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Impact Investing Metrics Help Firms Improve Bottom Line, Valuations

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One effect of impact investing is that it encourages investors to focus on company metrics beyond the balance sheet. A new study shows that focusing on those metrics can help a company increase its value.

Impact investors use many tools and systems to measure social and environmental performance, the better to understand and maximize impact.

Many of these investors also use these data to generate strategic and operational value for their portfolio companies and themselves, the Global Impact Investing Network reported in a new study released this week.

As an example, GIIN cites Bridges Ventures, a specialist fund that invests in the health care, environmental and educational sectors in the U.S. and U.K. It collects data on customer and patient satisfaction and tracks metrics like the number of people its projects move off of unemployment, metric tons of waste diverted from landfills and the number of students enrolled or nursing homes built.

In health care, for example, the data the fund collects “engender trust among patients’ family members and improve patient retention,” GIIN says, and negative data can point to areas for improvement. Impact-related data can also foster goodwill among other stakeholders — governments, for example — which can help streamline approval and permit processes.

The GIIN report comes after a recent investigation by The New York Times on how private equity investments focused on aggressive cost cutting can hurt public services and even cost lives.

According to the GIIN report, impact measurement has always been a core component of impact investing. Ninety-nine percent of respondents in GIIN’s most recent investor survey said they measured the social and environmental performance of their investments.

More interesting, perhaps, 97% of respondents said measuring social and environmental performance was very or somewhat important because doing so can have business value, meaning it can improve the financial performance of investments and inform investment decisions.

Eighty percent of the survey’s respondents reported that they used data on investees’ social and environmental performance to inform business decisions.

“We are seeing an increasing fusion in the use of impact and financial data to make investments that not only optimize impact performance, but also help strengthen an investor’s business,” GIIN’s chief executive Amit Bouri said in a statement.

“Investors are continuing to find synergies between the social, environmental and financial aspects of their work, and they are applying these insights in ways that generate significant value for the investor, their investee companies, the beneficiary communities and the environment.”

The report was based on interviews with 23 investors (17 fund managers, three institutional investors and three foundations), six investees and one service provider. The interviews focused on each participant’s business strategy, measurement practices and use of collected social and environmental data. Target geographies included Africa, Asia, Europe, Latin America and the Caribbean, and North America, as well as global strategies.

The report notes that investors’ approaches to impact measurement vary based on their goals and capacities, and the choice of what to measure usually reflects investor objectives and, consequently, investor intention.

In general, it says, impact measurement best practices for impact investing comprise the following:

  • Establishing and stating social and environmental objectives to relevant stakeholders
  • Setting performance metrics and targets related to these objectives, using standardized metrics wherever possible
  • Monitoring and managing the performance of investees against these targets
  • Reporting on social and environmental performance to relevant stakeholders

Business Value

GIIN’s report highlights how impact investors derive value from their impact measurement practices, describing five drivers of business value they can gain from various stages of the impact measurement and management process. Revenue growth. Social and environmental data empower impact investors and their portfolio companies to drive revenue growth by understanding customers’ contexts, socioeconomic status, access to services and preferences related to products and services.

This information helps businesses to segment customers more precisely, develop effective marketing, access new market segments, and develop and refine product and service offerings.

Improving operational effectiveness and efficiency. Impact investors use social and environmental performance data to inform and improve a wide range of operational issues, from human resources management to accounting procedures.

Investment decisions. Impact investors find that they can improve functions related to investment decisions by actively engaging in impact measurement. Many find that data related to potential or actual social and environmental impact helps them determine which sectors and deals are likely to provide the type of impact and financial performance they are looking for. Measuring and communicating impact can also help expedite deal sourcing.

Marketing and reputation building. Social and environmental impact data are vital to investors and investees for marketing and earning trust with important stakeholders, helping them raise capital, smooth entry into new markets and cut through red tape involving local authorities.

Strategic alignment and risk mitigation. Impact measurement is critical for ensuring that investors’ and companies’ activities are aligned with their missions and strategies. It also helps mitigate risks that relate to both impact and financial concerns.

Monitoring social and environmental performance can provide early insight into overall business performance, with an opportunity to correct course and prevent losses owing to failure to achieve impact and/or financial returns.

“An impact measurement strategy is most beneficial to the investor when it moves beyond counting outputs and is used to inform investment decisions and portfolio management,” Kelly McCarthy, senior manager of impact measurement and management at the GIIN, said in the statement.

“We are witnessing a growing acknowledgement in the impact investing community that impact measurement and management is an incredibly useful strategic management tool.”

— Check out Foundations Slowly Come Around to Responsible Investing on ThinkAdvisor.