Ten years ago, I was working in Europe on impact measurement guidelines for what was then called venture philanthropy and social investment. At the European Venture Philanthropy Association, he devised five steps to measure the impact on investors and support social enterprises.1 One of the things we learned through that work is that we care less about specific data points from analysis and more about how organizations use impact data in management (for what purposes and for whom). It’s more important to pay attention.
Since then, initiatives such as the Impact Management Project and Operating Principles for Impact Management (OPIM) have facilitated the integration of data into impact investment management processes, allowing investors to learn from the data and adjust as necessary. Ta. OPIM requires investors to submit independently verified disclosure statements to demonstrate that they have considered impacts throughout the investment process, from transaction review to exit, for example.
On the grants side, from our work with foundations and discussions with people like Jeremy Nicholls, we know that in order to have a positive impact on your beneficiaries, you need to listen to them, learn from your mistakes, and take corrective action. A growing number of foundations are recognizing the need to formalize their processes for implementing .
Although the field has become more sophisticated, there is still a long way to go in terms of transparency and accountability. Impact reports still primarily show aggregated output numbers and do not explain methodology or learnings. This contributes to the tension between standardizing methodologies to enable the benchmarks demanded by financial markets and creating learning opportunities for grant makers to take corrective action. Both impact investors and grant makers have an opportunity to understand whether they are pouring resources into organizations and projects that are addressing the issues that matter most and making a difference in the lives of their beneficiaries. The two fields are also in a position to learn from each other.
Developing impact accounting and setting new standards
International Accounting Standards governing financial accounts specify what the accounts should be and how they should be audited, but there are no equivalent standards yet for impact. This creates the impression that impact is subjective and prevents the use of impact data as a basis for benchmarking or decision-making. The International Sustainability Standards Committee represents a positive development on this front. Its non-financial reporting standards aim to provide investors and other capital market participants with rigorous and homogeneous information on sustainability risks and opportunities, enabling more informed decision-making. I am. This standard makes sustainability issues financially material so that shareholders can assess the potential impact of sustainability decisions on a company’s financial statements.
Developing in parallel is the Impact Economy Foundation’s impact-weighted accounting framework, which incorporates the concept of ‘double materiality’. This framework includes an integrated accounting system that considers both the financial materiality of an organization and its impact on the environment and stakeholders.2 (essentially influence), thus helping to position finance and influence as an integral part of management and corporate governance.
Meanwhile, the United Nations Development Program has developed a set of internal decision-making criteria, including an assurance framework and seal of approval. These Sustainable Development Goals (SDGs) Impact Criteria aim to help businesses, debt issuers and investors, and development finance institutions drive decision-making to maximize their contribution to the SDGs. is.
The sector could also benefit from guidance from Europe, which is promoting environmental sustainability through policies such as the European Green Deal. The policy, approved in 2019, includes incentives to encourage investment in companies and activities that move Europe towards zero emissions and leave no one behind. It also includes a taxonomy for classifying activities as sustainable, as well as regulations on sustainability disclosure for companies (Corporate Sustainability Reporting Directive) and financial institutions (Sustainable Financial Disclosure Regulation, SFDR).
European impact investors have welcomed the adoption of SFDR as a way to encourage more investment in funds and financial institutions that operate in a sustainable manner. This regulation is based on the concept of dual materiality and considers how investors integrate sustainability risks into their business operations and set sustainability goals. One concern is that the current focus is primarily on environmental factors, with social impact largely ignored when pioneering European impact investors such as Pitrust and Ortre Ventures built their investment thesis. This is what is being done. As regulations evolve, it will be important to ensure that impactful initiatives are funded, not just those with the resources to comply.
Impact investors who are genuinely interested in making a positive impact on society need to adhere to standards in order to be seen as trustworthy and have a genuine commitment to addressing social issues in a profitable and scalable way. We need to find the right balance between supporting innovative companies. One challenge is the inherent rigidity of impact funds. Investors ideally support investment strategies that are valid over the lifetime of a fund (approximately 10 years), but it is difficult to incorporate learnings into such a rigid structure and the theory of change Few impact investors set overarching impact goals for their funds.
