What’s Next for Impact Investing: Definitions, Measurement and Rising Expectations


Devex Impact, By Adva Saldinger

July 09, 2014



Impact investing represents a potential additional funding stream for development, but the field is still evolving and those working in it warn we may be expecting too much, too soon.


While the field may be beyond its initial phase, stakeholders focused on building the infrastructure and proving its case agree that there is still much work to be done.


Impact investments are made with the intention of generating measurable social and environmental impact, along with a financial return. It’s clear that the sum invested in this way is growing — a recent study showed that last year about $10.6 billion in impact investments were made and investors intend to commit this year a further $12.7 billion or 19 percent more.


The study by JP Morgan Social Finance and the Global Impact Investing Network also highlighted that about 70 percent of the total money is invested in emerging markets, and that investors are most planning to increase their allocations in sub-Saharan Africa.


Emerging markets in particular present opportunities for impact investing as increasingly companies are using market-based solutions to tackle development challenges, Bart Houlahan, co-founder of B Lab, told Devex. While impact investing is not going to replace donor funding, he said, it may provide the opportunity to scale more quickly and effectively in situations where market-based approaches to development challenges are possible.

“There has been a shift from strong headwinds to tailwinds in regards to interest, but that hasn’t translated into significant meaningful capital being deployed,” Sonen Capital CEO Raul Pomares noted in an interview with Devex.

Several in the field share that sentiment that critical challenges — mainly around definitions, measurement and proven track records — and outsized expectations are restraining some potential.

Finding the right language

There is more clarity now about what impact investing is, but one of the greatest challenges remains around how to define and talk about those investments.


Impact investing is not easily defined, in large part because there are a spectrum of different returns that are acceptable to the variety of  investors involved. Some investors, mostly philanthropists, will look to impact investing to provide a sustainable, re-investable flow of capital and be willing to receive no return. On the other hand, other investors may be willing to accept low rates of return in exchange for significant social or environmental benefits and there are also those who expect competitive returns.

“The language of impact investing could prove to be exclusionary and could prove to hamper growth,” we learned from Erika Karp, founder and CEO of Cornerstone Capital, who worked in mainstream capital markets before starting the company.

Too often, she said, the language used to describe impact investing focuses on social impacts and doesn’t speak to traditional capital markets which are unlikely to give up financial returns.


But if the language changes — and it’s starting to — to become less divisive, dismissive or arrogant and takes into account the constraints and motivation of mainstream capital markets, then more growth is possible. Until the language more closely aligns, impact investing will remain a fairly small niche market.


One example of where language could be harming growth is the way impact investing is often equated with funding high-risk social enterprises, Pomares said. This happens with great frequency in the development community and can turn off investors who have a specific risk appetite. Discussing a more holistic portfolio, that may include private equity for social enterprises but also global corporations that have a meaningful impact, could be useful in educating potential investors, he added.


The Global Impact Investing Network is tackling the need for common language in defining impact and financial performance for impact investments.


The GIIN created IRIS, a catalog of performance metrics that impact investors can use to evaluate deals, measure social, environmental and financial success. The goal is that by using a set of common definitions the industry can achieve more standardization, said Amit Bouri, managing director of the GIIN.

“There’s been a discussion around the definition and boundaries of impact investing since its earliest days,” he told Devex, adding that for the GIIN definitions allow for mutual understanding and flexibility for different types of investments.

The IRIS definitions have been adopted by various rating systems including B Lab’s Global Impact Investing Rating System, GIIRS and PRISM, a rating system for the Indian market.

Measurement is critical

Those definitions help to tackle what is one of the most often discussed challenges that is impeding growth in impact investing — accurately measuring and tracking outcomes.


Generally there is a consensus that impact investing must move to a common set of metrics and methodologies in order to benchmark progress and build the field. In the past few years IRIS and GIIRS have helped to develop that common system.


B Lab, a nonprofit founded in 2006 with the mission of serving entrepreneurs who are using business as a force for good, developed B Analytics, a database tool for measuring and analyzing impact along with the GIIRS. GIIRS hopes to serve a similar function as Morningstar or other ratings systems serve for the commercial investing market. The ratings it issues are based on social or environmental performance and not financial returns, though it does provide that information and facts about the company’s size.

“Like any new marketplace perfect can be the enemy of good,” Bart Houlahan, co-founder of B Lab, told Devex. “The definition of the entire space is still under consideration and appropriate metrics and methodologies to capture impact will continue to evolve.”

It’s been about three years since the GIIRS was introduced and it’s certainly been an evolution, he said, adding that it has undergone several rounds of changes to make it easier to use and clearer in its ratings.


Initially the ratings combined an assessment of the company’s business practices and a company’s impact business model into one score. Recently, however, the GIIRS split the rating because there is no correlation between the two, and by splitting the ratings it allows different types of investors to best evaluate the right investments for them.


While there has been some progress made on tracking outcomes, there is one area that still needs work — measuring impact after an investment. While GIIRS and IRIS have helped with the pre-investment metrics, there is no guide for what to do afterwards, Yasemin Saltuk, Director of Research for JP Morgan Social Finance, told Devex.

