The first question anyone who is introduced to the impact investing world invariably asks is, ‘Can you have investments that can create immediate positive impact?’ and the second question is ‘Can you measure that impact?’. The answer to both these questions as we know is a resounding Yes, but then to explain how that happens takes a while – for most people the impact measurement field is a completely unknown one. Thus, to grasp the nuances around it becomes difficult without understanding the basic terms.
As the field of impact investing flourished over the past decade and many of you are coming into it, I thought I will give you a head start and introduce you to a number of jargon-like terms that have developed around measuring impact.
As the second installment of this blog series, I thought it would be most appropriate to offer insight into the terminology commonly used in impact assessments. The industry engages a breadth of diverse stakeholders, from conventional finance to international development; from academics to impact entrepreneurs. It is therefore imperative that universally recognized definitions for these terms exist, and such knowledge is crucial to our understanding of the larger impact investing ecosystem.
At its most basic, impact refers to a change (positive or negative) experienced by an individual or community. When IIX Foundation, formerly known Shujog, defines the impact of an intervention, we look at both the positive and negative changes along various dimensions of human well-being, including livelihood, health, knowledge, mobility, security and social capital.
Beneficiaries are the constituents and stakeholders who experience change as a direct result of an organization’s activities. Typical examples include individuals or groups within the organization’s supply chain, for example the employees, or customers who benefit from its products or services. If a sound impact investment is made, then positive impact on beneficiaries has the potential to rapidly scale across several communities, sectors and geographies. Therefore, a key component of the impact assessment work we do here at IIX involves determining which stakeholder groups to include and which to exclude from the impact model. Sample inclusion criteria include deciding which beneficiary groups experience direct material change from activities within the assessment scope; and identifying whether the target beneficiary group is otherwise from economically or socially disadvantaged or marginalized backgrounds. There can be both direct and indirect beneficiaries. Thus, for example, for IIX’s Women’s Livelihood Bond, there will be over 350,000 direct women beneficiaries and over 3 million indirect beneficiaries (family members of the women).
Outputs reflect the direct products of organizational activities and may include types, levels, and targets of services that the organization expects to deliver. They are the immediate, deliverable returns following an investment (input), used to describe the quantitative summary of an activity. For example, an investment into the vaccinations and healthcare industry could lead to an output of increased profits and number of people vaccinated against diseases.
Often misunderstood as an interchangeable term for output, outcomes are the benefits which naturally succeed outputs. Outcomes indicate specific changes in the stakeholder’s behaviour, knowledge, skills, status, or level of functioning. They may be direct, such as an increase in local employment opportunities; or indirect, such as leading to a more prosperous local economy. Outcomes may be measured at a variety of levels (e.g. individual or organizational), and may encompass multiple time horizons. Regarding the vaccination investment, an outcome would be improved local health through a reduction in transmissible diseases.
Indicators are established to measure outcomes. Indicators can show whether, how, and to what extent desired outcomes have occurred. The framework our analysts use at IIX employs a broad set of sector, country, and enterprise-specific indicators to assess the sustainability and impact of a particular organisation and the subsequent empowerment of stakeholders. Indicators involve a mix of qualitative and quantitative metrics tailored to the situation. There are now Impact Reporting Investment Standard (IRIS) that captures indicators on a public platform. IIX Foundation, formerly known as Shujog, is a founding member of IRIS and contributes to enriching IRIS to create global benchmark around indicators.
6. Theory of Change (ToC)
The Theory of Change, commonly abbreviated to ToC, is a methodological tool used in impact investing, philanthropy, and governance to help frame and promote social change. The ToC maps out a chain of events, linking an organization’s activities to outputs, outcomes and eventually impact. These causal links are based on the efficiency and effectiveness of an input to the system. The ToC model provides a systematic and visual way to present the relationship between input resources, planned activities, and the change or result that the organization hopes to achieve. It is important to point out ToC does not give you a measurement. It is merely the first step in creating the framework for the impact measurement work.
7. Social Return on Investment (SROI)
In simple terms, SROI measures how much social and environmental impact – in dollar value – results from every dollar invested into an organization or project. SROIs can be evaluative, which are measured retrospectively; or forecast, which are vital to the planning stage of an impact investment. If you are familiar with financial lingo, this is the equivalent to financial IRR. Just like in the financial context, in order to calculate SROI, you need to create forward looking indicators, create proxies around them and then discount them back to current day to calculate the SROI.
IIX’s method of calculating SROI relies on a series of proxies, which––similar to an electoral proxy––are used to represent an aspect which cannot be measured. Proxy indicators are used to evaluate impact, by adding a monetized (numerical) value to a social or environmental outcome.
9. Dead weight
Dead weight refers to “what would have happened anyway” without the intervention of an impact enterprise. This is a crucial aspect to consider when forecasting or evaluating impact. For example, if an impact assessment were being conducted on a sustainable agriculture enterprise, dead weight considerations must include the effects of climate change, water use, and business competition.
Displacements are any negative effects (also known as externalities) which may have occurred as a result of the positive impacts on the stakeholder group. I openly acknowledge that a positive bias is frequently constructed following a successful impact investment; in this normative quest to measure impact, negative side-effects produced by business activities may potentially and unintentionally be overlooked. IIX’s methodology includes the analysis of displacement factors as one of its core principles in an effort to confront such bias often present in the industry.
I trust that this short blog post has proven informative and entertaining, shedding light on an aspect of the industry which many avoid due to fear of over-complexity. Do look out for next week’s blog installment, which hopes to further demystify a key aspect of the impact investing ecosystem.
IIX Founder & Managing Director
Originally Published on www.linkedin.com