As a result, most impact reports still do not clearly reflect how the investee has created positive or negative change for the target population, but instead only reflect the value of output (e.g. ‘jobs created’). It is a list of the SDGs that the aggregation and investment strategy will address. Organizations rarely discuss methodology in their evaluations, often making the excuse that they use proprietary approaches. As impact investors become increasingly specialized in problem areas such as sustainable agriculture, there are increasing opportunities to incorporate learnings from previous funds and create synergies between portfolio companies. Specialist funds can also better target specific impact goals and measure success against those goals.
Building a culture of transparency and learning
Grantmakers are ready to experiment, risk-take, and learn to drive social innovation, but they have a clearly defined mission coupled with hard data and a shared understanding of what impact means across the organization. I often have trouble matching it up. Many organizations that work closely with grantees intuitively believe that they are making a difference in the lives of their beneficiaries. Rather than burdening your beneficiaries with lengthy reporting requirements, you could rely on their feedback to tell you stories about how their lives have changed. And while grantmakers tend to take pride in the passion and trust that pervades their culture, board members from corporate backgrounds find that an emphasis on goodwill and collegiality breeds groupthink. You may feel that it can get in the way of transparency.
Boards tend to ask more questions about how the organization manages its financial assets than about the impact the organization is having on its core stakeholders, and they tend to There is an inherent tension between the generation of data that informs decisions about financial assets. impact. When boards encourage management to focus on reporting on how well they have leveraged their financial assets, they are less likely to share what went wrong. Ultimately, this inhibits an organization’s ability to learn from mistakes, and without risk there would be no social innovation.
Grant makers increasingly talk about learning as part of monitoring and evaluation, but they do not necessarily incorporate learning as a concrete activity with responsibility. More companies are investing in learning units that create a common language around impact, developing scorecards and tools to track what works and what doesn’t, and understand the pluses and minuses of their programs. Staff need to be trained to identify the types of data they need. Impact on beneficiaries. Good examples of organizations that have created the physical and temporal space for staff to carry out this type of work include Belgium’s King Baudouin Foundation, which recently established an internal learning group to foster knowledge sharing; , the Loud Foundation, which has an Effectiveness and Learning Committee. It is part of the governance structure.
The importance of focusing on initiatives that impact accountability to beneficiaries is clear. But to do this effectively, grantmakers need to create governance systems that further support learning.
Funding innovation for the future
In the coming years, it will be important for impact investors to evolve their impact measurement processes. New standards are beginning to take shape that allow us to incorporate social and environmental factors into investment accounts, measure them, and then make better-informed decisions. It is encouraging to see investors quickly adopting these new standards and complying with the new regulations, in part because measurement tools have become more digital and easier to implement. However, the field must ensure that the standards and associated tools that prevail are not necessarily the easiest to implement or have the most financial backing. They must be the most fair and just. Investors must be accountable to beneficiaries and consider both positive and negative impacts.
Meanwhile, grantmakers need to take impact data more seriously. The lack of hard impact data often results in vast resources being spent on projects that have no real impact. More grant makers should consult beneficiaries as experts and include them on committees and advisory boards to ensure that beneficiaries are at the center of measurement, accounting, and decision-making. be. Additionally, impact data should be at least as prominent as financial data in the dashboards and scorecards that inform decision-making. These practices should provide impact standards and regulation for both impact investors and the broader financial market.
Ultimately, all funders need to use data more effectively to understand which initiatives are having an impact and which are not. Impact investors speak the language of metrics and can take the lead in translating metrics into understandable and actionable terms. Meanwhile, grant makers can take the lead in ensuring space for experimentation and learning. And by working together, both groups can help develop standards and accounting systems that are truly accountable and inclusive to the people they are trying to help.
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Read more stories by Lisa Hehenberger.