Social Impact Measurement Use Among Canadian Impact Investors

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Purpose Capital recently published Social Impact Measurement Use Among Canadian Impact Investors, a report that identifies the needs and priorities for Canadian impact investors as they relate to social impact measurement.

The key objectives of the report were to:
- Determine investors knowledge about social impact metrics
- Assess investors’ reliance on social impact metrics to make investment decisions
- Identify the tools that investors use
- Identify frameworks to reduce barriers for greater investment
- Provide recommendations to government aimed at improving the use of social metrics

For more information, visit: http://www.purposecap.com/portfolio/social-impact-measurement-use-among-canadian-impact-investors/

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Social Impact Measurement Use Among Canadian Impact Investors

  1. 1. Social Impact Measurement Use AmongCanadian Impact InvestorsFINAL REPORTFEBRUARY 2013
  2. 2. Purpose Capital gratefully recognizes the support ofHuman Resources and Skills Development CanadaPurpose Capital also wishes to acknowledge the organizations thatgave freely of their time to participate in this study. They include:ACCESS Community Capital The J.W. McConnell Family FoundationAddenda Capital OP TrustAlterna Savings and Credit Union RBCCentre for Impact Investing Renewal2Desjardins Investments Sarona Asset ManagementDesjardins Sécurité Financière Social Capital PartnersEdmonton Community Foundation SustainalyticsInfrastructure Ontario TARIS AdvisorsInvesteco Toronto Atmospheric FundLe Réseau d’Investissement Toronto Enterprise Fundsocial du Québec VancityMaRS Cleantech FundAuthors:Hilary Best, Karim HarjiResearch Assistance:Alex KjorvenContact the Authors:info@purposecap.comThe opinions and interpretations in this publication are thoseof the authors and do not necessarily reflect those of theGovernment of Canada.Les opinions et les interprétations figurant dans la présentepublication sont celles des auteurs et ne représentent pasnécessairement celles du Gouvernement du Canada.
  3. 3. Purpose Capital, in collaboration with Human Resources and SkillsDevelopment Canada, recently released Guidebook for Impact Investors:Impact Measurement, a guidebook for impact investors to help them enhancetheir use of social metrics.The guide provides investors with:• A basic overview of social metrics for impact investing• An outline of the issues and challenges of social impact measurement• A summary of existing social impact measurement tools and a description of how they are being used• A set of diagnostic tools to help you think through key questions and issues related to measurement and to select appropriate social impact metrics based on your goalsThe Guidebook is available for download at http://www.purposecap.com/portfolio/guidebook-for-impact-investors-impact-measurement
  4. 4. TABLEOF CONTENTS ACRONYMS EXECUTIVE SUMMARY 1.0 PROJECT CONTEXT 1 2.0 OVERVIEW OF IMPACT INVESTING 2 3.0 METHODOLOGY 3 4.0 RESULTS 7 5.0 RECOMMENDATIONS 20 6.0 CONCLUSION AND NEXT STEPS 23 SOURCES 24 APPENDICES 26
  5. 5. ACRONYMS ESG Environmental, Social and Governance GIIRS Global Impact Investing Rating System GJ Gigajoules HRSDC Human Resources and Skills Development Canada IRIS Impact Reporting and Investment Standards LEED Leadership in Energy and Environmental Design LP Limited Partnership SRI Socially Responsible Investing5 ACRO NYMS
  6. 6. EXECUTIVE SUMMARY 1.0 Project Context This document reports on the activities and results used to analyze and monitor the social or environ- of the project, “Social Impact Measurement mental outcomes or impact of a project, venture, Use Among Canadian Impact Investors”, funded or organization. by the Community Development and Partnerships In order to deploy capital, investors must have Directorate, Human Resources and Skills Development confidence that their investments will generate the Canada (HRSDC). The purpose of this project is financial and social returns they have targeted. In to identify needs and priorities for Canadian impact spite of growing interest in impact measurement, investors as they relate to social impact there remains a great deal of confusion amongst measurement. investors due to fragmentation in the approaches and tools used to measure impact. 2.0 Overview of This report aims to identify needs and priorities for Impact Investing Canadian impact investors as they relate to social impact measurement. The key objectives were to determine: In Canada and internationally, there is a growing movement towards the creation of social, environ- • The extent to which Canadian impact investors are mental and economic value in addition to financial knowledgeable about social impact metrics; returns. A diverse group of actors including individual • The extent to which Canadian impact investors and institutional investors, ventures, non-profit rely on social impact metrics to make invest- organizations and government are coalescing around ment decisions; the concept of impact investing. • The kinds or variety of specific applications or tools that Canadian impact investors use; Impact investments are • Whether a framework exists that would: a) reduce “investments intended to barriers for greater investment from social finance investors; b) coalesce social finance investors in the create positive impact beyond field of social impact measurement; and c) include financial returns”. information on ‘lessons learned’ and ‘failures’, to demonstrate the legitimacy and genuineness of Impact investments are “investments intended to evaluation; and, create positive impact beyond financial returns” • An understanding of what Canadian impact inves- (O’Donohue et al., 2010). Impact investors are inten- tors and potential impact investors need to see tional in their efforts to generate both social and/ regarding the social impact of an enterprise before or environmental outcomes and a range of financial choosing to invest. returns, from return of principal to above-market returns, to the investor. This report also identifies opportunities for HRSDC’s Community Development and Partnership Directorate Just as a variety of financial indicators help inves- to develop policy options and present strategic tors to assess potentially profitable opportunities, guidance to senior management on issues that have inform investment decisions, and allow for monitoring implications for the development of the impact of their investments, those seeking to generate investment marketplace in Canada. non-financial returns use non-financial indicators to inform their investment decisions. These indicators, what are generally termed ‘social metrics’, are oftenI EXECUTIVE SUMMARY
  7. 7. 3.0 Methodology The methodology consists of targeted primary and Key informants indicated secondary data collection. This included a compre- hensive literature review of key publications on the a preference for outcome and relationship between investors and social metrics impact measurements, yet and twenty-two key informant interviews with inves- tors who have experience in impact investing and/or very few are able to collect this potential interest in the area. information and instead rely on Readers are cautioned that the findings from key outputs. informant interviews should be considered anecdotal as the project’s sample size does not justify any broad conclusions about the perspectives of Canadan impact Scale of Analysis investors as a whole. Investors differ on the scale of analysis they use when monitoring social metrics – ranging from the invest- ment level, to the portfolio level, to both. At the invest- 4.0 Results ment level, metrics are collected only as they pertain to a single investment. At the portfolio level, metrics are collected from all of an investor’s investments to Who are Impact Investors and capture the overall impact of an investor’s activities. Why Do Metrics Matter? Most informants were able to monitor metrics at the investment level, while a few key informants measure metrics at the portfolio level. Less than half of As in the traditional investment universe, impact informants monitor metrics at both the portfolio and investors vary in the nature of their motivations, individual levels, due to the challenge of capturing the assets, risk and return expectations, and social impact sector-specific nature of impacts at the portfolio level. objectives. Most investors have both financial and impact goals that they seek to balance through their investment decisions. Generally speaking, social Principles, Approaches and Tools impact metrics help investors to ensure that their Key informants noted that their measurement prin- impact goals are being met, but investors vary in ciples, approaches and tools vary by investment, by their investment intentions and these differences are sector, by size and by asset class. Frameworks used reflected in the ways that investors use metrics. include Theories of Change, GIIRS, IRIS, ESG Screens, Social Return on Investment, Cost Benefit Analysis, Measurement Principles, Sustainable Livelihoods and Case Studies. Approaches and Tools Limitations Investors are keenly aware of the limitations and There is no silver bullet when it comes to social impact challenges of existing measurement frameworks. metrics, there are only approaches that are well suited These include comparability, standardization, and for use in a particular context. cumbersomeness. Amongst investors, there is a desire for comparability and consistency in measurement. Metrics Types More than half of key informants indicated that they, Investors must account for a variety of factors when or their ventures on their behalf, use a customized/ choosing between several different types of metrics. proprietary measurement system. Most key informants Key informants indicated a preference for outcome felt that existing standardized metrics frameworks do and impact measurements, yet very few are able to not meet their needs, due to the nature and diversity collect this information and instead rely on outputs. of their investments. Customization has resulted in a diversity of measurement methods which have contributed to investor confusion in the field of measurement.II EXECUTIVE SUMMARY
