Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Investors measure impact for many reasons, and in many ways
Participants in the impact investing industry are motivated, at least in part, by the
desire to create positive impact. Entrepreneurs, fund managers, Limited Partner
investors, service providers and other stakeholders may vary in the theories of social
change with which they approach their investments, in the relative importance they
place on impact or profitability, or in their requirements for impact measurement
systems. Nonetheless, each will need some degree of information about the social
performance of their investments. Even some traditional investors have begun to
track the social performance of their portfolios in order to understand the impact they
are having and the relationship between these metrics and financial return.
Social impact can inform investment covenants, performance targets or certifications
Beyond their own understanding of their impact, entrepreneurs and fund managers
are also asked to provide social performance data to their investors. In some cases,
the data is requested for initial due diligence or on an ongoing basis as a condition of
investment. In other cases, they influence the way an investment is structured,
informing covenants or performance targets the company is expected to meet over
time. In addition, metrics may also be used for certification (e.g. fair trade labeling),
compliance with regulatory requirements (e.g. Community Reinvestment Act
investments in the US) or to access public loan guarantees or preferential tax
treatment (as is the case with the GroenFunds scheme in the Netherlands). At an
industry-wide level, social impact measurement will also ensure that the industry can
demonstrate its ability to deliver multiple bottom line performance.
Social impact performance data allows for comparisons across investments
In addition to having different reasons for measuring impact, participants in the
impact investing industry will use the measured data in different ways. Companies
want to understand, track and report their social performance, and compare their
performance with that of their peers. Fund managers also need a system for
managing the variety of social performance information they receive from their
portfolio companies. Limited partner investors often invest across different
geographies, sectors and asset classes, with investments directly into companies as
well as funds. They require an overarching framework to facilitate comparisons
across these varied investments.
Measuring impact is complicated, expensive and subjective
Some investors seek a credible agency to whom they can effectively outsource their
social due diligence; others want to perform this function in-house, but need a set of
analytical tools to use. Almost all industry participants seek a set of industry
benchmarks that can provide a standard framework for understanding the social
performance of a company or fund, but there are significant challenges to designing
the right system:
1. Data collection can be resource intensive, expensive and difficult to execute
In order to measure social impact, one needs data about a company’s practices,
suppliers and clients. This data typically must be collected and reported by the
company itself. Since many impact investments are small companies located in
countries with limited infrastructure, the data can be difficult and costly to
collect. As a result, company management may consider data collection as a
distraction from business priorities, particularly in cases where investors’ impact
goals are more expansive than those the company sets for itself.
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