What Is Impact Measurement?

Investing is an important aspect of any business. Today, business leaders are increasingly interested in a type of investing called impact investing. In an age of growing sustainability awareness, impact investing has become an effective way to create positive change in the world while making a profit.

Successful impact investing isn’t possible without impact measurement, or gauging specific investments’ effects. Here’s an overview of what impact investing is and the important role it plays in business sustainability, along with investment strategies you can use and methods for measuring their outcomes.

What Is Impact Investing?

Impact investing is a strategy that considers financial return and environmental, social, and corporate governance (ESG) impact. It ensures the quality of an investment’s outcome exceeds what the alternative would be without that investment. As a pivotal part of sustainable investing, it promotes long-term social or environmental improvements.

Impact investing’s success relies on appropriate measurement tools, effective analysis, and strategic investment plans. These factors aren’t crucial to determining an investment’s financial return, but rather, its social or environmental impact.

Related: 5 Critical Social Impact Skills You Need to Effect Change

Today, there aren’t widely accepted impact standards, but several groups are working to develop them. Most investors use the United Nations Sustainable Development Goals (SGDs) Impact standards.

Impact Strategies

Without generally accepted impact standards, investment strategies focused on social and environmental impact can’t rely on the outcomes of previously used, traditional strategies. Instead, they must consider different methods to define objectives, such as:

1. Issue or sector: Focusing on solving a specific issue or sector, such as affordable housing or microfinance
2. Target population: Impacting a target population, such as the impoverished in rural regions or women of color
3. Target outcomes: Producing a positive outcome for a target objective, such as improving public health or reducing poverty
4. Geography: Making a difference in a vulnerable community in a specific geographic location

By specifying a dimension with a clear objective, investors can curate impact strategies based on positive effects from previous investments. Doing so also narrows an investment’s area of influence, which is the first step to measuring its impact.

How to Measure Impact

Impact investments are easier to execute and analyze with measurable metrics. While there aren’t standardized measurements for impact, there are methods for determining investments’ outcomes to inform future strategies.

In the online course Sustainable Investing, Harvard Business School Professor Shawn Cole describes six methods every investor should consider when evaluating investments.

1. Randomized Controlled Trial (RCT)

Perhaps the most respected impact investing method is randomized controlled trials (RCTs). This type of study splits people into two random groups from an eligible population, which share the same overall demographics to ensure consistency. One group is assigned an impact initiative while the other acts as a control group. The groups are then analyzed for a long time to determine if the investment succeeded.

RCTs aren’t as susceptible to bias as other methods because both groups are randomly chosen.

2. Difference-in-Differences (DiD)

Difference-in-differences (DiD) is another method for measuring impact investing that uses a selected treatment group and a control group. The two groups are carefully—not randomly—selected and measured for impact before an investment. This pre-trial data sets a baseline. The data is then compared to post-trial data after the treatment group is solely impacted by the investment.

While this economically designed study efficiently measures impact, bias can affect findings. Since individuals’ involvement in an investment plays a key role in outcomes, it’s difficult to determine the method’s accuracy.

3. Pre-Post Comparison

Pre-post comparison is another method affected by outside influences. It takes one group from a population and measures impact by gathering pre- and post-investment data. Investors then compare the data using specific impact measurement metrics.

While this can provide helpful insight into how a community’s successes resulted from an investment, several factors can skew results. For example, the state of the global economy is important to consider. Other events that could greatly influence an investment’s impact are global pandemics or public health crises.

4. Survey

A survey gathers data from a group impacted by an investment through a series of questions. While this method is prone to survey-taker biases that skew received data, it’s useful for collecting representative samples that optimize impact measurements.

The challenge with surveys is that they don’t solve the problem of causal attribution. In other words, surveyed communities can’t rate their successes if they only speak about their own experiences. Therefore, data tends to be supplementary to personal stories and testimonials.

“Causal attribution is really a fundamental problem that’s challenged statisticians and economists for hundreds of years,” Cole says in Sustainable Investing.

5. Anecdote

Anecdotes are an effective way to share an impact investment’s results. They aren’t data-based, but rather, dependent on the emotions and experiences of those affected by an investment.

While anecdotes can be inaccurate, they encourage further action or decision-making—mainly because real-world examples are more relatable than numbers and statistics. For this reason, they’re often included in impact reports to add context to data.

6. Proprietary View

Proprietary view is the baseline for determining whether an investment had its desired impact. For example, most would agree that investing in clean drinking water in communities with high levels of cholera and hepatitis would result in lower levels of disease. This assessment, however, is only backed by investors’ previous bias and knowledge of the problem.

Select Impact Metrics

While each method and metric has pros and cons, there are several factors to consider before measuring an investment’s impact.

First, the best metric is the one that efficiently produces results. For some investors, this might mean choosing the most cost-effective option. In such cases, measurements such as RCT and DiD may be too expensive because of the resources required and their longer lengths. Investors concerned about detailed results should consider more costly methods since they produce the most data.

Another aspect to consider is impact measurement’s relationship to investment goals. Can metrics apply to multiple investments and initiatives? Is the data attributable to a cause? These questions are important when choosing impact measurement metrics because they inform investment decisions. For instance, methods like surveys and anecdotes are better options for those prioritizing adaptability and focus.

The Importance of Impact Measurement

Impact measurement has three main purposes:

• Ensuring limited funds are directed to the highest-impact opportunities
• Assessing past investments’ impacts
• Ensuring companies are held accountable for impact performance

Impact measurement enables investors to determine the outcomes of past investments and make better decisions regarding future ones. Without impact measurement, impact investing would be a guessing game.

In addition, businesses with ESG goals benefit from impact measurement because it allows them to use their resources to achieve optimal results. As sustainability, ESG policies, and SGD initiatives become bigger parts of business, impact investing and measurement will play major roles.

Impact Measurement for Sustainable Investing

Impact measurement is crucial to successful sustainable investing, allowing investors to help improve the world through financial means. As it becomes more popular among business leaders, it’s imperative that professionals learn the intricacies of sustainable investing and impact measuring.

Want to learn more about how to optimize the cross-section of financial success and sustainable positive impact? Explore Sustainable Investing, one of our online business in society courses. Also, download our free guide on becoming a purpose-driven, global business professional to learn how measuring impact can enable you to make a difference.