  8. 8. When Investors Use Social Metrics As discussed, investors use metrics at different times and for different purposes throughout the investment lifecycle. Investment Lifecycle Ongoing Value Definition Due Diligence Monitoring Reporting Measurement Identifying impact Selecting investments Understanding Communicating Continuing to mea- goals and invest- which fit an investor’s whether impact goals impact sure impact after an ment parameters impact goals are being achieved with stakeholders investment has closed Value Definition While many investors favour quantitative data, several By definition, an impact investor’s investment deci- investors noted the importance of qualitative factors sions are guided by an intention to have a positive in their decision making. social or environmental impact. One tool that is com- The use or lack of use of social metrics can make or monly used by investors during this phase is a theory break an investment decision at the due diligence of change. A theory of change is a map that describes phase. Many key informants had previously chosen the “process of planned social change, from the not to invest in an organization because it was unable assumptions that guide its design to the long-term to prove its social impact. goals it seeks to achieve” (Community Foundations of Canada, 2012). While the literature suggests a strong While key informants take the social impact of their role for theories of change in the investment process, investments seriously, they also stressed the impor- our key informants lacked consensus on its value. tance of being flexible, particularly for early stage ventures that have not yet developed a track record. Due Diligence Most key informants use social impact metrics in the Monitoring due diligence or investment screening phase, though Once the due diligence process is complete and an these metrics are used in different ways depending investment has been made, investors monitor their on the type of investor. Social metrics can serve as investments to ensure that their financial and social risk mitigation tools, commonly achieved through objectives are being met. Investors will continue to the use of environmental, social and governance monitor social metrics up until an exit from an invest- (ESG) screens. Metrics can also help investors ment, though they differ in terms of how frequently to capture the long-term value inherent in many they measure and face challenges in accessing data. impact investments. Many key informants argued that metrics should be Many of the key informants had strongly defined an intrinsic part of both the management of the orga- investment themes or parameters, such as the social nization and the monitoring of progress. Investors economy, clean tech, and environmental consumer face several challenges related to data acquisition in products. Key impact metrics allow investors to the monitoring phase. screen potential investments to make sure they fit with their investment focus and expertise. Reporting When an investment is completed, metrics help investors to “understand the value achieved” by While many investors favour quantifying or describing the change brought about quantitative data, several by an investment (Robertson, 2012). Metrics are also helpful to investors who report on this value to their investors noted the importance stakeholders. Accountability and marketing are key of qualitative factors in their drivers for reporting on impact, while attribution remains a challenge. decision making.III EXECUTIVE SUMMARY
  9. 9. Challenges Costs of Social Measurement Investors want to see demonstrable evidence that investments made in the measurement of an organization’s impact will be useful and cost-effective in the development of the venture (Golden et al., 2010).With limited resources available, many investors are reluctant to divert resources from operations to measurement. Some investors noted that they pick organizations that already view measurement as a key part of their business. Use of Third Party Metrics Service Providers Third party metrics service providers are one option for investors seeking to measure impact and add credibility to their findings. Some investors choose to collect and manage social impact data in house, while others leave measurement to the venture. Competing Priorities Investors face many competing priorities for their time and resources. Many of the key informants downplayed the role that social metrics play in their operations and in their ability to achieve their social and financial objectives. Investors expressed particular concern about having their investees divert attention from operations to conduct measurement.IV EXECUTIVE SUMMARY
  10. 10. 5.0 Recommendations While investor perspectives on metrics are highly individualized, a few themes have emerged around key areas for the future development of the field of measurement. Recommendations have been categorized by target group. For Investors 1. Collaborate with other investors on due diligence 2. Share sector-based strategies for metrics 3. Clarify why metrics matter For HRSDC and Other Government Agencies 1. Support collaboration between stakeholders related to metrics 2. Support ventures as they strengthen their financial and social reporting 3. Create incentives for investors and ventures to work together on social impact measurement 4. Encourage the creation of policy/regulation that advances social impact measurement 5. Encourage the use of non-financial indicators in government procurement and reporting 6. Pursue further research to understand whether the findings of this report are reflective of the broader Canadian investment community. 