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Through my years working as a chief impact officer at a leading impact investment firm and as a long-time nonprofit executive before that, I’ve learned that the intent of impact investing can mean a lot of things to many different people. Depending on the stakeholder, people will define impact differently and seek different desired outcomes.
A managing director at an investment firm will be interested in whether their impact funds deliver a sizable double-bottom-line return. A budding entrepreneur or small business owner will be focused on whether the capital they’ve secured will enable them to scale, increase production, grow headcount and generate more revenue for what they have defined as their impactful work or product. Impact-minded politicians, philanthropists, and foundations will be more concerned with community-wide improvement or change in the value that an investment (or grant) may have.
Whatever interest a person or organization may have in impact investing, this much holds true: without measurement, there is no validation of mission. That is why the data we collect and provide is central to our impact investment strategies. By reporting on our progress, impact investors and others can ensure they are moving their missions forward.
Unfortunately, far too often, we see investors looking to do well fall short when defining goals and measuring outcomes. A lot of times, this can be attributed to the fact that their goals may be tied to vanity metrics or other data that doesn’t demonstrate or convey true impact or improve outcomes. For instance, it’s one thing for a company to aim to generate a 10% return for funders or add three dozen new jobs. Still, it’s another for those jobs to pay more than the median salary of a county, offer great benefits, including wealth creation opportunities such as 401Ks, and provide pathways and training for advancement.
Essentially, investors must define their metrics and evaluate whether they accurately depict the factors that change people’s lives.
Related: Understanding Impact Investing: Its History, Rise, And Evolution
Impact investors must develop an investment framework
Impact investment frameworks must establish double-bottom-line investment goals for investors and business owners alike to ensure that investments, business growth, and impact investing goals are aligned from the beginning.
Each party wants to see a return generated from the money that a business receives but to deliver and show true impact; additional benchmarks must also be met.
It’s one thing for a new supermarket to turn a profit, but is the business also prepared to show how the impact is being felt throughout its neighborhood? Is the grocer focused on increasing healthy food options in the community? Does the business offer quality jobs to local residents who were previously on the sidelines or otherwise struggling to get by? If so, are those earnings being spent or reinvested back in the community, perhaps through purchasing new homes?
When getting started, all stakeholders should clearly identify their North Star and have that baked into the framework. An environmental impact investor, for instance, must be clear in their mission and the outcomes they want to see. Do they want to reduce carbon emissions or aspire to provide more people with affordable clean energy? If the answer is yes to either of those, they need to outline how they will get there and measure their progress.
If investment dollars are being directed to a business, be prepared to identify the community-wide impact, particularly those for workers. Are wages helping employees get off of public assistance or meeting or exceeding average pay in a region? Do employees receive health benefits, and are they building personal economic stability that leads to personal and generational wealth?
By laying out a framework upfront, investors can set clear goals and work rigorously toward them to achieve the true spirit of their impact investing strategy.
Related: Why Addressing the Racial Wealth Gap is Good for Business
Clearly define what must be measured
The metrics we use to gauge the effectiveness of impact investments must be intentionally and deliberately set to ensure we are doing the excellent work we set out to do. I have long believed that if you didn’t measure it, you didn’t do it!
With financial and economic impact in mind, set out to see if the compensation of newly hired or supported workers is livable and at or above the median wage in a region. Track if these workers are also enrolling in retirement plans or perhaps receiving equity in the company. Set out to understand if the workers are also receiving additional benefits that deepen family stability, such as child care, wellness, and mental health support.
Measuring meaningful impact also extends outside the walls of any particular investment in a portfolio. Impact investors should be prepared to follow the effect that new funding or job creation has in a county or city. Are more people falling from the ranks of unemployment? Is the need for public assistance subsiding in a community? Getting back to the clean energy space, do we see a noticeable improvement in regional air quality? Or are residents’ electric bills being lowered?
Related: Why the Private Sector, Not Public, Must Continue to Lead Impact Investing
Admittedly, tracking these types of metrics takes time and seeing trends and results requires longitudinal analysis, but to ensure impact investors are meeting and exceeding their mission, the tracking must be done.
As impact investors, we must see beyond short-term profits. Annual reports should contain data convincingly showing that communities are being uplifted and people’s lives are being changed for the better. After all, those metrics are at the heart of the mission of impact investing.
