By Melissa
A simple ROI calculation will give you a good indication of how well your investment is doing relative to the amount of money invested. But lately there is a rising asset class called "impact investments" that is making things a little more complicated. In short, impact investments are those that yield not only a financial return, but a social or environmental return. An investee may receive an investment for their business to sell solar lamps to off-grid households and as a result, make safe and reliable lighting accessible for families, improve health, increase productivity, and reduce carbon emissions from polluting lighting sources. We can easily measure the financial performance of this company by looking at their accounting documents, but how do you measure social or environmental performance?
Why measure social impact?
In both developed and developing markets, businesses are increasingly adopting double or triple bottom lines. Environmental concerns, financial crises, and lingering social problems are sparking the redefinition of the role of business and people are beginning to leverage the power of markets to fix the world's ills. But we cannot measure this collective performance based on financial data alone.
As more and more people choose to make impact investments, they want to know which companies to invest in and what kind of return they are getting for their money. How is it helping to improve access to education? How effective is it in reducing carbon emissions? How is it promoting gender equality?
By measuring social impact, investors can make intelligent investing decisions, investment funds can effectively fundraise, ensure due diligence, and manage the funds' impact performance, and companies can raise capital, do reporting, and manage their firm's impact performance.
What are IRIS, GIIRS, and Pulse?
In order to get a better picture of their overall performance, companies have started to create their own social and environmental performance metrics. But the resulting fragmentation is inefficient and expensive. Plus it limits comparability. Consequently, three major initiatives to produce a common reporting language have emerged. Standardization enables performance comparisons and benchmarking, and streamlines and simplifies reporting requirements for companies and their investors.
The Global Impact Investing Network (GIIN) started as a group of investors brought together by the Rockefeller Foundation to discuss the needs of the impact investing industry. One obvious challenge is to standardize impact reporting so that we can better understand the impact of investments. The Impact Reporting and Investment Standards (IRIS), therefore, was developed to do just that. It is a standard set of performance measures for describing social and environmental performance that facilitates comparisons of impact data across investments.
The IRIS framework consists of six parts:
Organization Description - metrics that focus on the organization's mission, operational model, and location
Product Description - metrics that describe the organization's products and services and target markets
Financial Performance - commonly reported financial metrics
Operational Impact - metrics that describe the organization's policies, employees, and environmental performance
Product Impact - metrics that describe the performance and reach of the organization's products and services
Glossary - definitions for common terms that are referenced in the metrics
The IRIS is available for download in English and Spanish. It is a self-reporting tool. Organizations can use it on a voluntary basis and select their own metrics based on their activities, objectives, and stakeholder requirements. There is also an online registry where IRIS users can list the metrics they use to monitor social, environmental, and financial performance publicly.
The GIIN's IRIS expands upon the work initiated by B Lab and Acumen Fund to develop and promote standard performance measures. The Global Impact Investing Ratings System (GIIRS) was developed by B Lab, the same nonprofit organization that created the third-party B Corp certification to underscore corporations with a double or triple bottom line. The GIIRS is a comprehensive rating of a company's social and environmental performance. The GIIRS Impact Assessment gathers a range of information about the company's work, size, sector, and region. These assessments are carried out annually and validated and reported by the GIIRS.
The GIIRS incorporates IRIS metrics into the core of its rating system. So any company that is rated by GIIRS is by default in compliance with IRIS. An IRIS metric may be the number of female workers and total workers in a company. Using this information, GIIRS may calculate diversity in a company.
Finally, Acumen Fund's assessment tool is called Pulse. It is a web-based data management tool where users can apply industry standard metrics or create custom metrics unique to an investment. Similar to the GIIRS, Pulse adheres to IRIS. The technology by Pulse allows users to track and measure impact investment data. The original version was built jointly by Acumen Fund and Google. Today, technology company App-X is responsible for the long-term management of the software.
With the number of social enterprises growing, being able to measure and communicate non-financial performance will be a key differentiator between companies. This will also ensure that money is going into the most effective models in a world of limited resources.
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