Yet while impact investors have come to a consensus on the importance of social impact assessment–an impressive accomplishment led by players such as the Rockefeller Foundation–there are signs of trouble in the social impact assessment world. A study by Hope Consulting suggests that only 3% of potential investors/donors make investment decisions based on quantitative reporting of social impact. The general assumption that commercial investors are waiting in the wings until impact investors get “social impact” figured out has yet to prove itself (we have doubts that it will). In its recent reporting on impact investing as an emerging asset class, JP Morgan warns potential investors that some of their money might go to impact assessment rather than growth–suggesting that investors may see a focus on impact assessment as a liability rather than an asset. Every hour and dollar spent on impact assessment means another hour or dollar not spent on building a company; that is neither something that entrepreneurs want to do nor that commercial investors want to see. As a result investors, especially for-profit investors that lack donated funds for impact assessment, have trouble getting rigorous impact data out of entrepreneurs.
2011: Fish or cut bait
For social impact assessment, 2011 will a crossroads as investors decide to fish or cut bait on expensive, time-consuming impact assessment projects. To choose to “fish” could be useful. With comprehensive data sets regarding impact, the field could establish benchmarks not only for impact investing but for the nonprofit sector writ large. To do so, however, would require an industry body (GIIN) to require all of its members to be rated for social impact (GIIRS) and for those firms to demand impact data as a pre-condition for investment, similar to the manner in which all enterprises looking for funding from Investors’ Circle now fill out a B-Corp application. The biggest weakness to date in the impact assessment movement is the lack of real financial, operational, and impact data from real enterprises, and entrepreneurs are unlikely to report these data unless they are financially incentivized to do so, perhaps with charitable dollars or support from universities.
Given the state of the sector, it may be more likely that investors will choose to “cut bait” in 2011, looking for other ways to report social impact that are more closely connected to the daily operations of the companies in which they invest. One source of ideas may be other capital providers such as universities, sovereign wealth funds, and corporate innovation funds that have non-financial goals for investing–and ideas about how to measure progress toward those goals.
Another option is the approach taken by the Mulago Foundation, which requires each of its investments to focus on a single metric–and a single metric only–to determine the social impact of their intervention (see Mulago head Kevin Starr explain the approach here). Investors hesitant to commit money and time to impact assessment may consider a “one metric” system, with that metric tied to a key financial or operational performance indicator.
By Mark Hand and Ross Baird. Photo credit Rudolph.A.furtado. See other Top Trends here.