Industry Experts Propose New Benchmarks, Metrics for Impact Investing

Between 1998 and 2010, impact investment funds outperformed funds of the same size, according to the Wall Street Journal. Impact-focused funds of $100 million or less posted a 9.5 percent pooled net internal rate of return, outperforming the 4.5 percent delivered by funds of the same size that were not focused on impact investments. The industry, however, is still in its nascent stage and data remains somewhat scarce. In an article for Quartz, William Burckart contends that wealth management professionals are hesitant to propose impact investment funds to their clients for several reasons, including:

• Many financial managers do not really understand impact investments or how to explain impact investment to their clients so they are less willing to bring them up to their clients.
• For the managers that understand impact investments, the lack of metrics in the field cause these managers to be hesitant to suggest them.

To address this issue, several recent research studies and books propose industry-wide benchmarks, metrics, and other methodologies to understand how to measure both the monetary and social impact of impact investing. In many cases, these benchmarks, metrics, and methods are intended to reduce the complexity of the issue and make it easier for individuals to compare impacts across a spectrum of areas.

To address the issue of impact investing, the Global Impact Investing Network (GIIN) released a new report – Introducing the Impact Investing Benchmark. In the report, the authors propose a set of financial performance benchmarks for impact investing funds. Over 51 funds were included in the final study. Findings include:

• Market-rate returns are attainable in impact investing – Over the full period analyzed (1998–2010), the impact investment funds returned 6.9 percent to investors versus 8.1 percent for comparable funds;
• Smaller funds and EM funds have been the strongest performers – Impact investment funds that raised under $100 million returned a net Internal Rate of Return (IRR) of 9.5 percent to investors.

Another key finding of the report is the importance of fund management and due diligence in launching and sustaining a successful impact investment fund. Especially in the first year of the impact investment fund, the experience of the fund management is essential to producing a return for investors. Cambridge Associates will maintain and update these benchmarks on a quarterly. Read the report…

In a report from Burckart Consulting, the authors examine benchmarks, metrics, and methods that could make the potential return on investment and social impacts of these investments easier to explain to financial managers and their clients. First, the authors contend that the industry needs to go beyond the utilization of mainstream providers of Environmental, Social and Governance (ESG) data—MSCI, Thomson Reuters, and Bloomberg—and adopt leading impact investing tools for accounting for ESG outputs. Several of these examples include the Global Reporting Initiative (GRI), Impact Reporting and Investment Standards (IRIS), Global Impact Investing Rating System (GIIRS), and Sustainability Accounting Standards Board (SASB). However, the impact investment community should also focus on creating more specialized investment products that enable a specific portfolio and broader systems perspective on impact created, according to the authors.

In addition to new accounting systems, the impact investment community needs to establish education program for financial advisors and managers for greater clarity for how investors, advisors, and firms can integrate impact information in a way that would be strategically material, as well as socially and environmentally effective. The report also calls for more transparency in the field of impact investing.

In a recent book – The Pinchot Impact Index: Measuring, Comparing, and Aggregating Impact –Michael Libes proposes a potential solution to measuring, comparing, and aggregating the impact of organizations on social and environmental issues including entrepreneurial support organizations, nonprofits, and impact investors. Libes believes that by using a logarithmic index organizations maybe be able to aggregate its impact across a set of projects or across a portfolio of impact investments.

The Pinchot Impact Index uses a scale of 1 to 7 (or -7 to +7 to include both positive and negative impacts) to measure the impact of an organization’s projects or investments that mix orders of magnitude and scale. Since impacts vary tremendously, Libes contends that the Pinchot Index allows organizations to quantify their impact better than trying to create quantifiable comparable units for diverse projects.  Read post by Libes about the book…