Impact measurement and management challenges every investor should consider, and the principles, and key practices MacArthur uses as we assess the results of our impact investments.
The practice of impact measurement and management (IMM) is important to the impact investment field and yet, inherently difficult and complex. While all impact investors can tap a growing and helpful body of management and measurement expertise and tools, critical challenges and choices remain.
Over the last year, the development of our IMM report on MacArthur’s Catalytic Capital Consortium (C3) investments was an opportunity to reflect on our approach, process, and the lessons we learned along the way.
In our view, aggregation, attribution, and analysis are three critical challenges for every impact investor to consider. In addition, we have identified several key IMM principles and practices we use to monitor, support, and learn from an active portfolio of approximately 80 various impact investments totaling $400 million.
Three Critical Measurement and Management Challenges for Every Impact Investor
Aggregation
Combining quantifiable “units” of impact within an impact investment portfolio is intuitively appealing but complicated by several factors. For a set of investments within one impact sector, standardized metrics may be tracked and added together for portfolio-level statistics (e.g., tons of greenhouse gas emission avoided or number of housing units constructed).
But the funds, businesses, and nonprofits within MacArthur’s impact investments portfolio collectively address all 17 of the United Nations Sustainable Development Goals (SDGs) across diverse fields, including climate solutions, affordable housing, community development, and smallholder farming in emerging markets, among many others. This wide range prevents aggregating standardized units of impact in a meaningful way at the portfolio level.
Moreover, the nature of intended impact can vary significantly among seemingly similar investments. For example, consider a loan to a mission-driven real estate developer that helped create 500 new retail jobs in an underinvested neighborhood through a redevelopment project. Another impact investment could support a social enterprise that employs 20 people on the autism spectrum who had never been employed previously and require significant ongoing job support.
Our impact investments portfolio represents diverse fields, such as UP Fund, which aims to help upskill people who face barriers to education and employment. Credit: UP Fund
You could combine the impact metrics from these two investments and say that they jointly supported the creation of 520 jobs; however, this could conflate the intended impact between the two.
This is not to say that the smaller job creation for individuals on the autism spectrum is “better than” the larger number of retail jobs created in an underinvested community (or vice versa). Instead, it simply acknowledges the specific impact thesis for each of these impact investments and assesses progress accordingly.
Attribution
Attributing the generation of positive impact to our own investments or to investments made by others presents a second critical IMM challenge.
Consider again the example of the social enterprise providing jobs for 20 individuals on the autism spectrum. If the company then receives an impact investment from multiple investors that enables it to employ 100 people in the next year, how many individuals can each of the capital providers claim to have helped? All 100 or only the incremental 80? How should impact be allocated among the investors? Is it clear that the impact would not have happened without the investment?
Given the potential for conflation or a false level of certainty, we believe our investments contribute to the impact created by our investees. But we do not try to attribute a specific amount of impact to our investments.
Analysis
Once impact data is collected and compiled it requires context. Impact data on its own has limited meaning because it is difficult to know how to evaluate it in the absence of robust, relevant comparison data or other contextual information.
Impact data on its own has limited meaning because it is difficult to know how to evaluate it in the absence of robust, relevant comparison data…
For example, to analyze the significance of the 500 jobs created by the real estate developer we would want to know the number of jobs that were intended to be created or how many jobs might have been created with an alternative investment or no investment at all.
Investors generally assess their financial performance relative to indexes or benchmarks. And for impact investments, a range of impact taxonomies, datasets, quantification, and assessment methods, including benchmarks, do exist, including several that MacArthur has supported through our ongoing grantmaking.
Nonetheless, alignment on indexes or benchmarks for impact performance, unlike financial performance, remains inherently challenging due to the variety of goals and definitions, as well as the difficulty of aggregation and attribution.
IMM Principles and Key Practices
The inherent challenges and complexity of assessing impact have informed the Foundation’s IMM principles where, aligned with MacArthur’s values, we seek to:
- Center the investee by minimizing data collection and reporting burden;
- Support the field of impact investing by using industry standards where feasible; and
- Prioritize learning.
Guided by these principles, we have developed three IMM practices that are foundational to ongoing assessment of progress across our full portfolio. These practices help to guide ongoing monitoring of our active investments, while also generating important data to inform more formal evaluation and learning activities. These learning activities typically involve engaging third-party experts and collecting a wider range of quantitative and qualitative information, as we have shared in evaluations of our Arts and Culture Loan Fund and the Catalytic Capital Consortium (C3).
Set Measurable Impact Targets
We work with our investees to set measurable impact targets at the outset of new investments. This enables us to assess over time whether the investment is ahead, behind, or on track for achieving the intended positive outcomes. For example, we typically review results from the perspective of people experiencing the impact, such as families that can thrive once they have stable, affordable housing. It also allows us to assess progress across groups of investments or the entire portfolio without having to compile or compare disparate measures.
The Women in Safe Homes Fund purchases and refurbishes properties that are leased to partners providing housing to women at risk of homelessness. Credit: Women in Safe Homes Fund
If we had expected the loan to the community-based real estate developer to support the creation of 1,000 jobs and the social enterprise investment to support 10 jobs, and they created 500 and 20 jobs respectively, we would know that the first investment fell short of expectations and the second exceeded expectations despite the different scale and depth of impact.
This approach of assessing progress toward targets enables us to compare impact performance across all our investments regardless of impact sector and avoid the aggregation and attribution challenges noted above.
Track Capital Mobilized
To multiply and amplify our impact, we prioritize opportunities to pave the way for others to commit investment capital, too. One way we measure this is by tracking capital mobilized by our investments.
We know that our degree of influence in mobilizing capital varies, so we rate whether it is high, medium, or low. By combining the amount of capital mobilized and our degree of influence, we can generate an estimate range.
For example, depending on the degree of influence we think we have had, we estimate that the $128.5 million MacArthur committed to the eleven C3 investments has mobilized between $1.4 and $3.1 billion in additional capital to date.
Evaluate Financial Return Relative to Expectations
MacArthur and a growing community of impact-first, catalytic capital investors prioritize impact when selecting and structuring our investments, rather than maximizing risk-adjusted financial returns. But evaluating the financial results of our investments is essential, too.
Our approach is to evaluate financial returns relative to our expectations rather than “market rates” of return or other external benchmarks.
At the outset of each investment, we set a financial target that we believe is the most likely outcome given financial risk and opportunity. Our targets may differ from those of other investors or even from seemingly similar investments within our own portfolio.
This investment-specific target enables us to more easily assess financial performance alongside impact performance. In both cases, we assess whether performance is above, below, or in line with our expectations. Having a simple, consistent methodology to assess impact and financial performance alongside each other supports our learning.
Continuing the Learning Journey
Applying our IMM principles and practices, we use a combination of quantitative measures and qualitative assessments to make an informed judgment about impact progress. This helps generate insights and informs the creation and implementation of future impact investments and initiatives.
Going forward, we will continue to refine how we measure impact and look forward to advancing our practice by learning from others throughout the impact investment field.
Related Content
Impact Measurement and Management Progress Report
The Catalytic Capital Consortium is a collaborative, global initiative launched in 2019.
