Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
access financial services than to access education should be considered when
weighing these alternative uses of capital.
The values attached to social impact are by nature subjective and often driven by
emotion (just as people tend to donate to charities with which they feel some
connection). As a result, it is difficult to be objective when constructing an impact
measurement system and when comparing investments on the basis of their impact.
Investors often implicitly assign value to certain types of impact over others when
deciding where and on what terms to allocate their capital. By instituting standard
approaches to impact measurement, the industry can become more objective and
transparent around the drivers of investment decisions.
Reporting standards need to grow from the right definitions
To date, most impact investors have created their own systems for tracking and
measuring impact, which is inefficient for the market as a whole and limits
comparability across investments. Indeed, among our survey respondents only 2%
currently employ a third-party impact measurement system. As the market has
grown, participants have identified that standardized, well-defined social
performance metrics will ensure that impact investments can be assessed against a set
of rigorous social impact criteria and compared more broadly.
In defining measures of social impact, these standards must find the line between a
level of detail that is too onerous to collect and one that is too superficial to be useful.
For example, when asking businesses to collect data on the jobs they create, it may
be reasonable to expect them to report the wages they paid, any benefits they offer
and the skill level of the worker prior to employment. These are data that good
management will know about their employees. But to rigorously assess the social
impact of these jobs would also require additional data such as their prior income
level and job history, and the alternative job opportunities in the community. It is
unlikely that all businesses in an impact investing portfolio would be able to record
all these data in a cost-effective and comparable manner (particularly without
consistent definitions and data measurement standards).
A common language for social performance metrics will encourage transparency,
credibility and comparability, just as the International Financial Reporting Standards
(IFRS) provide transparency and comparability across financial performance reports.
A common taxonomy prevents the (false) side-by-side comparison of companies and
funds on the basis of social metrics that may share the same name but have different
underlying meanings, such as ‘jobs created’ and ‘number of poor consumers served’.
Common reporting standards will also streamline and simplify the reporting
requirements of entrepreneurs and fund managers, who sometimes face inconsistent
requests for information from investors.
IRIS is building the taxonomy to standardize social impact reporting
If it is to be successful, this common language should function as a non-proprietary
public good 108 . The Impact Reporting and Investment Standards (IRIS) initiative was
launched in 2009 as a project of the Global Impact Investing Network to develop this
taxonomy and provide a reporting framework that is applicable across a range of
108 It would not serve the interests of the industry, for example, to have multiple competing
definitions of basic social metrics. Common reporting standards will also enable a variety of
industry infrastructure to emerge, many of which may be private or proprietary in nature.
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