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Things to consider when measuring impact investments

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Impact investing has gained traction since more investors want to see measurable social and environmental results along with financial returns from their investments. But as this developing investment market grows, there is also a need to properly assess the different investments available for funding.

Since it can be difficult for investors to measure an entity’s social and environmental contributions by simply relying on investor reports, a number of tools have been developed to assess its overall value.

What do impact assessment tools measure?

In line with the goal of impact investments to produce both financial returns and measurable solutions, impact assessment tools measure an entity’s value based on its monetary and non-monetary returns— otherwise known as performance metrics. These are:

Financial measurement assesses the income generated by the investee, or return of investment for the investors, for each reporting period. This part of the investment is important because there are investors who prioritise financial returns over social impact.

Non-monetary returns are measured by qualifying and quantifying the investment’s social and environmental impact. This includes the potential impact opportunities, risks and the measures the investment entity plans to take to address or mitigate expected and unforeseen impacts.

By using the assessment tool developed by regulatory bodies, impact investors could learn to evaluate if their investments are underachieving or achieving the current market rate. Likewise, the tools would guide potential investors to differentiate between impact investments and investments that are merely being marketed as impact investments due to some positive results they produce.

Where to find effective impact assessment tools

There are many assessment tools available for assessing an investment’s performance. Investors may look into the overall assessment of their impact investment or compare their investment with other investments within its sector—either way, various assessment tools are available.

The best place to source credible assessment tools is from regulatory bodies and organisations that focus on benchmarking impact investments. These organisations look at a broader view of impact assessments. One such organisation is the Global Impact Investing Network (GIIN), which launched the Impact Reporting and Investing Standards (IRIS) initiative in 2009.

The IRIS is a cross-sector and sector-specific metrics catalogue designed to help investors evaluate and keep track of the results of their investments in a clear, credible manner. Likewise, investees benefit from the IRIS catalogue using the metrics as a guide to clearly document the results of their endeavours.

This way, both investees and investors speak the same language and see a clear picture of how the promised returns are being met.

Not-for-profit organisation B Lab also developed the ‘B Impact Assessment (and GIIRS Rating)’—a tool to assess an entity’s overall environmental and social performance using the Global Impact Investing System (GIIRS). This uses IRIS metrics, along with additional criteria, to grade investments in their performance.

Sector-specific metric reporting frameworks may also be used to analyse impact in the financial, land conservation, employment, healthcare and other sectors. It is worth noting that many of the accepted frameworks in specific sectors have been included in IRIS.

What to watch out for when assessing projects

In response to concerns and to better understand impact investments, the industry has developed the environmental and social impact assessment (ESIA) process to predict and evaluate a project’s potential impact(s) and actual performance.

It is important for all entities interested in becoming impact investment ready to develop their plan according to the ESIA guidelines because these reflect existing internationally accepted standards for good practices.

The ESIA guidelines consider all potential social and environmental impacts, whether intended or unintended, so that both investee and investors have a holistic understanding of the project and its impacts.

Investors should take note of the following aspects:

  • Project description/objectives
  • Timeline and management plan
  • Expected and potential opportunities
  • Expected and potential risks
  • Proposed actions for mitigating impacts
  • Proposed alternatives

Investors should consider how well a company is able to show their expected impact through ESIA guidelines and evaluate its performance using internationally accepted metrics.

This information has been sourced from the World Business Council for Sustainable Development, Global Impact Investing Network, Stanford Social Innovation Review, Investopedia and Nest Egg.

Things to consider when measuring impact investments
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