As this blog series progresses, we’ve built the case for the importance of impact measurement to organisations, stakeholders, investors and the market. But the actual process of impact measurement may still seem a bit of a ‘black box’. With a variety of approaches offered by organisations on how impact should be measured and managed, it can be confusing to unpick exactly how impact should be measured.
This week, we hope to wade through this confusion to highlight the strengths and weaknesses of current approaches and the key factors to consider in impact measurement. The good news is that the market is beginning to develop an agreed set of well thought out standards, the bad news is that a missing factor (or the missing counterfactual) means that many impact measurement results may still be highly misleading.
As the last blog explained, a growing awareness of the value that impact measurement brings has led to stakeholders developing different approaches to the discipline. The aim is to find an alternative to traditional development programme approach to impact evaluation without the same time burden, rigid evaluation framework or cost, which can be 10-15% of total budgets.
Evolving beyond simple qualitative reports, market leaders have developed an impressive array of frameworks and tools to help track impact. The market is gradually coalescing around a best in class set that include the Impact Management Project’s 5 Dimensions of Impact to assess impact, IRIS+ to find common benchmarked metrics that align with the United Nations Sustainable Development Goals, and the IFC led Operating Principles for Impact Management, which assess impact manager compliance with best in class frameworks and practices.
Nevertheless, current approaches are still lacking in three complex but significant ways:
1. Beneficiary outcomes – impact measurement often concentrates on the outputs of investees and enterprises, rather than the impact this has on beneficiaries. Organisations may track mosquito nets handed out, without realising they are used for fishing rather than disease control.
2. Negative impacts – investors often track positive outcomes but fail to properly assess and report unintended negative outcomes from investment.
3. Proving additionality – at present, investors make qualitative judgements about whether their investment ‘would have happened anyway’, meaning impact results often confuse correlation with causation. We go into the consequences of this below.
Correlation between two events simply indicates that a relationship exists, whereas causation more specifically says that one event causes the other. So when impact measurement observes correlations between impact investment and impact performance, this doesn’t imply causation. In reality, omitted variables bias, selection bias and reverse causality may drive a ‘counterfactual effect’, which is the impact that would have happened in the absence of an intervention.
To explain this, the table below may help. It looks at the self reported health status for individuals and whether they have visited a local health clinic that aims to bring essential medical facilities to an underserved rural community.
On the face of it, this table might suggest that health clinics cause people to get sicker. This is, of course, completely wrong, and misses the fact that individuals who attended this health clinic were already less healthy. Statisticians call this ‘selection bias’ and it is the same reason that only studying living people is not a good way to get information on the causes of mortality.
Similarly, a study that tracks individuals over time might find a correlation between poor health and visiting a health clinic, but this would omit things like their immune system, exposure to illness, lifestyle that both a) make people go to hospital and b) increase their chances of getting ill.
In the context of impact funds, the fact that fund managers pick leading examples of impactful businesses may mean they measure the impact of being a competent impact enterprise rather than the impact of the investor. Alternatively, the fact that an investee is on the trajectory toward becoming a profitable, impactful company may cause a fund manager to invest, or invest higher amounts, rather than the reverse.
Innovest has developed an impact measurement approach that directly focuses on beneficiary outcomes within the context of their community, using statistical techniques to produce valid estimates of the causes of impact. We believe that, if our impact measurement processes are adopted across the market, it is feasible for impact investors to gain a true quantitative understanding of their impact.
It is only when this practice is adopted widely across the market that we can gain a true understanding of the value and additionality of impact investments. Without it, we risk misallocation of responsible capital into initiatives that have negligible or negative impacts on the populations they are intending to reach.
To encourage alignment across approaches, Innovest has developed a set of key principles that we hope can be adopted irrespective of context:
In this diverse world of impact investment with a myriad of different thematic approaches, the reason for measuring impact is simple. We want to know if what we do works. To do this, we want to find evidence to prove an organisation or business is achieving their stated mission, as predicted in a logical theory of change. We want to use this information to improve impact performance, communicate it to stakeholders and improve credibility among partners and networks.
Doing so can create value for organisations across 7 key areas:
Impact Measurement and Management has become a hot topic among impact investors, development professionals and impact driven organisations that care about the effect they have on the world around them. But for many businesses, organisations and stakeholders across society, it can be hard to pin down exactly what this seemingly abstract process is.
Well, Impact Measurement is the process of assessing how much social and environmental impact has occurred and the proportion of observed impact that has been caused by an organisation’s actions.
Impact Management is the process of overseeing the creation and measurement of impact, identifying relevant risks that may prevent the achievement of impact and restructuring an organisation’s activities based on results to maximise impact.
Together, Impact Measurement and Management (IMM) is used by impact-driven social enterprises, organisations and investors, to better understand and improve their impact.
Every organisation generates positive and negative impact through their operations, purchases, hiring practices and strategic decisions, but many lack the awareness and expertise to identify these effects.
And yet, times are changing. Increasingly, companies are waking up to the real opportunities to benefit from knowing and communicating impact, and the risks of being associated with the toxic drivers of the world’s largest problems.