7. Enhance understanding of investment structures that incentivize the alignment of financial and social returns 8. Develop an understanding of the use of social metrics in social impact bonds 9. Develop an understanding of ventures’ use of social metrics 10. Explore the use of social metrics and how they differ by investor type 11. Explore the use of social metrics by foundations, specifically differentiated by impact first and finance first 6.0 Conclusion and Next Steps Impact investing continues to build momentum as new capital is placed in ventures that generate both financial returns and social impact. As the field grows, it is anticipated that the role of social metrics will also grow, helping both investors and ventures to define value, make decisions that yield the greatest financial and social value, monitor progress and report to their stakeholders. Investors will continue to face issues of cost and competing priorities until measurement is more fully integrated into the operations of social ventures. To facilitate this process, this report has provided a number of recommendations to investors and government that could reduce upfront costs through enhanced collaboration, understanding, and support. Follow up research could enhance the applicability of the findings of this report to the broader Canadian impact investment community, as well as exploring potential applications for different types of investors and investment vehicles.V EXECUTIVE SUMMARY
  11. 11. SOCIAL IMPACT MEASUREMENT AMONG CANADIAN IMPACT INVESTORS1 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  12. 12. SOCIAL IMPACTMEASUREMENT 1.0 Project Context This document reports on the activities and results of the project, “Social Impact Measurement Use Among Canadian Impact Investors”, commissioned by the Community Development and Partnerships Directorate, Human Resources and Skills Development Canada (HRSDC). In 2012, Purpose Capital undertook a comprehensive literature review and key informant interviews with Canadian impact investors to understand their approach to social impact metrics. The project also aimed to identify needs and priorities for Canadian impact investors as they relate to social impact measurement. The key objectives of the project are to determine: • The extent to which Canadian impact investors are knowledgeable about social impact metrics; • The extent to which Canadian impact investors rely on social impact metrics to make investment decisions; • The kinds or variety of specific applications or tools that Canadian impact investors use; • Whether a framework exists that would: a) reduce barriers for greater investment from social finance investors; b) coalesce social finance investors in the field of social impact measurement; and c) include information on ‘lessons learned’ and ‘failures’, to demonstrate the legitimacy and genuineness of evaluation; and, • An understanding of what Canadian impact investors and potential impact inves- tors need to see regarding the social impact of an enterprise before choosing to invest. This report is designed to be useful to both impact investors and government officials in providing a general overview of social metrics, how they are used, and what can be done to support their development. This report also identifies opportunities for the Community Development and Partnerships Directorate to develop policy options and present strategic guidance to senior management on issues that have implications for the development of the impact investment marketplace in Canada. Additionally, it will serve as a foundation to support further work in this area by suggesting next steps for project stakeholders.1 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  13. 13. 2.0 Overview of social metrics can be just as important and relevant Impact Investing as financial indicators, given the intentional nature In Canada and internationally, there is a growing of impact investments to generate positive social and movement towards the creation of social, environ- environmental outcomes. mental and economic value in addition to financial Figure 2 describes the way the social ventures create returns. A diverse group of actors including individual non-financial value and where this value can be mea- and institutional investors, ventures, non-profit sured. It also defines several different types of social organizations and government are supporting the metrics: inputs, outputs, outcomes and impact. Inputs development of concepts, tools and models that Figure 1: The Spectrum of Impact Investment GRANT PRIVATE SUBORDINATED SENIOR CASH GUARANTEES CASH FIXED PUBLIC PRIVATE SUPPORT EQUITY LOANS LOANS INCOME EQUITY EQUITY -100 % * -90 % to -10 % * 0% 1 % to 7 % * 8% + * Grants “Soft” investments Capital-protected Commercial-return Social returns only Very soft debt investments investments Mix of grants and other capital “Blended return” equity Market-rate debt Willing to lose some money Soft debt Equity Willing to take below- Full commercial returns market return Social benefit can be * Anticipated Return a requirement Source: F.B. Heron Foundation and Jessica Shortall (2009): “Introduction to Understanding and Accessing Social Investment” take social, environmental, economic and financial are measures of the resources required to operate value into account. Many of these actors are a venture (e.g. staff time). Outputs are measures of coalescing around the concept of impact investing. a venture’s activities and operations (e.g. number of workshops offered). Outcomes are measures of Impact investments are “investments specific changes in attitudes, behaviours, knowledge, intended to create positive impact skills, status of level of function that result from a beyond financial returns”. venture’s activities (e.g. increases in income levels). Impacts are measures of the difference between Impact investments are “investments intended to the outcome created by a venture’s activities and create positive impact beyond financial returns” the outcome that would have occurred without the (O’Donohue et al., 2010). Impact investors are inten- venture (e.g. home ownership) (Clark et al., 2004). tional in their