Impact investing is attracting increased interest from various investors. But what is success based on?

While most Ultra High Net Worth (UHNW) families support considering social and environmental returns, many professional money managers could be more supportive.

One reason is a need for more reliable impact data. Fortunately, new methods are helping address this issue.

Key Performance Indicators (KPIs)

Using a set of KPIs is essential for measuring impact and addressing the needs of different stakeholders. Investors prioritizing investment returns may focus on impact considerations that optimize financial performance, while those aiming to create the most social good often prioritize scale and sustainability.

Investees may provide data via public reports, private reports, and ongoing engagement, including a board seat (for private equity and debt investments). Some investors may use standard industry tools such as IRIS+ to align with impact objectives and benchmark like the UN Sustainable Development Goals.

When selecting KPIs for impact investment, consider how they align with your values and goals. You should also be aware of how your choices can have implications for the sustainability of an investee and its ability to scale up. For instance, avoid survey fatigue among beneficiaries by focusing on a few surveys yearly instead of many.

Performance Measures

While more data is needed for impact investors, new initiatives attempt to address these challenges by creating more systematic and comparable analytical tools. Impact management is important in impact investing measurement because they generate the evidence to show that positive social returns are being achieved while also helping identify negative impacts that may go unnoticed or unchecked.

Choosing the right metrics depends on the investor’s goals and priorities. For example, if the investor prioritizes adaptability and speed, simple methodologies like surveys are more useful than methods that require extensive monitoring resources over longer periods. On the other hand, if the investor’s goal is to determine how many lives are being saved, the most reliable data comes from randomized controlled trials (RCTs), which randomly assign individuals to either an impact initiative or a control group. This method is less prone to bias, but it is more expensive than other measuring methods.

In addition to customizable metrics, some impact investors use standardized metrics aligned with their organizational strategy.

Impact Measures

Investing with impact requires specific information to guide investment decisions and evaluate success. The goal is to understand how a project or enterprise can improve lives. Investors use a variety of metrics to measure impact, from output-oriented measures, such as the number of people reached, or the percentage of income increased, to outcome-oriented measures, such as the number of jobs created or the number of schools improved.

One popular method is to compare two groups of people pre-post. However, this type of measurement is susceptible to many outside factors that can skew the results, such as other initiatives being undertaken in a community or global events such as health crises or pandemics. Another problem is the inability to measure human emotions and perceptions, which are hard to quantify.

Other methods include surveys, prone to survey-taker biases that can skew the data received. However, they are useful for collecting representative samples that optimize impact measurements. Finally, randomized controlled trials (RCTs) are among the most respected impact-measurement methodologies. They divide a population into two groups and assign one group to an impact initiative while the other is left unaffected by the initiative. RCTs are more reliable than other methods, as they eliminate outside influences.

As impact investing becomes more mainstream, more investors seek opportunities with social and environmental benefits. However, their enthusiasm has been hampered by the lack of robust and accessible information on the impact of their investments. Getting this data will require changed practices by companies and investors, as well as greater transparency and culture change.

Evaluation

Gathering and using impact data is crucial to the impact investing process. This includes collecting the right metrics and having a framework for an impact assessment that enables investors to make meaningful comparisons with their peers. This is a critical step in establishing trust in the impact investment space.

One of the most important factors that prevent impact investing from becoming more widely adopted is the need for robust data on impact performance. When asked what barriers they faced in making an impact a core aspect of their investments, UHNW wealth holders identified a lack of reliable impact data as the biggest impediment.

Other approaches to impact measurement include surveys, which provide an opportunity to collect data from communities directly impacted by an investment. However, this method can lead to survey-taker biases that skew the data received. Furthermore, it doesn’t solve the problem of causal attribution, which is difficult to measure without being able to control external factors.