Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
2. The tension between feasibility, credibility and cost
In order to be certain of the relationship between a company’s activities and the
desired social impact, an investor must know what would have happened absent
that company’s activities. Furthermore, he must know what would have happened
to the company were it not for his investment. As we described above,
measurement against a control group is often considered the best way to answer
these questions, but is often prohibitively expensive (or impossible) in practice.
Investors can also be more confident in social performance data when it has been
audited, ideally with third-party verification. Self-reported social performance
data, much like financial data, are susceptible to error and deliberate
misrepresentation. An assurance process, however, introduces significant costs,
and it remains unclear how much investors will pay to enhance the credibility of
social performance data.
3. Impact investments exist within a complex system of impacts
Social impact is difficult to parse out and attribute to a specific intervention. The
extent of social impact of a water delivery business for example will result from a
complex interplay of forces in a community including education levels, public
health campaigns, or potential new job opportunities. Assessing social impact
requires an understanding of the system in which a business operates that cannot
be developed from company-level data alone.
4. Diversified investors need to balance custom metrics and universal frameworks
Investors that concentrate their impact investments in a single sector, such as
microfinance or green real estate, may find that a single set of metrics is sufficient
for assessing the social performance of their entire portfolio. For investors that
invest across sectors and geographies, however, relying on a customized set of
metrics for each business model or sector may make it difficult to understand the
impact they are having across their portfolio or to compare potential investments.
Diversified investors will seek out a common framework for understanding
impact, which requires a less specific set (and weighting of metrics) that are
comparable across investment types.
5. Different people have different opinions about what matters
There is no single metric for assessing the impact of an investment because
people value things differently. Some investors, for example, place a high
premium on environmental performance; others may consider poverty alleviation
a much more important goal. Investors in a bednet manufacturer in India may
differ in their views on whether the company creates more value by creating local
jobs or by maximizing bednet production. Others will debate the importance of
the bednet itself compared to clean water or education.
6. Even if we agree on what matters, different metrics will give different conclusions
In Does Microfinance Really Help Poor People (R Rosenberg, CGAP 2010),
CGAP argues against two studies that found no evidence that microcredit loans
improve household income or consumption over a 12- to 18-month period. CGAP
proposes that those studies are measuring the wrong thing: that the impact of
microfinance is best reflected by the increase in reliable access to financial
instruments rather than in a change in household financial status, since many
borrowers will already have had access to financial instruments via informal (but
unreliable) providers. Further, they argue that while it seems unlikely that a year
of microlending helps poor people as much as a year of primary education, the
fact that the same level of government subsidy can support many more people to
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