According to the SDG (Sustainable Development Goal) Reporting Challenge 2019, whilst 72% of companies mentioned the SDGs in their reporting, only 1% of the overall are reporting quantitative measures to show their progress towards targets.
Clearly, the demand for IMM is there, but a lack of knowledge and expertise has prevented wide-scale adoption by the market. A huge capability gap exists with much debate ensuing around the “right” way to measure and manage impact.
In Innovest’s latest blog series, we aim to answer some key questions about Impact Measurement and Management and why it is so important for us all to do it. Over the next few months, we’ll be using our industry experience to cover essential topics such as:
Stay tuned for more valuable IMM insights over the next few months.
Displacement is a critical issue, disrupting societies across the world and attracting significant attention from the international community. Indeed, the UNHCR estimates there are over 79 million people displaced worldwide, the largest number since World War II. The problem is most significantly pronounced on the African continent, which hosts over one-third of the global forcibly displaced population. The number includes 17.8 million internally displaced persons, 7.4 million refugees, and 712,000 stateless persons (UNHCR).
In addition, the COVID-19 crisis has further exacerbated the long-term negative conditions endured by vulnerable refugee communities, through the loss of income, employment uncertainty, and decreased allocation of humanitarian budgets – placing them into positions of increasing economic precarity. In these unprecedented times, more significantly than ever before, securing stable formal employment remains problematic for displaced populations, with many dependent on humanitarian aid or engaging in informal sector employment.
Recognising the urgent plight of displaced populations in Africa, two leading displacement focused intermediaries, Innovest Advisory and the Amahoro Coalition, have come together to support the design and implementation of market-based approaches to achieving sustainable livelihoods for displaced Africans.
Both partners recognise the critical role the private sector and private capital have to play in achieving reliable, long-term solutions for displaced persons. Private sector displacement inclusive business and investment models benefit communities twofold, through their ability to educate, train, and employ refugees, and through the provision of products and services that improve their quality of life.
Innovest brings to the partnership its historic experience in refugee inclusive market-based solutions including support to the design of the world’s first displacement inclusive private equity concept with Developing World Markets and a refugee-inclusive SME support technology platform with the International Trade Centre.
Amahoro contributes its expertise and stakeholder commitment to refugee solutions including partnerships with the UNHCR Office for the Horn of Africa, International Rescue Committee (IRC), World Economic Forum, and more. Amahoro is one of the few organisations mobilising the African private sector to be actively involved in refugee economic inclusion. Leveraging its networks and knowledge, Amahoro has supported refugee-focused multilateral organisations in strategically engaging private sector partners.
Innovest and Amahoro will collaborate to design and curate displacement inclusive market-focused projects on the African continent and facilitate their connection with funding and technical support. In addition, Innovest shall formally join the Governing Committee of the Amahoro Coalition and Amahoro will become a regional advisor to Innovest.
“I am delighted to announce this partnership with the Amahoro Coalition,” Justin Sykes, Innovest Advisory Managing Director, said. “As we seek to enable an environment for the deployment of public and private capital and capabilities into livelihoods and local economic development solutions for displaced populations in Africa, partnering with Amahoro their extensive network of business leaders, non-governmental experts and private investors will be invaluable to these efforts.”
According to Amahoro Coalition founder, Isaac Kwaku Fokuo Jr.,
“Africa’s protracted refugee crisis needs transformative and sustainable solutions to be able to empower these vulnerable communities to access better opportunities. Additionally, we recognize the importance of working with market leaders and other partners in leveraging our collective expertise to address this crisis. We are delighted to bring on board Innovest as one of our partners whose experience is especially valuable as we create and deploy innovative and market-based solutions to empower refugee communities across Africa”Isaac Kwaku Fokuo Jr.
About Innovest Advisory
Innovest Advisory is a development consultancy firm that seeks to unleash the power of public and private capital to address some of the world’s most challenging issues. Our mission is to support the creation and scaling of sustainable market-based solutions to development challenges in line with the United Nations Sustainable Development Goals (SDGs). Innovest supports public and private impact stakeholders and social impact initiatives with a range of advisory and project management services. On behalf of our clients, we develop innovative funding and development tools leveraging our expansive network that seeks to contribute funding, know-how, and capabilities to achieve agreed development outcomes.
About the Amahoro Coalition
Amahoro Coalition is an African-led initiative convening business leaders from the region to spearhead the engagement of the private sector in transforming refugee communities. Focusing on education and livelihoods, the Coalition amplifies existing refugee initiatives, stimulates awareness and interest among businesses across the region, generates solutions by facilitating concrete private sector commitments, and serves as a dynamic hub to catalyse policies that encourage companies to integrate refugees within their supply chains.
Innovest Advisory was invited to participate in the Syrian Diaspora Business Forum in Eschborn, Germany and was represented by its Counsel, Michelle McMahon. The forum was orginised by the World Bank Group to facilitate dialogue around opportunities for scaled job creation for Syrian refugees through skills transfer, policy change impact investments and philanthropy. Michelle was present to share Innovest’s work on designing impact investments that improve the livelihoods of Syrian Refugees.