efforts to generate both social and/ or environmental outcomes and a range of financial In order to deploy capital, investors must have confi- returns, from return of principal to above-market dence that their investments will generate the finan- returns, to the investor (see Figure 1). cial and social returns they have targeted. In spite of growing interest in impact measurement, there Just as a variety of financial indicators help investors remains a great deal of confusion amongst investors. to assess potentially profitable opportunities, inform One of the main challenges is fragmentation in the investment decisions, and allow for monitoring take approaches and tools to measure impact, which has of their investments, those seeking to generate resulted in a lack of consistency and transparency in non-financial returns use non-financial indicators to how impact is captured and communicated. Globally, inform their investment decisions. These indicators, the Impact Reporting and Investment Standards what are generally termed ‘social metrics’, are often (IRIS) and the Global Impact Investing Rating System used to analyze and monitor the social or environ- (GIIRS) have gained visibility in recent years. At the mental outcomes or impact of a project, venture, or same time, a host of smaller, decentralized initiatives organization. Depending on the investor’s needs, continue to exist.2 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  14. 14. Figure 2: Impact Value Chain INPUTS ACTIVITIES OUTPUTS OUTCOMES GOAL ALIGNMENTS What is put into Venture’s primary Results that can Changes to social Activity and goal the venture activities be measured systems adjustment — WHAT WOULD HAVE HAPPENED ANYWAY LEADING INDICATORS = IMPACT Source: Clark, C., W. Rosenzweig, D. Long and S. Olsen (2004). Double Bottom Line Project Report: Assessing Social Impact In Double Bottom Line Ventures. Methods Catalog. Available at http://www.community-wealth.org/_pdfs/articles-publications/ 3.0 Methodology 3.2 Key Informant Interviews A series of key informant interviews were conducted The methodology consists of targeted primary between October 8th and November 16th to identify and secondary data collection. This approach was specific needs and priorities of investors with regards designed to yield an overall assessment of the to social metrics. importance of social metrics for investors, as well as an identification of specific needs and priorities. Forty-six Canadian investors were considered as Drawing on prior experience and expertise on social potential key informants; these individuals were metrics, a comprehensive literature review was identified as having existing experience in impact conducted and further contextualized by key investing and/or potential interest in the area. These informant interviews. individuals were identified through a combination of approaches: reaching out to key investor networks, contacting social impact professionals, and tapping 3.1 Literature Review into the project team’s substantial networks. Of the thirty-three investors that were contacted, twenty- A comprehensive literature review was undertaken two participated in key informant interviews. Key between September 10th and September 21st, 2012. informants represented a range of geographical areas The review targeted key publications on the relation- and reflected a diversity of preferences with regards ship between investors and social metrics. A full list to financial and social returns as reflected in the of documents consulted can be found in the Sources figures below. section of this document. Development of Questionnaire: To guide key Consistent with the focus of HRSDC, the review informant interviews, the project team developed a focused on Canadian materials wherever possible. questionnaire which attempted to surface investors’ Recognizing that other jurisdictions have made perspectives on the use of social metrics, as well as important progress on the use of social metrics, key challenges and opportunities. The questionnaire the project team also drew on international sources is included in Appendix A. where key best practices were identified. Publications were selected on the basis of recommendations from Interview Process: A member of the project team HRSDC as well as our own knowledge of relevant contacted potential key informants via email to literature on best practices, lessons learned and explain the nature of the project and to request recommendations related to the use of social metrics. their participation. A copy of this email is included in Appendix A. Interview questions were sent in advance to interviewees. Semi-structured interviews were con- ducted via phone and lasted between 30-60 minutes.3 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  15. 15. Key Informants by Key Informants by Key Informants by Key Informants Investor Type Experience with Years of Experience by Percentage Institutional: 17 Impact Investment in Impact Investing of Total Funds in Service Provider: 3 Has made an impact Not at aII 4 Impact Investments Government: 1 investment: 18 0-2 years 2 0-10% 3 2-5 years 1 91-100% 11 Has not yet made an 5+ years 15 Intermediary 4 impact investment: 4 Did not report 4 Geographic Distribution of Key Informants 2 1 15 44 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  16. 