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In my years as a Chief Impact Officer at a leading impact investment firm and as a long-time nonprofit executive, I’ve learned that the intent of impact investing can mean many things to many different people. Depending on the stakeholder, people will define impact in a different way and seek different desired outcomes.
A CEO at an investment firm shall be interested in whether their impact funds are generating a significant double-digit net return. A start-up entrepreneur or small business owner shall be focused on whether the capital they have raised will allow them to scale, increase production, increase staff, and generate more revenue from what they have defined as their high-impact work or product. Policymakers, philanthropists, and impact-oriented foundations shall be more interested in improving the state of an entire community or changing the value that an investment (or grant) can have.
No matter what interest an individual or organization may have in impact investing, this much is true: without measurement, there is no mission validation. That’s why the data we collect and share is critical to our impact investing strategies. By reporting on our progress, impact investors and others can ensure they are delivering on their missions.
Unfortunately, too often we see that enterprise capitalists who want to do well fail to define goals and measure results. This can often be because their goals could also be tied to vanity metrics or other data that doesn’t reveal or communicate true impact or improve results. For example, it’s one thing for a company to aim to generate a 10% return to funders or add three dozen recent jobs. But it’s a whole other thing when those jobs pay greater than the county median wage, offer great advantages, including wealth-building opportunities like 401Ks, and provide paths and training for advancement.
Fundamentally, investors need to define their metrics and assess whether or not they accurately reflect the aspects that change people’s lives.
Impact investors need to develop an investment framework
Impact investment frameworks must set dual investment objectives for investors and business owners to be sure that investment, business development and impact investment objectives are aligned from the outset.
Each party wants to see a return on the money the company receives, but to achieve real impact, additional criteria have to be met.
It’s one thing that a recent supermarket is profitable, but is the company also prepared to show how the impact is felt across the neighborhood? Is the food market focused on increasing the variety of healthy food options in the community? Does the company provide high-quality jobs to local residents who were previously marginalized or otherwise struggling to survive? If so, are those profits being spent or reinvested back into the community, perhaps through the purchase of recent homes?
At the outset, all stakeholders should clearly define their North Star and include it in the framework. For example, an environmental investor needs to be clear about their mission and the outcomes they need to see. Do they need to reduce carbon emissions or provide more people with reasonably priced, clean energy? If the answer to either query is yes, they need to define how they’ll achieve that and measure their progress.
If investment dollars are being directed to a company, be prepared to determine the impact on the entire community, especially employees. Do wages help employees get off public assistance or meet or exceed the average wage in the area? Do employees receive health advantages and do they build personal economic stability that leads to personal and generational wealth?
By establishing a framework up front, investors can clearly define their goals and work toward them consistently to realize the true meaning of their impact investing strategy.
Clearly define what needs to be measured
The metrics we use to assess the effectiveness of our environmental impact investments need to be intentionally and thoughtfully set to be sure that we are doing the excellent job we set out to do. I have long believed that if you don’t measure it, you’re not doing it!
With the financial and economic implications in mind, check to see if the salaries of recent hires or supported employees are reasonably priced and equal to or above the median wage in the area. Track whether these employees are also enrolling in retirement plans or perhaps receiving equity in the company. Check to see if employees are also receiving additional advantages that enhance family stability, similar to childcare, wellness, and mental health support.
Measuring meaningful impact also extends beyond the partitions of a specific portfolio investment. Impact investors needs to be prepared to track the impact that recent funding or job creation has on a county or city. Are more people coming off the unemployment line? Is the need for public assistance in the community decreasing? Coming back to the clean energy space, are we seeing noticeable improvements in regional air quality? Or are residents’ electricity bills being reduced?
Tracking these kind of metrics takes time, and it takes longitudinal evaluation to see trends and outcomes. But to be sure that impact investors are meeting and exceeding their goals, it’s essential to track them.
As impact investors, we’d like to look beyond short-term gains. Annual reports should include data that convincingly demonstrates that communities are being lifted and lives are being modified for the higher. After all, these metrics are at the heart of the impact investing mission.