Measuring Social Impact

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.