By Lauren Burnhill aka @LaurenOPV
Transparency has become a holy grail in the world of impact and socially responsible investment. On the plus side, bringing both success and failure into the light of day and understanding the lessons of each experience can add significant value at the global level. In our high-tech society, there is no reason that well-meaning social entrepreneurs in Africa should invest scarce resources in business models or service delivery mechanisms that have failed abysmally in other regions of the world. Yet, if they are unaware of previous failures (and the reasons for those failures), reinventing the wheel may seem like the best available option. On the minus side, transparency is not a proxy for trust. Irrational exuberance to push non-profits and corporates alike to share every conceivable bit of data that relates to our personal, professional and/or philanthropic interests increases the cost of sustainability without providing much additional value.
In a fragmented, global environment, seeking proxies for trust is perhaps natural. Fast pace, tech-driven innovation places little value on face-to-face interaction, deep and thoughtful due diligence and the need to develop human capital as well as financial resources. Scorecards and benchmarking become decision drivers rather than tools for making well-informed decisions. At the same time, the short-term thinking that plagues exchange markets (debt and equity) acts as a deterrent to real transparency. Here’s an illustration of the problem.
I met recently with a colleague, George Petty, who has done a fantastic job building a multi-country SME lending operation focused on small business and social impact (Venture South). I had received his latest newsletter shortly before our meeting and was impressed at the progress made in terms of lending volumes, types of clients reached and impact achieved. What I didn’t see anywhere was information on(portfolio at risk (“PAR”) ratios or past due loans. I wondered if there was a problem with the lending model that made this omission a necessity or if there were something else going on.
When we sat down to talk, I asked about the PAR rates of his different operations. In two of three countries, the numbers were very good. In the third country, which followed a different business model to reach small and social enterprises, the results were less encouraging. My colleague was well aware of the issues that had arisen in this third country and was taking appropriate steps to adjust his operations, including potentially exiting the country in question or trying a different business model. Was the disclosure issue that lessons learned in one country would be misinterpreted as a black mark against the successful models in other countries or was it something different? Wouldn’t the great results of those successful models encourage investment in the local funding vehicles, I wondered?
“When we’re talking to investors, I share everything early on during due diligence. You have to do that to build trust and avoid wasting everyone’s time. That includes PAR data, which they need to look at, but which I don’t want to be the subject of idle public speculation. I gave a lot of thought to including PAR information in the newsletter” George told me “but here’s the key problem: a drought, flood, mudslide or political campaign can create a short-term spike in past-due loans. Impact investors see this higher number and the negative buzz begins, or they just move on to looking at a different fund. Transparency is a double-edged sword. The real question” he continued ” is where do we draw the line between market information and transparency?” I think he’s right! How do we nourish the markets, help grow the nascent impact investment industry and also build stable, healthy firms?
Transparency is indeed a double or triple edged sword! It costs money to gather impact data, especially when there is no baseline against which to compare outcomes. Analyzing data is part of the job, put compiling it in pretty reports for others to peruse adds time and cost to the exercise. We may want to know everything about our impact and outcomes, but maybe we only need a handful or core goals and indicators to help guide us forward. Where and how do we draw the line?
Sharing information is important because it allows a wider audience to understand challenges, lessons learned and opportunities — but where sharing information also triggers negative short-term thinking, it creates “noise” that can divert time and effort away from core operating challenges. When transparency efforts have adverse effects on funds due to short-term market type thinking, investment managers have every incentive to game the system; releasing data fragments that support the fund or firm’s strategic efforts but fail to tell the whole story. Ever noticed how many mutual funds report top quartile results? Are they all top quartile performers consistently or are they choosing a time period that highlights their best returns only? Are we creating conditions for transparency or just pushing for numbers?
We know that changing investment mindsets requires hard data, preferably longitudinal hard data. Myriad industry efforts are underway to refine impact measurement and define standards for measurement and reporting. We must nevertheless remain cognizant of the fact that transparency involves trade-offs, especially in the field of investment.
How much do you need to know and at what cost? Furthermore, bearing in mind that the people we hope to serve are human beings too, how much of their privacy is it fair to invade in the interest of measuring impact? Can we gather and share data in ways that are respectful of human dignity, cost, materiality and sustainability? Can we find methods, through industry associations or otherwise, to share our data in a way that contributes to learning without potentially harming portfolio companies, their clients or our own fundraising prospects? I sure hope so!
My thanks to George for suggesting that I turn our discussion into a blog post! Clearly, the line between market information and transparency is not so clear at all. The question is worthy of more thought, discussion and clarification: not just what indicators we should be tracking, but when and to whom we disclose those indicators and for what purpose.