April 9, 2020

The Role of Evidence in Impact Investing

How to put evidence center stage when deploying capital in pursuit of impact.

By: Mariah Collins, Michael Etzel

EverFi, a decade-old social enterprise providing online education and training, experienced the rigors of evidence-based impact investing firsthand when it received an equity investment from The Rise Fund. A $2-billion impact fund created by private equity firm TPG, Rise evaluated EverFi’s potential for generating social returns. Drawing on applicable research studies, Rise projected that EverFi’s college-level programs aimed at boosting financial literacy, curbing alcohol abuse, and preventing sexual assault would result in significant social benefit. Taken together with EverFi’s market-leading position and growth potential, Rise bought a major stake.
The data Rise collected also had an unexpected spillover effect on EverFi’s operations. It showed greater impact for high school and middle school financial literacy programs compared to college programs, an insight that prompted EverFi to launch new programs for younger students.

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Like a growing number of companies across the globe, EverFi’s business strategy embraces profits and social uplift. And Rise exemplifies the investment community’s increasing interest in using evidence to steer investments that aim for both profits and measurable social good. Yet, how to bring evidence to bear remains an open question for many investors.
Impact investors have experimented for years with methodologies that gauge social value. Examples include REDF’s Social Return on Investment, Root Capital’s Efficient Impact Frontier, and Bridges Fund Management’s Impact Radar. More recently, the Impact Management Project (IMP) has tapped the thinking of more than 2,000 practitioners to achieve consensus on five dimensions of impact measurement and performance. And the International Finance Corporation (IFC) released its nine Operating Principles for Impact Management to help establish a common discipline around managing investments for impact throughout their lifecycle. 
Against this backdrop, The Bridgespan Group has worked with a number of impact investors to determine how to put evidence of both a company’s products and services, and its means of production (e.g., labor practices, environmental impact of supply chain, etc.), center stage when deploying capital in pursuit of impact. From this work, we have identified three essential practices that complement the emerging industry standards: (1) use quantitative evidence, (2) assess impact potential in due diligence, and (3) manage impact during ownership.
Use quantitative evidence: Qualitative data conveys important information. Do people like a particular product or service? What do they say about it? How do they use it?
Quantitative third-party or independently verified assessments of social or environmental impact fill an important gap in understanding whether a product or service is likely to create the impact desired. Of course, this evidence must be translated with care. A study based in India, for example, cannot be applied to another country without consideration of context, such as urban versus rural setting or similarity of income brackets. Fortunately, tapping into quantitative evidence does not always require a randomized controlled trial (RCT), the gold standard for evidence. In fact, RCTs represent only a fraction of the global trove of social science research reports.
Foundations and a number of government agencies over the past decade have relied heavily on such research to guide funding for social programs. This “what works” movement has spurred the development of an industry around social outcomes measurement, led by organizations like MDRC, a nonprofit social policy research organization; the Abdul Latif Jameel Poverty Action Lab (J-PAL) at MIT; and Mathematica Policy Research, a pioneer in using research to shape public policy. Navigating Impact, an initiative of the Global Impact Investing Network, is one offshoot of this movement. It helps investors select impact strategies and adopt metrics aligned with the existing evidence base.
The Global Innovation Fund (GIF), a London-based nonprofit that invests in innovations to improve the lives of the world’s poorest people, has created its own evidence-based tool to forecast, track, and evaluate its impact investments. Its Practical Impact approach uses available research to project the number of people benefitting, the depth of impact on those involved, and the risk-adjusted probability of success. These impact forecasts inform investment choices and allow impact management at the portfolio level.
Assess impact potential in due diligence: Historically, impact investors have put money into a deal first and measured social or environmental change later. This approach inherently brings uncertainty about what impact success would look like—opening the door wider to selling the idea of impact without delivering on actual impact (so-called impact washing).
The evidence-based approach creates a check on impact washing by rigorously assessing potential impact and establishing key performance indicators before a deal closes. These indicators span both outputs (for example, how many farmers participate in a particular program) and outcomes (increases in the farmers’ productivity and incomes), as both are necessary to understand impact.
Investors increasingly want to estimate impact before making an investment decision. The IFC, for example, recently replaced its ex-post (after making the investment decision) Development Outcome Tracking System with its Anticipated Impact Measurement and Monitoring (AIMM) assessment tool, which assesses impact both ex-ante (before making the investment decision) and ex-post.
PG LIFE, a blended private markets impact fund launched by Partners Group, conducts due-diligence based around IMP’s five dimensions of impact management and performance. It evaluates each potential investee’s ability to support a specific UN Sustainable Development Goal (SDG), following a three-step process: 1) creating a logic model to establish the connection between a company and the SDGs; 2) assessing impact based on company-specific studies and the broader research literature; 3) selecting key performance indicators for measuring impact over time. The information from this process informs whether the five-member investment committee approves a deal.
Manage impact during ownership: While it’s possible for financial and social returns to advance in tandem, in many impact investments there’s a real risk of backsliding on social impact over time as attention drifts to financial returns. For that reason, evidence-based impact investing comes with expectations for building mission into an investee’s business model and managing the investment for impact performance. Establishing performance management tools and systems explicitly tied to impact is a necessary step before any deal is closed.
The Rise Fund’s Impact Multiple of Money, a social return on investment metric TPG developed in partnership with Bridgespan, serves as both a pre- and post-investment tool. Impact Multiple of Money requires Rise to select a set of key performance indicators to track impact—an approach shared by the IFC’s AIMM. These indicators appear in periodic performance reports alongside financial indicators. Rise also helps investees stay focused on impact. In some cases, it sets “impact covenants” for portfolio companies to ensure impact remains a central management goal.
PG LIFE and GIF also build impact into investment management. Within the first 100 days after an investment, PG LIFE has set a goal for management teams to agree on how to measure and support impact. PG Life also requires impact data from their companies annually to track and measure progress throughout the investment period. GIF typically builds rigorous evidence generation into its investments. This allows updating of impact forecasts and informs management decisions.

Evidence will underwrite the future of impact investments

GIF, IFC, PG LIFE, and Rise illustrate both the evolution and quickening pace of experimentation with evidence-based approaches that tap available research to inform and manage impact investments. They also highlight the diverse approaches investors may take. No one size fits all.
This diversity of approaches is a sign of the market’s increasing maturity and a needed spur for more private-sector investment. Whatever the approach, evidence keeps investors’ eyes on the impact prize, and it lays the groundwork to persuade more conventional investors to pursue both profit and purpose. The stakes are high. Global issues such as hunger, inequality, and climate change require greater and sustained capital allocation. Evidence-based impact investing can lead the way.

Mariah Collins is a manager with The Bridgespan Group, and Michael Etzel is a Bridgespan partner.

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