As the impact investing market has grown to an estimated $500 billion, concerns about the field’s relationship to social impact have also increased. The key question is, how do investors know their dollars are truly creating the social change intended?

While stories can shed light on examples of positive impact, impact investors must point to evidence and data to demonstrate their investments are in fact creating impact.  Through the practice of impact measurement and management, investors are able to track and report on social and environmental performance, inform investment strategy and decisions, and create more transparency around impact within the market.

At Pacific Community Ventures (PCV), we support clients in developing and implementing impact measurement and management approaches to help them more effectively deploy and manage impact capital. In 2018, The Kresge Foundation’s Social Investment Practice engaged our research and consulting team at PCV to conduct an evaluation of five investments made in 2012. Through a case analysis format, the evaluation examined investees’ progress toward social and environmental objectives, including successes, challenges, pivots in strategy, and the role that the Foundation’s investment capital, grant dollars, and staff played in contributing to impact. More broadly, this evaluation was intended to generate strategic learnings for the Foundation and inform investment strategy — especially opportunities to better support investees.

As part of the evaluation, we examined the Social Investment Practice’s approach to impact measurement and management and use of evaluation. We identified three main ideas for bolstering the Foundation’s impact management efforts, which we believe can help you deepen your own organization’s ability to manage for impact.

1. Embed impact measurement and management throughout the investment process

When impact is not measured or managed consistently, investors leave themselves open to information gaps, investment blind spots, and missed impact management opportunities. The IFC Operating Principles for Impact Management calls for integrating impact considerations into all phases of the investment lifecycle. To better integrate impact within your own investment processes, you should incorporate the following best practices:

• Establish clear impact goals and identify your contribution to impact – Investors should establish impact goals and understand how they will support investees in achieving desired impacts. The Impact Management Project offers guidance on goal setting and identifying the different ways an investor contributes to impact.  A theory of change or logic model can also be a helpful tool in documenting key outcomes and the ways in which an investor contributes to these outcomes.
• Create an impact due diligence approach –As part of impact measurement and management, most investors focus their efforts after, not before, investments are made.  This represents a missed opportunity to interrogate assumptions around impact, better understand the anticipated impact of an investment, engage with prospective investees, and ensure capital is being invested appropriately.  Investors should embed impact measurement and management within investment due diligence to gain a more holistic view of a prospective investment and make more informed investment decisions.  For more on how investors examine impact pre-investment, see our new research on emerging best practices in impact due diligence.

2. Prioritize Strategic Learning and Knowledge Sharing

Investors’ examination of impact can produce significant insights that can generate knowledge and inform strategy.  Unfortunately, this too often only benefits investors, and not investees or other key stakeholders.  In order to ensure stakeholders benefit, you can focus on the following:

• Co-develop learning objectives and discuss observations and insights with investees – Focus on understanding critical aspects of an investment that will benefit both you and your stakeholders. This might include assessing the efficacy of a new business model, the potential to catalyze a new market, or ability to improve the livelihoods of target beneficiaries.  These learning objectives can include key questions that can be explored over the life of the investment through conversations with investees as well as more formally through impact measurement and management.  For foundations making investments aligned with a specific program strategy, the investment team and program teams can co-develop the learning objectives with investees to ensure valuable insights will be generated and staff are well positioned to engage and support investees over the life of the investment.
• Use evaluation as a complement to impact measurement and management – Evaluation has been less common in impact investing due to concerns around cost, time-intensity, and applicability. But as the field has grown more serious about impact, evaluation has gained traction. Investors can use evaluation to leverage data and information already monitored through impact measurement and management, and then go deeper through a variety of research methods to examine longer-term outcomes and surface additional lessons learned that can benefit both investor and investee. For foundations and other investors interested in evaluation and impact investing, the American Evaluation Association’s Social Impact Measurement Topical Working Group offers a community of practice for evaluators and investors to share approaches to measuring social change in impact investing.
• Share results, experiences, and lessons learned – Investors can use their own experiences to help others in the field. As the original stewards of impact investing, foundations are uniquely positioned to play a role in fostering openness and transparency in the market by sharing the impact of their investments and can lead by example by publishing blogs and reports, hosting webinars, and speaking at conferences. Partnerships with other investors or organizations such as Mission Investors Exchange or the GIIN can also help in sharing findings more widely.

3. Allocate resources to impact management as you would for financial management

It takes resources to engage in this work and effectively manage for impact. That said, many investors view impact measurement and management as an additional cost that should be minimized.  However, investors often don’t account for the opportunity cost that not appropriately resourcing impact measurement and management can pose, including enhanced ability to identify and mitigate risks, learning opportunities that help refine investment strategy, or most importantly, unrealized impact and financial returns. To advance impact management efforts, you should consider the following:

• Staff appropriately for impact– Impact measurement and management should not be one more responsibility handed off to a team member to execute on to tick the proverbial impact box. Investors need to thoughtfully staff for impact within their teams in the same way they would financial management to ensure that time and resources are appropriately allocated.
• Strengthen the capacity of investees- Investors can help investees engage in impact measurement and management by providing guidance from their own experience or connecting them to others who can provide advice or dedicated support. Foundations that provide grants to investees alongside investments can also consider allocating grant funding to impact measurement and management as well as evaluation to better capture learnings and further support investees.

Looking Ahead

As our social and environmental challenges become ever more urgent, it’s critical for impact investors to embrace the use of impact measurement and management and evaluation as key tools to build more rigor and move beyond good intentions and glossy impact reports. Through a systematic approach, emphasis on strategic learning and knowledge sharing, and dedication of real resources to impact management, impact investors can more effectively manage for impact alongside financial risk and return and achieve better results.

Tom Woelfel is Director of Pacific Community Ventures’ research and consulting practice. Follow him on Twitter @tomwoelfel. For more on PCV’s impact measurement, management, and evaluation work, including their new research, Impact Due Diligence: Emerging Best Practices, follow them on Twitter @PCVtweets and visit their website.