The Last Turn of the Screw: Gauging Non-Financial Returns

By Randy Kaufman, with research assistance from Dustin Lowman

In construction, the last turn of the screw is both the toughest and most necessary. Think of the extra effort it takes to make it tight: Whatever you’re assembling will function acceptably without it, but optimally with it.

Evaluating an investment’s social and environmental impact is the last turn of the screw when it comes to impact investing. It’s very difficult, but increasingly considered necessary — especially by millennials, a majority of whom see social responsibility as a key criterion of good investment.

“Not everything that can be counted counts, and not everything that counts can be counted.”
— Albert Einstein

Unlike evaluations based purely on financial returns, evaluating impact investments depends on metrics beyond what meets the eye, monitored over an extended period of time.

As I've written before, good intentions only go so far with both philanthropy and impact investing. Measuring impact is hard, but critical. Due to an increasing desire to see it done well, more and more organizations are stepping up.

Enter the Metrics [STAGE LEFT]

Measuring traditional investments is not for the faint of heart, but at risk of offending many of my investment friends, it really is all about the money earned,

With impact investing, the goal is to earn money of course, but importantly, to also make the world a better place. This includes factors beyond money, and means different things to different people. The “impact” in impact investing refers to changes caused specifically by the investment, and a positive change in one area could be accompanied by a negative change in another. So, it takes rigorous systems of analysis to know what happened, and why.

Thankfully, over the last decade or so, a number of international organizations have established metrics to do exactly that. Like rating agencies for stocks or mutual funds, you have to dig deep and do your own due diligence, but these guidelines are an excellent source for gathering information.

IRIS+. In 2008, the Rockefeller Foundation, Acumen Fund, and B Lab collaborated to develop the Impact Reporting and Investing Standards (IRIS), “a catalog of generally accepted performance metrics.” Then, based on feedback from more than 800 stakeholders and input from 104 “expert contributors,” IRIS evolved into IRIS+, with an even vaster catalog of information and metrics.

Published in 2019, the resulting database comprises nearly 600 metrics across 16 impact categories — Climate, Education, Pollution, and Water, to name a few. Metrics like Target Stakeholder Demographic/Geography help narrow down who is being impacted, and metrics like Student to Toilet Ratio and Sales Revenue help develop results-tracking protocols.
IRIS+, now run by the Global Impact Investing Network (GIIN), aspires to be for impact investing what the Securities and Exchange Commission is for traditional investing. That is, IRIS+ wants their metrics database to be a one-size-fits-all guide to good impact investment. Best of all: GIIN has made IRIS+ a free and public good.

GIIRS. In addition to evaluating investments, there exist systems for evaluating investors. The Global Impact Investing Ratings System (GIIRS) Fund Ratings is used to determine a fund/company’s net impact on the world. In just one section of the evaluation, respondents must answer 60 questions related to how clearly they state their impact mission, how well this mission is integrated into their function, and how well they manage for impact during investment lifecycles. 

Additionally, companies of all kinds take the B Corp Certification test, which also uses GIIRS (pronounced “gears”) to make its determinations. The test — administered by B Lab — rates companies’ Governance, Workers, Community, Environment, and Customers, producing a final score out of 200 (you need at least 80 to get certified). As the demand for impact investing rises, so does the demand for B Corp certification.

It’s like health inspection for restaurants. If a restaurant serves edible food, but their health practices are substandard, they’ll get a bad grade. Similarly, if a company is financially solvent but hurts the It’s like health inspection for restaurants. If a restaurant serves edible food, but their health practices are substandard, they’ll get a bad grade. Similarly, if a company is financially solvent but hurts the environment, it won’t get certified. You wouldn’t eat at a restaurant with a D health rating. Impact investors hope that in the future, you won’t do business with companies with poor GIIRS scores.

Happy Adopters

A number of prominent impact investors have adopted IRIS+ and/or GIIRS to guide and evaluate their work. For example, Gary White, who co-founded Water.org with Matt Damon (yes, that Matt Damon), uses IRIS+ “to ensure that we are delivering social returns as well as financial returns to investors” for WaterEquity, a program allowing investors to fund water-based projects with an economic return.

GIIN CEO Amit Bouri notes that he is “increasingly seeing enterprises adopting IRIS for their own impact measurement and management practice.” Nell Derick Debevoise, founder and CEO of Inspiring Capital, adds that “GIIRS and IRIS are more investor-facing, so startups looking to raise institutional capital should think about mapping their impact to those standards sooner than later.”

Substantiating this, Investors’ Circle (IC), the nation’s first early-stage impact investing network, requires finalists for funding to complete the B Impact Assessment. According to an IC representative, “a new group of IC investors in Minnesota loved [the B Impact Assessment] because it helped them navigate complex and unfamiliar territory.” Companies receiving IC support have average B Impact scores of over 90. So, by taking note of and adopting GIIRS standards, interested companies would stand a better chance of receiving funding.

Evaluations have also prompted internal changes. A lackluster GIIRS score caused Etsy to organize a company-wide Hack Day, in which all employees designed and pitched new practices that would improve their score. The Hack Day led to a number of new ideas and programs, including an updated volunteer leave policy and program, carbon footprint tracking, living plant walls, and female-driven learning and development workshops. Similarly, the B Analytics Impact Assessment caused Dancing Bear Baking Co. to introduce a non-GMO cookie line, provide health advocates for employees, and offer four hours of paid time off for employees to volunteer.

IRIS+ and GIIRS are not the only ways companies and investors plan for and evaluate impact. Metrical guidelines vary company to company and project to project, so each impact measurement process requires its own unique work. But while these systems are still young and evolving, they are already responsible for more conscientious commerce. 

I Pledge Allegiance…

While not expressly designed to measure impact, other organizations and alliances have been set up to prevent negative impact. Members and signatories adopt a stated set of values, and adjust their practices accordingly. These include the Equator Principles, the Sustainability Accounting Standards Board (SASB), the UN’s Sustainable Development Goals (SDGs), and Kofi Annan’s Principles for Responsible Investment (PRI). 

Looking Forward

I’m proud of the impact investing work I’ve done in my career, and count myself among its more vocal proponents. But I also recognize that people have different investment preferences and different definitions of “impact.” While I am always eager to present my views on subjects I feel passionate about, what really matters is the fact that it’s your portfolio, and your priorities get the final say.

But in addition to busting the myth that “impact” always means “concessionary” (it doesn’t) I hope this shows that measuring impact is an increasingly exact science. It’s a relatively new endeavor, but one that will only continue to grow.
To return to the screw metaphor, it’d be as if you could channel the strength of fifty people to make that last, tough turn.

The confluent efforts of many with the same goal make difficult tasks much less intimidating. For impact investing, we are seeing groups all around the world applying their strength to that collective handle, gradually turning toward impact-based returns. 

Click here to download a printable PDF of this article.

Sources

If you like what you’ve read, please share this article by email, or by the social media links below.

Featured Posts, Investing with PurposeRandy Kaufmannon-financial returns, financial returnsComment