The practice of impact measurement and management is important to the impact investment field, yet it is inherently difficult and complex. While all impact investors can tap a growing and helpful body of management and measurement expertise and tools, critical challenges and choices remain.
Over the last year, the MacArthur Foundation has developed a report on impact measurement and management across our Catalytic Capital Consortium, or C3, investments. This process provided an opportunity to reflect on our approach, our process and the lessons we learned along the way.
In our view, aggregation, attribution and analysis are three critical challenges for every impact investor to consider. In addition, we have identified several key impact measurement and management principles and practices we use to monitor, support and learn from an active portfolio of approximately 80 various impact investments totaling nearly $400 million. Below we share three critical measurement and management challenges.
Challenge 1: Aggregation
Combining quantifiable âunitsâ of impact within an impact investment portfolio is intuitively appealing but complicated by several factors. For a set of investments within one impact sector, standardized metrics may be tracked and added together for portfolio-level statistics such as tons of greenhouse gas emission avoided or the number of housing units constructed.
However, the funds, businesses and nonprofits within MacArthurâs impact investment portfolio collectively address all 17 of the United Nations Sustainable Development Goals across diverse fields, including climate solutions, affordable housing, community development and smallholder farming in emerging markets, among many others. This wide range prevents aggregating standardized units of impact in a meaningful way at the portfolio level.
Moreover, the nature of intended impact can vary significantly among seemingly similar investments. For example, consider a loan to a mission-driven real estate developer that helped create 500 new retail jobs in an underinvested neighborhood through a redevelopment project. Another impact investment could support a social enterprise that employs 20 people on the autism spectrum who had never been employed previously and require significant ongoing job support.
You could combine the impact metrics from these two investments and say that they jointly supported the creation of 520 jobs; however, this could conflate the intended impact between the two.
This is not to say that the smaller job creation for individuals on the autism spectrum is âbetter thanâ the larger number of retail jobs created in an underinvested community, or vice versa. Instead, it simply acknowledges the specific impact thesis for each of these impact investments and assesses progress accordingly.
Challenge 2: Attribution
Attributing positive impact to our own investments or to investments made by others presents a second critical impact measurement and management challenge.
Consider again the example of the social enterprise providing jobs for 20 individuals on the autism spectrum. If the company then receives an impact investment from multiple investors that enables it to employ 100 people in the next year, how many individuals can each of the capital providers claim to have helped? All 100 or only the incremental 80? How should impact be allocated among the investors? Is it clear that the impact would not have happened without the investment?
Given the potential for conflation or a false level of certainty, we believe our investments contribute to the impact created by our investees. But we do not try to attribute a specific amount of impact to our investments.
Challenge 3: Analysis
Once impact data is collected and compiled, it requires context. Impact data on its own has limited meaning because it is difficult to know how to evaluate it in the absence of robust, relevant comparison data or other contextual information.
For example, to analyze the significance of the 500 jobs created by the real estate developer we would want to know the number of jobs that were intended to be created or how many jobs might have been created with an alternative investment or no investment at all.
Investors generally assess their financial performance relative to indexes or benchmarks. And for impact investments, a range of impact taxonomies, datasets, quantification and assessment methods and benchmarks do exist, including several that MacArthur has supported through our ongoing grantmaking.
Nonetheless, alignment on indexes or benchmarks for impact performance, unlike financial performance, remains inherently challenging due to the variety of goals and definitions, as well as the difficulty of aggregation and attribution.
Principles and practices
The inherent challenges and complexity of assessing impact have informed the Foundationâs impact measurement and management principles. In alignment with MacArthurâs values, we seek to:
- Center the investee by minimizing data collection and reporting burden;
- Support the field of impact investing by using industry standards where feasible; and
- Prioritize learning.
Guided by these principles, we have developed three impact measurement and management practices that are foundational to ongoing assessment of progress across our full portfolio. These practices help to guide ongoing monitoring of our active investments, while also generating important data to inform more formal evaluation and learning activities. These learning activities typically involve engaging third-party experts and collecting a wider range of quantitative and qualitative information, as we have shared in evaluations of our Arts and Culture Loan Fund and the Catalytic Capital Consortium.
Set measurable impact targets
We work with our investees to set measurable impact targets at the outset of new investments. This enables us to assess over time whether the investment is ahead, behind or on track for achieving the intended positive outcomes. For example, we typically review results from the perspective of people experiencing the impact, such as families that can thrive once they have stable, affordable housing. This approach allows us to assess progress across groups of investments or the entire portfolio without having to compile or compare disparate measures.
For example, if we had expected the loan to the community-based real estate developer described above to create 1,000 jobs and the social enterprise investment to create 10 jobs, and they created 500 and 20 jobs respectively, we would know that the first investment fell short of expectations and the second exceeded expectations despite the different scale and depth of impact.
This approach of assessing progress toward targets enables us to compare impact performance across all our investments regardless of impact sector and avoid the aggregation and attribution challenges noted above.
Track capital mobilized
To multiply and amplify our impact, we prioritize opportunities to pave the way for others to commit investment capital too. One way we measure this is by tracking the capital mobilized by our investments.
We know that our degree of influence in mobilizing capital varies, so we rate whether it is high, medium or low. By combining the amount of capital mobilized and our degree of influence, we can generate an estimate range.
For example, depending on the degree of influence we think we have had, we estimate that the $128.5 million MacArthur committed to the eleven C3 investments has mobilized between $1.4 and $3.1 billion in additional capital to date.
Evaluate financial return relative to expectations
MacArthur and a growing community of impact-first, catalytic capital investors prioritize impact when selecting and structuring our investments, rather than maximizing risk-adjusted financial returns. But evaluating the financial results of our investments is essential, too.
Our approach is to evaluate financial returns relative to our expectations rather than to âmarket ratesâ of return or other external benchmarks. At the outset of each investment, we set a financial target that we believe is the most likely outcome given financial risk and opportunity. Our targets may differ from those of other investors or even from seemingly similar investments within our own portfolio.
This investment-specific target enables us to more easily assess financial performance alongside impact performance. In both cases, we assess whether performance is above, below or in line with our expectations. Having a simple, consistent methodology to assess impact and financial performance alongside each other supports our learning.
Continuing the learning journey
Applying our impact measurement and management principles and practices, we use a combination of quantitative measures and qualitative assessments to make an informed judgment about impact progress. This helps generate insights and informs the creation and implementation of future impact investments and initiatives.
Going forward, we will continue to refine how we measure impact and look forward to advancing our practice by learning from others throughout the impact investment field.
Charles Coustan is a portfolio manager for impact investments at the MacArthur Foundation. Disclosure: Through the Catalytic Capital Consortium, MacArthur supports ImpactAlphaâs coverage of catalytic capital.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
