Metrics to evaluate your impact investments

By installing its own water infrastructure in new housing developments, Mexico-based Agua Natural en Red is delivering affordable purified water directly to its clients, saving them not only money, but also time and space by eliminating the need to buy and store water containers.

The system has environmental sustainability benefits as well, since the bottled water trucks driving through the streets in Mexican cities contribute to increased carbon emissions, while the plastic water containers they deliver generate waste. The company is clearly contributing to solving both social and environmental challenges. But how do you measure the impact of a company such as Agua Natural en Red? This is a critical question for any impact investor. For if impact investing is to fulfill its dual nature — delivering both profits and social or environmental impact — you need to be able to measure both these returns on investment.

This example illustrates two important and related developments in the evolution of impact investing’s market infrastructure: measurement and certification systems. Agua Natural en Red is part of the portfolio of IGNIA, a Mexico-based impact investing venture capital fund. IGNIA is a so-called “pioneer fund” participating in an early version of the Global Impact Investing Rating System, which provides comparable and transparent social and environmental performance data on enterprises seeking investment capital. Meanwhile, IGNIA is also a certified “B Corporation,” which means it has met B Lab’s high standards of social and environmental performance, legal accountability and transparency.

Of course, as anyone familiar with the investment and finance sector knows, measuring returns is a complex business. It took decades for the traditional financial sector to develop robust ratings and reporting systems, and even then, there remains room for improvement. Add in the assessment of social and environmental returns, and the complexities increase dramatically. While it’s one thing to count the dollars, another is to put hard numbers on the returns to society of improved health care or the value of a healthy tropical forest. Take water provision — when investing in this essential human and natural resource, would you want to see your returns measured by the number of people served, the volume of water delivered, the lower disease rates resulting from access to clean water, or the improved viability of local rivers and watersheds?

The good news is that much work is being done on developing the kinds of systems needed to help you — as an investor — gain a clearer picture of how your money is being put to work and the impact it is making. In addition, certification and legal systems have emerged that make it easier to identify the investments likely to make and sustain the kind of impact you’re looking for. At the same time, policy makers are introducing measures (whether by offering investors tax incentives or financing the development of an ecosystem of investment fund managers and other intermediaries) that will help attract more people and organizations to impact investing by fostering the growth of robust market infrastructure.

The ability to measure impact investments is among several pieces of scaffolding needed to support the growth of the impact investment sector. In fact, assessment and rating systems are among the most important tools for impact investors. Here’s what we see as the critical elements of this support system that you, as a current or prospective impact investor, should be looking for:

• Data on financial performance. The industry is growing and attracting more investors because it’s building up the kind of robust data on the realized financial and impact performance of investments and funds that is available in traditional investing.

• Impact performance measurement. If the practice of using investments to pursue social and environmental impact as well as profit is to become more broadly adopted, that impact needs to be measurable. As with certification and legal registration, these systems provide an easy impact screen for investors and others who may not be ready for in-depth impact analysis or want to do all the measurement legwork.

• Certification and legal registration. Certifications (such as the B Corp system) that demand rigorous assessment processes and higher levels of legal accountability can give investors confidence in the performance, risk mitigation and practices of impact enterprises. In addition, a new corporate form, the “benefit corporation,” is taking rating systems one step further by legally enabling and requiring companies to pursue their social and environmental missions as well as creating traditional shareholder value.

• Policy measures. Governments play a critical role in creating the kinds of policies that will encourage the growth of the impact investing industry. These measures increase market transparency, make it easier for you to participate, and enhance your choices as an investor.

The nature of impact measurement and management will continue to spark debate, particularly questions such as whether general or specific assessments of social benefit are most appropriate and how impact can be attributed to individual investors. However, the good news is that an ecosystem is rapidly emerging to support impact investing, with smart thinkers and energetic activists bringing their skills and ideas to bear on propelling this industry forward and making it easier for you to engage in this form of investing.

Adapted from “The Power of Impact Investing: Putting Markets to Work for Profit and Global Good,” a new book by Judith Rodin and Margot Brandenburg published by Wharton Digital Press. Copyright belongs to The Rockefeller Foundation.

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