P R Ganapathy | July 14, 2016

The case for a common language in Impact Investing

This article has been co-authored by Chaarvi Badani

Impact Investment in the World
Impact investing has taken the world by storm in the past decade. It has the potential to change the world as it focusses on both financial and social return. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

Impact Investment in India
In the Indian scenario, impact investment is done at smaller scale and is, in some ways a nascent, evolving field. It has taken off properly in mid-2009 and has been constantly growing ever since. According to The India Impact Investment Story, a 2014 report by Intellecap, there are currently 100-odd such companies in India, which have invested a total of $1.6 billion in around 220 social enterprise firms. While there may be differences in the figures related to the sector, one thing is certain – that this an area that cannot be ignored. Though dollars are easy to measure, the impact is much less so.

This brings up the question of the impact of impact investments itself. While the financial gains and profitability are often well documented, the question of the social impact of these investments is still left unanswered. Each fund may release different numbers that they claim to be the social implications of their investments, but there is no commonly used measure in India to document these the same way. This leads to a lack of comparison across funds and makes it difficult to rate them. On a broader level, it is imperative to know that the volumes of capital being pumped into this sector are fulfilling the purpose of bettering the lives of those in poverty.

Credibility in impact investing, both for individual investors and for the industry as a whole, requires sound social, environmental, and financial performance measurement practices. At a minimum, these must include the use of performance metrics whose definitions are standardized across the field. Not only does this establish legitimacy for impact investing, it also enables data-driven evaluation and management of investment portfolios and the market broadly. In order to fully mature, investors need a common language to describe and compare the financial, social and environmental performance of their investments. One answer to this is Impact Reporting and Investment Standards (IRIS).

How does IRIS fit in?
IRIS is the catalogue of generally accepted metrics to measure and manage the returns on their investments. Managed by Global Impact Investment Network (GIIN), IRIS is a one-stop shop of powerful metrics across various parameters. Similar to International Financial Reporting Standards or the Generally Accepted Accounting Principles, IRIS can be integrated into most approaches to impact reporting and data management platforms. Each metric has a generally accepted definition that ensures that the data reported is similar. IRIS offers a library of around 400 widely used social and environmental metrics and provides standardized definitions that leverage best practices and expert input. As a result, IRIS is a meaningful and useful reference point for investors and investees implementing or upgrading their impact measurement practices.

It is important to note that IRIS measures only the outcome and not the impact. The outcome is the short-term – direct effect of the organisation’s activities and outputs. Impact, on the other hand, is a much larger and complex phenomenon – it is the long-term effect of the company’s efforts and activities. It is necessary to understand such terminology and use it effectively. That is the first step to ensuring good measurement and common language.

IRIS is a simple tool to use. For any given investment, it is necessary to document the theory of change. The theory of change is the organisation’s defined long-term goals which are then mapped backward to identify necessary preconditions. After defining the theory of change, the organisation must identify key parameters to measure their progress against. Each parameter must necessarily match back to the theory of change. If it doesn’t, it is wise to question its validity and usage.

It is then easy to integrate IRIS with these parameters. The IRIS metrics are available on their website and the organisation can easily map their chosen parameters against IRIS metrics. Many IRIS metrics apply across sectors, hence diversifying the impact of the metrics and measuring the portfolio health better. Companies can use IRIS creatively to measure their portfolio richly and in a varied yet simple manner. IRIS also understands that it is impossible to devise metrics that apply to every scenario. It is, therefore, possible to tweak the definition of a given metric to suit the organisation’s requirements.

To illustrate, let us take the example of a skills-training company. We shall assume their theory of change is – “By creating modular, time-bound skill training courses that can be delivered within institutes of higher education, the company is helping students build skills that will increase their chances of employment. By undergoing this training, students increase their skill levels perform better at recruitment opportunities and increase their overall likelihood of obtaining a job, which will increase their average household income. “In this case, it is sensible to track data on employment rates of the students who undergo this training, to begin with. The related IRIS metric for this is - Job Placement Rate (PI3527) It is explained as: number of students placed in jobs divided by the number of students enrolled in the course.

And in this way, more metrics can be developed and an IRIS tracking mechanism for any company can be then integrated.

How does this help?
By providing a standard common language to talk about results, IRIS makes it easier to compare investments and aggregate information across a portfolio. The usage of IRIS can compound an organisation’s credibility. Internationally, IRIS is seen as the fail-safe way for reporting and most investors recognize the importance of these standardised metrics. By using this common language, firms in India can meet up to the credibility standards of international funds in the case of reporting their performance.

One shortcoming of IRIS is the lack of well-defined metrics in certain sectors. For example, there are over 20 metrics to measure the financial performance of a company, but as compared to that, the scope of metrics for skill training sector are limited to as low a number as two. This anomaly in the metrics can make it difficult to track some sectors as well as others.

Here, it is imperative to understand that it takes the time to build a robust set of metrics for all sectors. The IRIS team understands this and constantly seeks feedback from their users via surveys and other such mechanisms. They are keen to comprehend which metrics work, which don’t and what is missing. They continually upgrade and revise their list. Usually, these updates are for adding new metrics rather than revising existing metrics. In a way, the onus then falls on us, the users to analyse and provide feedback to the team. While the team is responsive, they will be unable to implement actual changes unless we use it and give them feedback based on our social enterprise's situation. The evolution of IRIS has been an ongoing process and it will continue to evolve and grow till impact investment does so.

Integrating Impact Measurement in Everyday Activities
Because it’s a catalogue, the GIIN describes IRIS as only one part of an impact measurement program.  Impact measurement doesn’t stop at metrics selection.  Users need to collect and manage performance data, analyse performance data, and report performance data to stakeholders. While most small companies may complain that regularly collecting and tracking impact measurement data is expensive and time-consuming, it doesn’t need to be so.

A simple way is to integrate impact data collection along with all other metrics that the company tracks on a monthly basis, such as the sales and financial numbers. If added as fields to a sales order form or customer profile, it becomes less cumbersome. There is then no need to manage multiple data collection points. This is at no cost to the company and is as effective as it is simple.

Impact data has enormous potential within and outside a company. Within the company, it acts as a motivator to the employees to show them that the work done by done has truly impacted and changed lives. It reaffirms their belief in their work and the company’s mission. In the same thread, such numbers help showcase the company’s worth and effect. One way to think of it is, if this was not done, a number of lives would not have been bettered! Outside the company, these impact numbers showcase the company’s work in a broader light and help in fundraising, garnering larger interest and make it easier to show the worth of their work.

The Time is Now
It is time to raise the level of impact investing in India. Impact measurement will be sophisticated only as behaviours across the investment value chain change and understand the value of standardised measuring techniques. The growth of the impact investing market has already led many stakeholders to rethink how they make investment decisions, acquire new skills and familiarity with non-financial measurement concepts, and apply social and environmental performance data to activities like due diligence and investment management. But, the data we collect and the processes we build can go only so far if investors are using incompatible impact metrics.

IRIS is fast becoming the industry standard for impact metrics, and it is important and urgent for everyone in the field to incorporate IRIS into their social and environmental performance measurement. Not only will it ensure comparable data and credible aggregation and analysis across the growing impact investing industry, it will also help investors and mission-driven businesses better track, manage, and communicate their own impact.