Every investor out there has preferred metrics for evaluating financial performance and returns, but we are all struggling to build metrics that offer comparability and predictability with respect to social and environmental performance and returns. In our eagerness to demonstrate that pursuing multiple bottom-lines is worthwhile, we’ve sometimes strayed into the realm of irrational exuberance. We want to measure everything! And our measurements should be statistically meaningful, provide clear market and policy signals and have no financial impact on our bottom line. Let’s get real people.
I used the term “build” metrics for a reason. A prerequisite for the availability of robust longitudinal data is the passage of time. Hence the word “longitudinal”. Improvements in socio-economic well-being don’t happen overnight (unless you happen to luck into a reality TV show gig). What you CAN learn/know in the early stages of a venture with social impact (VSI) is different than what you can know and learn five or ten years down the road. Unless you plan on sitting it out and waiting for others to collect data over time before making any impact investments, you’re going to need to start simple, and have a plan for gaining deeper insight as the VSI grows.
Start with a practical and respectful approach to impact measurement. You don’t want to spend a boatload of money to find out that you’ve created 50 jobs that increased household income and nutrition for 250 people. Furthermore, the people who are the objects of your measurements are people: not objects of charity, not things. They have the same right to privacy that you and I do – and before you ask them to give that right up so that you can understand the impact of your investment, think about what you really need to know versus what you’d like to know. Given your core values, what impact is most important for you and how can you measure progress toward that impact goal?
Three tactics to keep in mind:
- Pick impacts that can be measured. If you can’t get raw data, or the cost of getting data is going to be significant, you may be over-thinking the problem. What information can you gather at little or no cost that will answer your questions about impact and help your portfolio company grow a better business?
- Get baseline data: If you don’t know how much protein was in a child’s diet before your nutritional supplement hit the market, you’re going to have a very hard time figuring out how much better off that child is after consuming your product. If you’re going to invest money up front in impact measurement, start by getting good baseline data around the specific impacts you plan on tracking.
- Be ethical: Your VSI is, to some extent, a social change experiment. The objective may be to improve the socio-economic well-being of the target market, but getting there usually requires that target market to adopt new behaviors, practices and values. The people who make up the target market struggle to survive in conditions far more onerous than we may be aware. Think twice before you violate their privacy, frame questions that threaten their dignity or ask questions that are illegal in your home market. You may want to know how many indigenous women are working in the company, or how their average salary compares to non-indigenous workers in similar jobs – but how is that information going to be used once it’s acquired? Make sure that the means you use reflect the same values as the impact you hope to achieve.
Now here’s a big secret that can help you get more value from an impact investment. Impact isn’t just the effect your VSI has on the target market. There are three different levels of impact that you should consider when looking at a possible investment:
- Impact on the Target Market: Of course you need to know that the product or service offered by a potential VSI portfolio company is delivering promised returns, within the projected revenue and expense profile. This is your level one impact.
- Impact of Internal Operations: Level two looks inside the VSI to explore whether customer-focused values are reflected in employee and organizational practices. Does the company offer benefits to its workers? Are there training and professional development opportunities? Is any element of compensation tied to performance (individual and/or firm level)? Does the company recycle? When renewable energy sources are available, are these being used? Ceteris paribus, a company that treats its employees well and cares about the environment is more likely to deliver long-term performance than one that uses human and planetary resources wantonly.
- Impact on the Eco-System: Level three looks for higher order impact. Are collaborative stakeholder relationships valued? Does the company participate in industry associations? Does management regularly and proactively dialogue with regulators and policy makers? Are suppliers screened? Is the company adding value to its market as a long-term sustainability practice, or is it just minding its own business and hoping for the best?
Impact measurement isn’t a simple task. Alongside the challenge of what we measure, when we measure it and who bears the cost, we need to dive more deeply into the complementary task of integrated reporting. We have IRIS impact indicators and GIIRS impact ratings, Sustainability indicators and ratings (Morgan Stanley, EIRIS and others), ESG indicators (Bloomberg and others), the Global Reporting Initiative, the One Report movement and all sorts of worthy efforts to develop standards and practices around an evolving multiple bottom-line ethos. For now, we each need to pick a set of indicators, use them, report our data and pay attention for convergence opportunities.
Back when dinosaurs walked the planet, industry conferences were few and annual events were often commemorated with a poster. At my very first international development conference, I received a poster that I have to this day – Miró-like modern art splashed in black, red, yellow and blue on white, the name and date of the conference, and this statement, scrawled in cursive across the bottom of the poster:
“We are all going to become one community, or we are going to die”
Bold, brutal and dramatic, but we only have this one planet. Let’s make sure the impact we have on it is something we can live with by making ALL investments multiple bottom-line impact investments.
Lauren Burnhill aka @LaurenOPV