“I think that’s probably the gap and why there is so much focus right now,” she said.

The impact measurement working group at the G-8 is working on the issue and is trying to create a set of best practices from the start of the process to the finish, including a plan for exiting the company, Saltuk noted.

See more about impact investing:

Proving success

In order to attract more investors of all kinds, there needs to be more proof that impact investing is effective — both socially and financially. Part of that means having a good pipeline of deals and greater sharing across the field.


Traditional capital markets operate on a broad scale, with products for a variety of clients and an ecosystem and infrastructure that help the system function. Impact investing does not have that yet and so it is something that  investors, firms and other field-builders are working to establish, according to Sonen Capital’s Pomares.

“The most significant impediment is how you demonstrate the viability of investments,” he said.

Many investors, including many foundations, won’t look at an investment until it has a three year track record, which given how young the sector is can prove quite challenging. But once more firms have track records, and share their results publicly, it will unlock additional traditional capital from individuals, pension funds and foundations.


Track records of success are important and will take time, but instead of just waiting while those are developed there are some interesting partnerships between organizations with experience in finance and impact investing, which are trying to prove experience “by proxy,” said Saltuk.


One example is the Global Health Investment Fund, a partnership between JP Morgan Chase, the Bill & Melinda Gates Foundation and Lion’s Head Global Partners which aims to catalyze investment for new technologies that address global health challenges.


Along with proving a history of success, it’s crucial to have a reliable pipeline of new deals and investments across sectors and asset classes.


Finding good deals is always hard work for an investor in any type of market, Bouri said. With impact investing still evolving people are working to ensure the right information flows to the right places. Certain funding gaps, like early stage funding, seem generally less attractive to investors, because of the risk. It is however an area where there is space for investment and growth.


However, Saltuk mentioned that “capital is growing at the pace of the opportunities that exist to receive it,” and while impact investing is small when compared to the rest of the commercial market, there isn’t currently a much greater absorption capacity.

Growth potential

For all the talk of growth and the potential for more dollars to flow to impact investing, the pool of capital committed remains small in comparison to the mainstream markets. As momentum picks up, questions of how big impact investing could or should also arise.


The excitement about impact investing’s potential to open up more financing for development may be creating outsized expectations, said David Ferreira, an expert in the field, former partner in a private equity business and until recently the GAVI Alliance’s managing director for innovative finance and private sector partnerships.


Ferreira, who has long been a proponent of innovative finance, told Devex that while he thinks impact investing and social investments are great, the success and size of the market don’t currently match the hype. In his view, many impact investments will never be suitable for commercial investors, and should be acknowledged as appealing to investors who have the ability and appetite to blend financial and non-financial returns.


Several of the impact investing examples held up as candidates for commercial investing “seem to me to be hopelessly complicated, uncommercial and small,” he commented, adding that it’s quite a leap from the current state of most impact investments to products that are broadly commercially investable.


In part, this is because the trillions of dollars in the commercial capital markets are largely constrained to achieving the highest possible financial returns, and do not have the latitude to trade off financial returns for social impact “returns,” in the same way as, say, a high net worth individual or a philanthropic foundation may, Ferreira said.

“How do you create a set of assets that play into that large pool of commercial capital?  You don’t do it by overlaying new return criteria,” he explained.

The success of investment opportunities seeking to attract commercial capital will be determined by whether they can make as much or more money for investors than competing investments.  While some impact investments can achieve that, many cannot, according to the same expert.


Similarly, while some impact investments can achieve scale, many cannot. While that is a reality, it is not necessarily a bad thing, Ferreira said, clarifying that it is important to be clear about the distinction and is “dubious about attempts to define impact investments as a single commercially investable asset class.”


Impact investing and social finance as a whole offer advantages other than just the ability of a subset of those investments to attract commercial capital, he said.


“Private capital will never entirely replace donor capital,” Ferreira noted.


We must acknowledge, he continued, that commercial capital, donor capital, and blended return capital all have their place — and it is equally important to seek to work on improving the connections between the various sources of capital. The outcomes-based measurement, transparency and reporting that accompany impact investing can themselves help to make a stronger case for effective development funding.


As the impact investing community works through this next phase, it is not only about focusing on one of these groups, but on the broad spectrum of investors and investment types.

“There is room for growth on all of these dimensions,” Bouri said. “We try to support growth in size and quality to make sure one doesn’t happen at the expense of the other.”

By developing a better infrastructure impact investing can ensure that it has the efficiencies of a vibrant market where investors can find the right companies and vise versa, he explained.


“Right now there aren’t clear enough signals and there’s poor information flow, so the thing that we think is the most critical to address is to strengthen the flow of information and of learning so investors and enterprises can scale their activities and ultimately lead towards more capital flowing — and of course, more people at the end of the day benefiting from the services provided by socially or environmentally oriented businesses,” Bouri said.


See the full article on Devex Impact.

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