Impact investing aims to direct capital to ventures expected to yield social or environmental benefits as well as profits—an investment approach with increasing appeal across the globe. But there’s a problem. Measuring actual benefits remains largely a matter of educated guesswork. Worse, without measurement standards, impact investing is vulnerable to “impact washing”—selling the concept without delivering on actual impact.
Against this backdrop, The Rise Fund, a $2 billion impact-investing fund managed by TPG Growth, and The Bridgespan Group, spent two years developing a methodology to bring the rigor of financial performance measurement to the assessment of social and environmental impact. The methodology estimates—before any money is committed—the financial value of the social or environmental good likely to result from each dollar invested.
At its heart, the methodology taps into a global trove of research and information about social and environmental interventions that work, and it uses that data to project the social or environmental good resulting from an impact investment. It’s a methodology equally attractive to philanthropy, corporations, or financial institutions. We call this new metric the impact multiple of money (IMM).
IMM puts pre-deal impact evaluation on a par with financial evaluation. Rise will invest in a company only if the IMM calculation suggests a minimum social return on investment of $2.50 for every $1 invested—an IMM expressed as 2.5X. The methodology can be used to monetize outcomes ranging from lower greenhouse gas emissions, to higher educational attainment, to better health. Here are the six steps involved:
- Assess Relevance and Scale: Does the company have potentially measurable social or environmental impact, and how many people will its product or service reach?
- Identify evidence-based outcomes: Identify social or environmental outcome targets and determine whether existing research and data verify that the outcomes are achievable and measureable.
- Estimate the economic value of those outcomes to society: Pick an anchor study that provides an evidence base for the investment’s claims of impact. Then use economic research to put a dollar value on the projected social or environmental change.
- Adjust for risks: IMM uses an "impact realization" formula that discounts the likelihood of achieving the projected social or environmental value.
- Estimate Terminal Value: A concept used in the business world, terminal value in this case estimates the probability that the people reached and the social or environmental value created will continue for five years after an investment terminates.
- Calculate the return on every dollar invested: Start with the total projected social value created by the investment and right-size it to reflect the investor’s share proportional to ownership stake. Rise then divides the projected social benefit of the investment and arrives at an IMM. For instance, an IMM of 8X means $8 social or environmental return for every $1 invested.
IMM is rigorous and fact based, but given the number of assumptions and choices involved, it does not claim to provide a definitive return-on-investment number. It should be viewed as a useful directional estimate of the potential magnitude of a company’s social or environmental change, not a precise calculation. Nonetheless, we believe IMM demonstrates the value of evidence-based impact investing. Time, and rigorous evaluation, will determine whether our optimism is justified.
The Journey to Find Impact in Impact Investing
Impact investors aim for solid financial returns alongside positive social and environmental change. These investors—primarily private equity funds, insurers, pension funds, and foundations—currently deploy more than $228 billion to socially attuned enterprises across the globe, a figure projected to top $2 trillion by 2025. But impact investing struggles to prove its worth.
The sticking point is how to measure the social and environmental impact in impact investing. Most investors currently use proprietary metrics or qualitative assessments, creating a measurement free-for-all that opens the door to promoting the idea of impact without actually delivering it—so-called impact washing. “That’s my number one worry,” said Matt Bannick, a managing partner of Omidyar Network, a leading impact investor. “This is a huge opportunity for people who just want to add another compelling product to market their financial advisory work. Who's going to be able to discern whether or not they truly care about impact?”
Bannick isn’t alone in his concern. Over 75 percent of respondents to the Global Impact Investing Network’s (GIIN) 2018 impact investor survey indicated “sophistication of impact measurement practice” a moderate or significant challenge.
By contrast, investors speak a shared language of risk, return, and liquidity to describe and manage their financial goals. Impact investors need a similar set of shared fundamentals to help benchmark and improve social and environmental impact performance.
Key industry players recognize this analytical shortcoming and have stepped up their quest to better understand impact measurement and management. Several have published articles or reports on the topic, including Root Capital, the MacArthur Foundation, the Omidyar Network, GIIN Navigating Impact, the World Economic Forum, and the Rockefeller Foundation. The Impact Management Project, a collaborative launched in 2016 involving foundations and major investment managers, aims to weave all these threads together into a shared language about impact management and develop a set practical tools to implement best practices.
The Impact Multiple of Money (IMM) methodology developed by The Rise Fund and The Bridgespan Group builds on these efforts with a new approach to impact assessment. Rather than measure impact after the fact, IMM uses social science research to estimate a company’s potential for impact before making an investment. We call this this approach evidence-based impact investing. IMM produces one metric for the expression of impact: for each dollar invested, now many dollars of benefit will the company generate for society or the planet? In short, it aims to put real impact in impact investing. This approach builds on the social return on investment (SROI) approach originally developed by REDF in the late 1990s, and adopted by others like the Robin Hood Foundation.
Chris Addy is a partner at The Bridgespan Group, a global social-impact advisory firm. Maya Chorengel is a senior partner at The Rise Fund, an impact fund that is part of the private equity firm TPG Growth. Mariah Collins is a manager at The Bridgespan Group. Michael Etzel is a partner at The Bridgespan Group.