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Whether it’s at the country, corporate or individual level, this blog considers how to gauge and measure impact.

Monday, October 29, 2012

NexThought Monday: Sharpening the Social Impact Lens: Why We Need a Broad, but Clear View on Impact Measurement

By Daniel Ramirez

 

Any organization engaged in poverty alleviation struggles, or should struggle, to reach clarity on the effects of its work. Understanding impact helps us be accountable to clients, partners, funders, investors, and indirectly to the entire industry. Yet for most socially-driven financial institutions, impact is incredibly difficult to both attribute and dimension. This reality forces organizations to search for indirect ways to understand and communicate the fruits of its activities.

 

Outputs vs. Outcomes

The traditional method for a financial institution engaged in impact investing (such as Calvert Foundation) to measure social performance is by tracking an investment through a progression of stages: inputs, outputs, outcomes, and impact. For example, an input can be a loan to a developer of affordable housing. Determining the output of the loan consists of collecting certain data points, like the number of low-income housing units created by that developer. A weighting methodology can then be applied to attribute a portion of the output to the loan.

 

Serious challenges appear immediately beyond measuring and attributing outputs. Identifying accurate outcomes – the social benefit accrued as a result of the investment – requires careful observation for a significant time period. Impact goes a step further, and seeks to attribute the outcome against a hypothetical situation where the investment didn’t take place, a type of inquiry that basically requires randomized controlled trials. And even if an organization could capture the impact or outcome of one investment, there are no economies of scale because the results can’t necessarily be generalized to the whole portfolio.

 

Applying a Social Lens

 

Despite the challenges, financial institutions can still work to understand the shape of their impact. One promising way is to organize activities around an issue, creating a social lens through which to contextualize and focus investing. From there, an organization can determine how they’re best able to address the issue, which in turn determines appropriate investing filters and social performance metrics. The case of investing through a gender lens is an encouraging example of this strategy, where investing organizes around women’s economic empowerment and access to quality healthcare.

The social performance metrics can take a multitude of forms, but the overall shape of impact is understood through the broader set of factors. For example, a socially-driven financial institution like Calvert Foundation can target areas where there are historical barriers to goods, services, and representation by making investments to women-owned businesses or organizations with strong representation of women in management or on the board of directors. In this case, though the investment may target a high-level issue, there may be difficulties in determining the attribution, scale, or depth of impact data. At the same time, a socially-driven financial institution could invest to fund outputs with clear causal connections to beneficial outcomes, say by lending to a health care facility that provides affordable, high-quality pre-natal care to low-income women and can demonstrate how the increase in the number of patients served affects birth outcomes. Here, while the marginal effects may be understood more easily, the investment may not address systemic causes of disparities. But as both investments are understood through their contributions to a larger, multifaceted problem, the social lens repositions them as aspects of a solution. Social performance metrics are then used in conjunction with more descriptive and anecdotal details to help verify that investments are performing as intended.

My own experience with lens investing is through work with Calvert Foundation’s Women Investing in Women Initiative (WIN-WIN), which partly resulted from a desire to adopt a gender lens to the portfolio. The development process was much like what has been described. The lending teams identified organizational strengths to leverage, and developed filters and areas of lending focus. Strong risk management practices underpinned the work so that no risk sectors would be adversely affected by the impact focus. Partners were identified for financial support as well as visibility, and social performance metrics were crafted to identify outputs that would verify that an aspect of the motivating issue was being addressed. In short, mobilizing for the initiative jibed with how an organization with a broad-based mission statement like Calvert Foundation should address a large issue – through acknowledging its complexity and engaging in a multipronged fashion. (Check out a NextBillion post on the WIN-WIN initiative here).

 

Grouping outcomes to tell the broader impact story

As always, there are potential drawbacks in the method. For example, by defining a social lens the organization eschews a picture of total outcomes. So, investment activities may have many outcomes apart from the one highlighted, some with social benefit and others that are more ambiguous. Another drawback is that although the social lens allows an organization to speak of its investment in terms of the impact, there is still a lack of precise measurements in terms of marginal impact. The last part has an obvious effect on strategy, because great care must be given to identifying areas of focus within the social lens. Organizations must be able to rigorously defend their decisions to invest in terms of relevance to the issue and the potential to drive positive change.

While difficulties with measuring social impact will always exist, investing through an initiative-driven lens helps organizations understand their activities through a broader impact story. Beyond investing through a gender lens, there is great potential in a broader array of lens-investing opportunities: funding smart-growth development practices, or investing in industries with high potential for job-creation, or addressing the effects of climate change. In an industry that is still relatively small and new, lens investing offers an opportunity to properly situate activities in a way that demonstrates relevance, viability, and a way forward for large organizations and public policy.

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  • Managing Partners

    William Davidson Institute
  • Sponsoring Partner

    Citi Foundation
  • Content Partners

    IADB

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