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& Insights

Resources created and curated to support the growth of impact investing, for those new to the field and for experienced practitioners.

Theory of Change as a Basis for Reporting Outcomes

Across the field of social enterprise and impact investing, there is a call for reporting of outcomes rather than outputs. Making this shift to understand, for instance, the ways that an investment has improved livelihoods or environmental sustainability, poses a more complex challenge than simply measuring the number of houses built, clients reached, or lanterns sold. Effectively measuring outcomes is very difficult and requires a deep and nuanced understanding of the ecosystem that is being affected. Significant human and financial capital is needed to achieve this nuanced understanding, but these investments are extremely important in framing the impact of an intervention. IA 50 fund managers have found that synthesizing the range of factors at play in their investments into a theory of change, which becomes the touchstone to guide their investment decisions, is key to their ability to connect action to outcomes and report on that impact.

For example, Root Capital seeks to increase access to capital and markets for the “missing middle” of agricultural businesses that serve small-scale farmers in Africa and Latin America. These businesses are too big for microfinance but unable to access commercial credit, and create impact through a variety of interventions:

“We have a portfolio of clients that operate with various business models in diverse value chains and geographic and environmental contexts, and with heterogeneous types of impact on small-scale producers. Our clients’ impacts on farmers range from price premiums paid to farmers for their crops; to agronomic training to improve yields, reduce agrochemical use, or enhance soil quality; to small loans to farmers in the off-season to smooth household income and support on-farm investments; to social services such as health and educational programs.” – Root Capital

The heterogeneous impacts of the agricultural businesses to which Root Capital lends makes it especially important for Root Capital to create a coherent framework in the form of a theory of change for their interventions, to organize both the investment process and their impact measurement. Their theory of change is that by providing capital and financial management training to agricultural businesses, Root Capital will enable those businesses to purchase more volume of product from small-scale farmers at a higher price, thereby reducing poverty and improving livelihoods.

For each of its 200+ clients, Root Capital tracks outputs, or in some cases, practices, at each point in the theory of change, to provide a directional indication of impact. With a subset of clients, Root Capital also engages in more in-depth evaluations, surveying dozens or hundreds of farmers to understand whether higher crop prices have translated into outcomes such as food security, schooling, and re-investment on the farm. By so doing, Root Capital both spot-checks the simpler output measures that it uses portfolio-wide, and refines and improves its theory of change based on new learning from impact studies.

Measuring and reporting on outcomes is often a significant shift from reporting outputs and requires training, creativity, and persistence. For Habitat for Humanity, their scale and established metrics have required a significant, and commendable, effort to transition their far-reaching network to an outcome mindset:

“In order to change this mindset, we at HFHI headquarters have needed to change the types of data that we ask for. Increasingly, we are asking our local affiliates to gather and submit data that speaks to the outcomes that occur over time with the families and communities they serve. This process does require a different deployment of financial and human resources, and in an organization as large and dispersed as Habitat, it is taking time for us to shift both our thinking and the way in which our scarce resources are allocated.”

Using the Success Measures methodology, managed by NeighborWorks America, Habitat for Humanity tracks and reports on indicators such as monthly housing costs, energy efficiency, social cohesion (as capital), sense of community, perceptions of safety and security, civic engagement, crime rates and housing values – metrics which are directly connected to the outcomes neighborhoods have identified and are trying to achieve.

Habitat for Humanity’s openness and persistence in working through the transition from evaluating outputs to outcomes sets an example for organizations of all sizes, and has the potential to deliver powerful data to policy makers, academic institutions, and funders as to the extent to which housing solutions can deliver qualitative benefits for families and communities.

The future of impact reporting, and consequently the integrity of impact investing, depends on fund managers thinking early and carefully about their theory of change and investing in the infrastructure to evaluate outcomes of their portfolio. ImpactAssets 50 fund managers are leaders in both thought and practice around impact reporting and we will continue to feature their insights on this topic.

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Impact investments are investments made into organizations and funds that generate measurable social and environmental impact as well as financial returns.