As investors are becoming more and more socially conscious, with 73% of investors considering ESG goals of companies in their investment decisions, impact investing is growing in popularity and relevance in the modern world. Impact Investment is defined as “investments made to generate positive, measurable social and environmental impact alongside a financial return” by the Global Impact Investing Network which means that it has two key aims:
1. Financial return
2. Tangible positive impacts on the world
While financial return is relatively easy to measure, by simply comparing the money put in with the money that comes out at the end of an investment, positive impact is much harder to quantify, especially social impact. While the environmental impact of investing can be measured through carbon emissions, water consumption, and various other metrics, social impact is tougher to get good data on. There's a big risk of virtue signaling, meaning it's important to find ways to calculate the value and the effectiveness of the impact portion of impact investing.
Why is social impact important?
While investing to help the environment is essential for helping us provide a safer and healthier world for our future generations, social impact is important to measure as it can help improve the lives of those future generations. Helping set up future generations for success by increasing wages, quality of life and access to education are ways we can avoid large-scale conflict, poverty, and more.
UN SDG goals
Impact investors have different perspectives on what is valuable to them and what counts as ‘impact’ but many will frequently refer back to the UN SDG goals. These 4 are especially relevant for social impact:
Quality of Education (SDG 4): Investments in educational technologies or initiatives that improve access to quality education.
Gender Equality (SDG 5): Supporting enterprises that promote gender equality in the workplace or provide services addressing women's needs.
Reduced Inequalities (SDG 10): Backing businesses that foster inclusivity and serve underrepresented or disadvantaged communities.
Decent Work and Economic Growth (SDG 8): Funding initiatives that create sustainable job opportunities and promote fair labor practices.
Real-world Example
One example of this is Rubio Impact Ventures, an impact venture fund that provides annual reports on its social and environmental impact on the UN SDG Goals.
As can be seen above, the fund measures various metrics such as workers moved out of poverty, hectares of land insured, and children with 21st-century skills. These are all metrics that are easier to quantify than merely aiming towards “Quality education,” for example, as the companies they’ve invested in have specific data relating to subsections of the category.
Key Performance Indicators (KPIs)
Impact investors use KPIs to track specific metrics that align with their investment objectives and desired impact. These indicators can vary widely based on the nature of the investment and the intended outcomes. For instance:
Quantitative:
Employment: Number of jobs created, quality of jobs (e.g., wages, benefits), or improvements in labor conditions.
Education: Literacy rates, school enrollment rates, or improvements in educational attainment.
Health: Reduced disease prevalence, improved access to healthcare, or increased life expectancy.
Qualitative:
Interviews: Conducting interviews with stakeholders, beneficiaries, or employees to capture their experiences and perspectives.
Stories of Change: Documenting success stories or testimonials to demonstrate how the investment has positively affected individuals or communities.
External Evaluations: Engaging independent evaluators or researchers to conduct in-depth impact assessments, combining qualitative and quantitative methods.
Qualitative assessments provide valuable insights into the lived experiences and transformative effects of the investments, offering a more holistic view of the impact generated.
Ratings agencies and certifications
Sometimes it is difficult for investors to measure these KPIs independently which has led to the creation of various rating agencies and certification systems to help standardize measurements and measure the social impact of products and companies.
Fair Trade Certification: Fair Trade certification is a labeling initiative that ensures fair and ethical trade practices for products such as coffee, cocoa, tea, and textiles. Fair Trade certifications verify that the producers receive fair prices, labor conditions are decent, and environmental standards are met.
EDGE Certification: EDGE (Economic Dividends for Gender Equality) is a certification system developed by the International Finance Corporation (IFC) to assess gender equality in the workplace. It evaluates companies' policies, practices, and benefits related to gender diversity and inclusion and provides recognition to organizations that meet certain criteria.
B Corp Certification: B Corp certification is offered by B Lab, a nonprofit organization. It assesses a company's overall social and environmental performance and evaluates its impact on stakeholders, including workers, communities, customers, and the environment.
GIIRS Ratings: GIIRS (Global Impact Investing Rating System) is an independent rating system managed by B Analytics. It assesses the social and environmental impact of companies and funds. GIIRS ratings provide a comprehensive evaluation of impact across various dimensions, including governance, workers, community, environment, and customers.
However, these rating agencies can’t vet every investment made and every company, and due to the quality of their output, may take extended periods of time to evaluate companies. A risk that can lead investors to miss out on potential profit.
The future of impact measurement
Going forward, new tools, agencies, metrics, and more are being developed to meet the rising demand for ESG information from different companies. Companies across the world are starting to include ESG information in their annual reports. Tools like AI can help make this process even easier by offering predictive insights into the effectiveness of certain investments at reaching certain goals as well as analyzing large swaths of data and comparing varying companies to one another. While it can still be difficult to measure whether social impact is actually being achieved, progress seems to show that there may very well be a day where companies measure social impact in as much detail as their carbo footprint or even their other financials.