Let’s say an investor takes a large stake in an engineering startup focused on projects in the United States. A short time later, that startup—buoyed by the infusion of capital—creates a product that greatly expands clean-water access in developing countries. Without ever trying—or perhaps even caring to—that an investor had a measurable positive impact on millions of lives. Does that person then qualify as an impact investor?

That’s a real question in the impact space, and one we’ll dive into more deeply later in this series. I raise it here in this introductory post only to highlight the fact that measuring “impact” is made tricky not just by a lack of standardized tools but, on a more basic level, by the fact that we’re still trying to define the term.

Right now there are two tests of impact investing that most people seem to have settled on:

  1. There was measurable environmental and/or social improvement as a direct or indirect result of the investment.
  2. The investor consciously intended to create or support environmental and/or social improvements.

The first view prioritizes outcome over intent, while the second takes the exact opposite approach. It’s good deeds vs. good intentions at the microeconomic scale. There is value to both approaches and in practice, most investments show a mix of the two—both a desire to affect positive change and an expectation that the impact or change will be measured against a benchmark. The world of standards for measuring impact, while still in its infancy, is starting to produce tools to support this two-pronged approach.

A number of ESG (environmental, social, governance) tools are now available to provide checklists and scores for demonstrating company and investor intent including Sustainability Accounting Standards Board (SASB), GRI, and GIIRS. The IRIS taxonomy adds value to these by providing a standardized coding system that facilitates more direct apples-to-apples comparisons. They’re not perfect, but they are useful enough that some entities, including the SBA, now even accept SASB, GRI and IRIS as reporting standards—my recommendation is that whatever IRIS metrics are used be tied to a framework for evaluating overall or issue-specific ESG performance, such as those embedded within SASB or GRI. The main problem with these approaches is that they don’t quite address how the performance of an intentional impact investment compares with what would have happened in the absence of the investment, or in other words, its “impact” in the scientific sense of the term.

As the tools become more sophisticated, it becomes clearer and clearer just how little of the world has been measured in terms of impact. Tweet This Quote

As the tools become more sophisticated, it becomes clearer and clearer just how little of the world has been measured in terms of impact. A new solar project in Tanzania might have meticulous SASB and IRIS reporting, but few other energy projects in world history will have gone through similar impact assessments. How then to know whether that project—or any so-called impact investment—is delivering greater benefits than the status quo? Without a large sample set for comparison, how can impact investors get a full picture of how capital flows create or hinder solutions to the problems they hope to address?

Other standardized tools address this problem by applying principles to the measurement of change relative to the status quo in any situation. Cost-benefit analysis, social accounting and audit, and social return on investment analysis permit the analyst to use a standard process and set of principles to evaluate overall social and environmental outcomes relative to “what would have happened” in the absence of the investment to arrive at a gauge of net benefits. While these tools help differentiate investments from one another and suss out the actual net benefits of any given investment, they are a heavier lift than the checklist approach of GRI and SASB, requiring training to use properly, which puts them out of reach for many. In future posts we will delve into how innovators are using big data to tackle this feasibility problem head on.

A lack of savvy tools for impact investors costs both ROI and much more Tweet This Quote

Historically, if there’s been any measurement of impact—of both investments and philanthropic grants—it has been merely to ensure that funds were spent in the way they were intended. Results were secondary. This isn’t merely wasteful and risky; it can lead to abuse.

Take the world of microloans. Years of solid work on Social Performance Management (SPM) by the nonprofit sector were shunted to the side when for-profit investors got involved, as many characterized the social benefits of microfinance as so obvious that few bothered to actually measure them. Some even felt it was unethical to take resources away from core microlending activities to check whether borrowers were actually doing any better than peers who weren’t getting loans. This lack of insight (or lack of oversight, if you prefer) with regard to microfinance investments gave rise to much of the same dysfunction that plagues conventional investing. Blinded by the substantial, countercyclical financial returns, over-exuberant microfinance lenders started making loans to people who were already deeply in debt. Many borrowers lost their livelihoods, several committed suicide, and whole regions banned microfinance. In the end, the net social impact has been decidedly mixed.

A lack of savvy tools for impact investors costs both ROI and much more—it can destroy lives and result in massive setbacks for vital social initiatives. Luckily, we’re beginning to figure out not only what to measure but how to measure it, and how to properly value that impact. That’s the purpose of this series—to uncover the various issues around impact measurement, management and valuation and to explore the solutions on the horizon.


To learn more, check out Critique of Microcredit as a Development Model and Cathy Clark, Jed Emerson and Ben Thornley’s new book, Collaborative Capitalism and the Rise of Impact Investing.

Sara Olsen

Author Sara Olsen

Sara is the founder of SVT Group, a social and environmental accounting and management firm, and the co-founder of the GSVC. She has led the design of customized systems that today reveal the impact of over $4.7Bn in 70+ countries and numerous industries including reforestation, green technology, sustainable agriculture, maternal and child health, education and community economic development.

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