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Impact Financing Performance Measurements In Fund Investments By Uli Grabenwarter
Introducing impact financing The notion that the success of an investment should be measured by financial returns alone has often been contested. There is a growing belief that investments should be judged by their ability to generate both a profit and a positive social impact. This approach is known as “impact investing” as it claims explicitly considering an investment’s social and/or environmental impact in the investment decision process. In pursuit of such impact focus, impact investors have been trying to identify means of making transparent social impact within the performance of an investment. In other words are there any ways of adequately measuring social impact in the performance of an investment. Approaches used in the past have been favouring single impact measures seeking to express social impact objectives and results for the entirety of actors and stakeholders in an undifferentiated way. These attempts did not however result in impact measurement methodologies capable of becoming market standards. The complexity of impact measurement in an investment context arises from the complexity
“In pursuit of such impact focus, impact investors have been trying to identify means of making transparent social impact within the performance of an investment.” and diversity of objectives (motivational spectrum of actors and stakeholders) and the degree of proximity or distance of stakeholders and actors to the concrete social impact activity. Looking at the various actors throughout the “investment food chain”, it appears relevant to distinguish between: • The social entrepreneurs who are typically interested in the most effective way to tackle a social issue (“how can the social issue be best tackled?”) • The active social investors/philanthropists who are typically interested in the most efficient way of tackling a social issue (“how can I make best use of my money in tackling a specific social issue?”)
Spectrum of “Mission-Related Finance” Impact Investing Environmental- / Social Impact-Benefits Grant Money
“Coincidental” Financial return
Financial Return Because of Social USP
Pos. correlation env./ social impact and financial return
Socially/ Policy Neutral Business Models
Neg. correlation env./ social impact and financial return
Investors with or without socialand/ or environmental investment objectives
Exclusively Financial-ReturnOriented Investors
Source: U. Grabenwarter (2009) The boundaries of the mission-related investment universe.
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• The pay-by results participants who may be interested only in an isolated segment of impacts of an activity that addresses their slice of specific results (“what is the social impact of an activity on my own activity?”) • The passive social investors who typically look at capital efficiency evidenced by process rigour and quality in funding social impact (“has the reason for my investment materialised or at least complied with?”) • The policy makers who, depending on the layer of intervention, often seek to influence sector trends, geographical development trends, market failures, and hence have a greater interest in the functioning of a market infrastructure than in individual impacts achieved even if concrete impact at social enterprise level may serve as evidence and justification for policy action (“has my policy support met my policy objective?”). In the pursuit of common impact indicators it is important to understand that one and the same social impact may be pursued by a multitude of stakeholders and actors for a multitude of reasons. These reasons may be direct or indirect results of the social impact activity and therefore are likely to require different social impact indicators in order to express to what extent such varied interests and expectations are met. As much as the outcomes of a given social impact activity may be positively correlated because they have, at their roots, the same social issue, it is equally evident that these results sought by various stakeholders are not necessarily (and actually very unlikely) the same. Consequently, any attempt seeking to express the social impact of an activity through one single measure that satisfies the information requirement of the entire spectrum of stakeholders is bound to fail: For instance, a social entrepreneur seeking evidence that his activity contributes to eliminating the negative societal impact of reoffending ex-prisoners (including domestic violence, precariousness of their families, social marginalisation of ex-prisoners and their families etc.) will very unlikely be served with an indicator that exclusively expresses the public cost saving generated by the number of ex-prisoners prevented from returning to prison.
CFI.co Spring 2013