade-off financial return for social impact or vice versa. A solid understanding of an organization’s impact performance can be as important to an investment decision as financial performance, and should be integrated throughout the investment process.