How measuring impact investing supports value creation

The Global Impact Investing Network’s latest report shows that impact investing measurement and management can yield useful data for investors and portfolio companies.

The Global Impact Investing Network released The Business Value of Impact Measurement last week, a new report highlighting the ties between social and environmental performance measurement and how the data that comes out of the process can help create value for impact investors.

The report, which is part of GIIN’s push to standardise performance measurement in impact investing that started in 2009, found there are five major drivers of value deriving from impact measurement: revenue growth, operational effectiveness and efficiency, investment decisions, marketing and reputation building, and strategic alignment and risk mitigation.

GIIN research director Abhilash Mudaliar spoke to Private Equity International about data measurement in impact investing and the standardisation efforts in the space.

What is the main takeaway from the report?

It was the wide variety of ways that impact investors use data to drive business value, whether it be revenue growth, marketing to different stakeholders or identifying new investment opportunities. We highlight a range of different examples. When you look at the impact theses of impact investors, they could be socially motivated or environmentally motivated, focused on agriculture, education or environmental conservation, and the ways in which they derive business value from impact data reflects this diverse range of strategies. 

At the same time, there is growing standardisation in terms of impact measurement. It’s something we feel is very important at the GIIN and that we are pioneering through our [Impact Reporting & Investment Standards] initiative, the generally accepted performance metrics used by impact investors, to encourage standardisation.

When private equity fund managers look at measurements of their impact investments, what are some of their priorities or focus areas?

Primarily, investors want to get a better understanding of the impact they’re having and how they can drive that further. Second, they want to get a better understanding of how this impact data can drive business performance and investments. That’s why our recent report focuses on how investors use impact data as a business tool, whether in terms of identifying customers or investment opportunities.

All investors track information and data about their investments. But the thing we noticed with impact investors is they often see information through the lens of impact, from the end beneficiary’s point of view. By looking at data through that lens, they can actually see what may not be available through a typical data approach.

Can you give a specific example?

We have a GIIN member, Root Capital, that invests in the agricultural markets. In one example, when evaluating a potential investment target through standard business metrics, Root noted that the target didn’t have a strong financial track record. But when it looked at an impact assessment of the organisation, Root learned that all members of this cooperative [they invested in] were fair-trade certified and trained in organic farming practices. They realised this could lead to premiums on prices. Despite not having a strong financial track record, Root made the investment and the company has been quite successful. It has grown over time and raised more capital. You can get new insights through an impact lens.

What are some creative methods you’ve seen that the PE industry uses to measure impact?

In general, impact investors use diverse ways to achieve impact, such as looking at products and services delivered to a community or improvements for the environment. Acumen, another GIIN member, invests in emerging markets [in agriculture, energy, housing, education, health, and water]. The Acumen fund has a Lean Data initiative, where it uses mobile technology for quick and efficient data-gathering directly from end customers. It provides social performance data from its investments directly to entrepreneurs and investors for business decision-making. It’s quite an innovative approach to impact measurement.

I can see many investors moving in the tech direction for data collection. It can certainly offer efficiency improvements in the way impact data is collected. The benefits of our latest report include informing and educating the investment community. Because impact measurement is an evolving practice, this report can provide information about how impact data is used to drive value.

 

PEI is co-hosting the Global Impact Investing Forum in Amsterdam on 7-8 December with the GIIN. For full details, visit the forum website.