Measuring social impact is of utmost importance
An impact investment is a combination of
entrepreneurial risk, financial return and social impact. Investors are
increasingly aware that their investment is likely to generate a financial
return that is below the market return – so there has to be something else to
compensate: namely the potential social impact.
Social impact is the aspect
that is most difficult to measure, but doing so is crucial if the impact
investing industry is to spread and attract a wider range of investors. This is
because understandably, potential investors will only be prepared to forego
potential financial return if they are made aware of the social benefits that
their investment can help to achieve.
After agreeing on an impact investment’s
objectives, the most promising approach for investors is to use common sense
combined with field research. In the real world of investment, it is often
difficult to make evaluations simply by applying academic principles: reality
is just too complex, and one and the same initiative may produce different
results in different circumstances. For measuring the real social impact of an
Impact Investment, attention must be paid not merely to the output generated by
the business operation. It is important to assess changes in social systems and
to measure the impact on society generally – multiple social, environmental and
economic aspects have to be included, and interviewing the beneficiaries being
addressed is one way of sounding them out
Impact Investors wanting to put funds directly
into an SME may find it difficult to assess very small enterprises that are
often located in rural areas and where it is scarcely possible to conduct the interviews
required. If interviewing the beneficiaries is too complicated, investors need
to make use of the increasing transparency in the sector, and resort to the
accumulated data and the measurement systems that are being developed.
Standardized measures may be helpful for
gauging the social or environmental return that is achieved by an impact
investment. For example, the Global Impact Investment Network (GIIN) is meanwhile
establishing the Impact Reporting and Investment Standards (IRIS) – standards
that are comparable to financial accounting principles and that make it easier for
investors to measure social impact. These standards allow comparisons of output
to be made across different sectors and regions, indicating the social effect
that an investment has had.
So measuring social impact still remains a
challenge. Nonetheless, progress is being made as new approaches are developed:
they have to be transparent, understandable, comparable and interdisciplinary.
In the light of all this impact
investors are recommended to define the impact they want to generate
with their investment, gear their activities towards the defined goal, conduct regular
interviews to monitor grassroots progress, and use tools such as IRIS to assess
their investment’s actual performance in terms of its social impact.
