Paved with Good Intentions

by Paul DiLeo

In the long-running discussions about social impact, there are prominent and respected investors and managers who continue to argue that good intentions, perhaps captured in a robust and compelling mission statement, are sufficient to confirm the impact character of a company. In this view, an impact investor needs to review a company’s stated social goals at the time of investment, but thereafter need only focus on the commercial success of the business, on the assumption that the social benefit will automatically follow from the intent; the company doesn’t need to track and report on its success in achieving its social goals.

Grassroots believes that now that it is 2016, good intentions are a necessary starting point for an impact business, but are inadequate and must be followed up with rigorous management and reporting on outputs and outcomes based on a well-articulated theory of change that takes advantage of the latest research on what works and what does not: identifying indicators, setting goals, measuring progress towards goals, and then using those goals to reassess strategy and operations. In our view, investors who are satisfied with ex ante intentions are inadvertently demoting the impact side of the double bottom line to a secondary and non-critical priority in the objectives of the business. In many cases, it appears that this demotion is due to an outdated appreciation of the current state of impact metrics.

The peculiarity of going no farther than good intentions can be illustrated by turning the approach on its head: what if conventional investors were to approach investments in this way? Would we be satisfied with a company that expresses the intention of being profitable, but does not feel it is necessary, and indeed is too burdensome and distracting, to measure whether profits are actually being generated? Hands up! The company would not collect information on costs, employee productivity, or revenues because this would be time-consuming, expensive and distracting. They would not know how to adjust operations or product mix to achieve the profit targets. Investors or other stakeholders, or indeed, company managers, who wanted to know whether profit goals are being met would be referred back to the mission statement – maybe illustrated with photos of piles of money – and assured that management remained fully committed to their intention to be profitable.

Ludicrous, right? So why would anyone be satisfied with an equally absurd approach to assessing the success of achieving the social impact objectives a company has set? The primary explanations are some combination of assertions that impact metrics are inadequate: (1) impact measurement is too expensive, burdensome and “distracting” to management, (2) metrics are not yet available or are poorly defined, (3) there is no consensus on how to define impact, and/or (4) there is no evidence that any particular outputs or outcomes are causally related to the desired impact. Let’s take these one-by-one.

Distracting Management: This is an odd one. It is hard to take seriously a company’s claim to be an impact business if it believes that confirming that it is actually achieving its impact objective, or devoting time and effort to more successfully achieve its impact objectives, are “distractions”. Companies seeking conventional financial investment may grumble about the cost and effort required to prepare financial statements, pro formas, projections and the like, but you don’t hear many argue that investors are unreasonable to expect these before committing capital. These are expenses that are intrinsic to gaining access to conventional capital markets. Similarly, robust and well-developed impact information is a core feature of any impact company and a cost of accessing funding in the social capital market.

No good metrics yet: The Grassroots team has been investing in impact businesses – primarily but not exclusively microfinance – for more than 15 years. In those early days, when the benefits of microfinance were an article of faith, good intentions seemed sufficient, and there wasn’t much data or research to test that faith. Lots has changed since then; the field of impact measurement has advanced enormously.   In September, Grassroots participated in several panels at SOCAP16 organized by the Rockefeller Foundation to take stock of where impact measurement was and where it was headed. The panels (see recording of the kick-off panel here ) provided solid evidence of how much progress has been made:

• Organizations like the GIIN, B Lab and Grameen Foundation have developed and promoted tools, metrics, data bases and standards;
• Consultants like Benetech work with companies to integrate social metrics fully and seamlessly into operations;
• Tideline has exhaustively surveyed asset owners and advisors to figure out how best to package impact data to be accessible;
• The Outcomes Working Group of the Social Performance Task Force has compiled methodologies currently being used by investors in the microfinance sector, including managers such as OikoCredit, Triple Jump, Incofin, Cordaid, GAWA and Grassroots that are leading members of the microfinance investment managers with over $8B AUM;
• Acumen has pioneered “lean data” approaches that use mobile communications and data mining to generate timely and actionable information for company managers at low cost.

Far from having to rely on faith, there are now a plethora of tools and data available for companies and investors to choose from.

But that’s the problem: there’s no consensus on how to measure impact!: This falls in the category of holding impact investing to a standard so unachievable that you have to wonder why the bar is set so high. Conventional investors do not look at a single metric or score in making decisions on how to optimize their financial results. They look at the short term and long term over various business cycles, correlation and volatility, multiple measures of risk, diversification and return. Evaluation of impact is infinitely more complex, because it relies on values, theories of change, and opinions of what is “good” for which there are no correct choices. So suggesting that we cannot require impact metrics to be used until we have all agreed on what is “the” metric is unrealistic or disingenuous. What we can reasonably ask for is an array of standardized measures that ideally enable some peer comparisons and enough consistent data to test results against intentions that each company and investor can choose from. In many areas – health, sustainable agriculture, education, job creation, GHG emissions, asset building and income smoothing – such metrics, albeit imperfect as with most financial metrics, are already available.

Evidence of Impact: As with the specious assertion that lack of metrics or data justifies failing to provide or require impact metrics, this critique is out of date. There is a steadily growing body of rigorous studies that look at impact initiatives and assess how effectively they deliver the change they target. In many cases the results have been sobering, most prominently with regard to microcredit. But critics of impact investment and measurement can’t have it both ways: crediting studies that undermine the case for specific interventions, but then pleading insufficient information as a reason to stand back. As in most areas of human endeavor, impact investing is advancing through trial, error and failure on its way to greater success.

What these outdated and erroneous assertions perpetuate is a mindset and a conventional wisdom that justifies waiting to make impact investments, or treating impact as the expendable stepchild of “real” investing: maybe okay to have around if it doesn’t get in the way.   However, this inadvertent or deliberate demotion of the impact side of the double bottom line needs to be persistently challenged. Whenever we find ourselves discussing the business case for impact, or how impact can goose financial performance we need to turn the question around and ask,

how can financial performance increase scale and scope of impact compared with philanthropy or government approaches?

Posing this question and changing the prevailing mindset can make impact investing a core principle of investing alongside diversification, correlations, and negative screens. The goal is to “bend the arc of the moral universe” as it pertains to investing so that it will no longer be acceptable to passively or blindly collect dividends and interest. Instead an investment portfolio will routinely be analyzed in terms of returns, volatility, risk and how it addresses issues of economic justice, environmental and community degradation, discrimination, and exploitation.