It’s all about context.
Impact investing experts agree that for impact investing to be embraced by the mainstream, more sophisticated ways of measuring impact, mimicking methods reminiscent of those used for conventional financing, are needed. An example of such a tool, the people of the… Global Impact Investing Network (GIIN), would be benchmarks that allow investors to compare the impact performance of their portfolios against that of their competitors in the same way they do for financial results.
With that in mind, the GIIN just announced a three-year effort it calls Impact Lab aimed at developing analytical benchmarking tools, with $4.5 million funding from EQT Foundation, Temasek and Visa Foundation. “We want investors to understand impact performance in ways they haven’t seen before,” said Amit Bouri, co-founder and CEO of GINN.
In addition to being able to compare impact performance with peers, the tools will also help show “how big the impact of an investment is relative to what the world needs,” Bouri says.
Building on IRIS+
In 2019, the GIIN introduced IRIS+, with the aim of creating common standards for impact measurement. It has more than 30,000 users. According to Bouri, the next step was to determine how that impact could be communicated and how to achieve it. To this end, the GIIN launched pilot studies a few years ago, focusing on areas such as access to clean energy, in which a group of investors shared data on their impact.
They then looked at whether they could analyze all investment portfolios – to address the existing vacuum. “At best, investors had data on their own portfolios with no information outside their own walls,” Bourit says. So the GIIN set out to find a way to fill that vacuum.
The first step was to create the benchmarks. Earlier this year, the GINN introduced a prototype focused on financial inclusion. Next is developing and refining a series of benchmarks, starting with agriculture, both sustainable and related to smallholder farmers. After that, the intention is to switch to clean energy. Two more sectors to be determined will follow. Each benchmark is submitted to other members of the impact world for feedback.
As the data and analytics become more sophisticated, investors can also look at the relationship between financial and impact performance, risk and liquidity. Those issues “are rarely backed up by good data,” Bouri says. In addition, the tools will enable other types of other analysis, for example how impact results are achieved over time, with implications for things like retention periods and what can be expected from early stage investments versus later stage investments.
They will also show investors whether an investment is developing at the pace necessary to achieve a specific objective set by the Sustainable Development Goals or other measure. If a fund grows the number of clients served by say 7% per year, is that at, above or below what the SDGs require? “That puts the impact in the context of the broader societal or environmental need,” Bouri says.
Ultimately, the goal is to have a set of benchmarks by the end of the three years that will help the impact market reach a higher level of sophistication. “We are moving beyond incremental progress and making a quantum leap in our understanding of impact intelligence,” says Bouri. In addition, according to Bouri, that more sophisticated understanding is also likely to attract more capital to the sector.