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Is it worth measuring impact? A thought-provoking approach

July 7, 2015
GIIN Impact Benchmark Performance

GIIN Impact Benchmark Performance

Two reports caught our attention recently, one from the investment company responsAbility and one from the GIIN. The GIIN report analyzes a unique dataset and brings positive news to the impact investing industry: the financial performance of Impact funds has been relatively in line with traditional private equity funds’ in 1998-2010. On a more cautious note, the responsAbility report wonders if we are not spending excessive resources on intermediaries. As we witness the growth of an entire industry focused on just calculating impact, the report shows the limitations of impact measurement. So is it worth measuring impact?

Lets start with the good news. The latest GIIN report shows the results from the newly-launched Impact Investing Benchmark, comprising 51 private impact investment funds analyzed between 1998 and 2010. Despite the common idea that impact investing needs to be made at concessionary rates, evidence shows that returns are not far from market rates. The GIIN report shows that the report from the Impact InvestingBenchmark is 6.9% versus 8.1% for traditional private equity funds. Smaller funds and impact funds invested in Africa have done particularly well. Overall, about two-thirds of funds in both the Impact Investing Benchmark and the comparative universe have provided positive net returns to LPs. The report highlights that manager selection and due diligence are critical steps in the investment process; nothing too different from the traditional PE universe.

Impact/ESG/SRI performance is becoming more accessible to mainstream investors, according to a recent report by the Money Management Institute, but that hard data may be difficult to interprete. With so many acronyms, one can easily see why some funds could easily portray themselves as “impact” in order to attract funds, and why investors who want to “do good” may rely on intermediaries who can define what has an impact and what does not. The report lists a number of companies and groups focused on developing the right methodologies for impact. In fact, a new industry of intermediaries has emerged.

The responsAbility report asks what type of impact can sensibly be measured. ResponsAbility operates according to a simple formula: the more profitable the investments, the higher the development impact – and vice versa. The industry typically aims at measuring output, outcome, and impact. ResponsAbility argues that funds should focus on measuring output. Their philosophy consists in trusting the basics: if financial returns are present, if end-customers keep buying a product, this indicates an effective impact investment. The fund has a 3-steps approach, as it identifies sectors with a high impact on development, then industries that serve the lower income or smaller companies, and finally picks companies. This approach appears as most cost effective and will for sure continue to provoke a debate in the impact sector.

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