16. Key Informants by Impact Investment Focus Key Informants by Type of Securities 0 2 4 6 8 10 0 2 4 6 8 10 Newcomers Hard Assets First Nations Other Cleantech Liquid Debt Securities Culture Real Estate Marine/Ocean Public Equity Fairtrade Quasi-equity/mezzanine finance Children’s Issues Deposit/CDs/Other Short Term Forestry Gurantees Waste Management Private Equity Education Loans Urban Renewal Natural Resources Health Community Development Key Informants by Directness of Water Impact Investments Microfinance 0 2 4 6 8 10 12 14 16 18 Housing Though Funds of Funds Poverty Alleviation Through Third Party Managers Sustainable Agriculture Through Funds Job Creation Direct Investments Alternative Energy Key Informants by Geography of Investment Key Informants by Organization 0 2 4 6 8 10 12 14 16 18 0 1 2 3 4 5 Global Non-profit investment fund Middle East Investment Fund Europe Chartered Banks South America Consulting Africa Credit Union Asia FoundationNorth America (Excl. Canada) Government Canada High Net Worth Individual Pension fund5 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  17. 17. Analysis of Findings: Members of the project team have included appropriate introductory context and made detailed notes during each of their interviews. additional references in the report for those less After each interview, key themes and findings were familiar with this topic. identified as they related to the objectives of the project. Once all interviews were completed, the There are a variety of persistent project team met to share and synthesize key findings measurement challenges at the and conclusions. international level that effect Canadian The key informant sample was strongly representa- investors. tive of experienced institutional investors. The International measurement challenges: There are a majority of key informants had more than five years variety of persistent measurement challenges at the experience in impact investing and held 91-100% of international level that effect Canadian investors. For their funds in impact investments. example, the standardization versus customization of measurement approaches, and shared versus 3.3 Limitations proprietary frameworks. While this report attempts to describe how selected Canadian investors are While this methodology was designed to deliver interpreting these challenges, it is not the purpose of robust results, it is important to acknowledge and this report to resolve them. account for some of its potential limitations. International jurisdictions have made more Inconsistency around language: The sector contin- progress than Canada: While HRSDC has expressed ues to face challenges with language, where terms a preference for Canadian sources and perspectives, that are often used interchangeably are in fact not. in many cases, international actors are working at There can also be misunderstandings of what terms the forefront of measurement issues. For example, represent or not, given the nascent nature of social a recent study from J.P. Morgan and the Global finance in Canada. The project team attempted to Impact Investing Network states that 96% of their address this by providing clear and concise explana- global sample of investors measure the social and/or tions of all terms used.1 environmental impact of their investments, with 82% using IRIS aligned metrics. These proportions indicate Bias towards active impact investors: Since a much more advanced state of measurement than interviewees were targeted based on their current this project’s sample (Saltuk, Bouri, Mudaliar, Pease, or prospective work with social metrics, it is very 2013). As a result, many of the most current best likely that they were disproportionately well-versed in practices, lessons, and recommendations will come social metrics relative to other investors. Even though from an international context, and may not have been this report was intentionally targeting this segment, tested in Canada yet. Our team has incorporated it may result in the perception of higher clarity and examples from across the globe into our deliverables, sophistication of social metrics than is representa- but note that many practices have yet to be adapted tive of a broader range of investors. As such, we for use in Canada. 1 For definitions used, please see Appendix A: Questionnaire6 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  18. 18. 4.0 Results A key distinction must be made between the motiva- tions of financial-first and impact-first investors. “Financial first investors seek to optimize financial This section presents the key findings from key infor- returns, with a minimum requirement for social mant interviews and literature review. It is divided in or environmental impact. They are generally com- the following ways: mercial investors searching for subsectors that offer • Section 4.1 explores who impact investors are; a market rate of return but yield some social good” • Section 4.2 outlines why social metrics matter (Thornley and Dailey, 2010). Banks, pension funds, to them; and development finance funds tend to be classified • Section 4.3 presents the measurement principles, as finance-first (E.T. Jackson and Associates, 2012). tools and approaches used; “Impact-first investors seek to optimize social or • Section 4.4 discusses the stages of the investment environmental performance while maintaining a floor process when investors use metrics; for financial returns. They accept a range of returns, • Section 4.5 discusses the challenges of measure- from principal-only to market rate, and seek social ment; and, good as a primary objective” (Thornley et al., 2010). • Section 4.6 outlines the competing priorities Foundations, family offices and impact investing funds investors face. tend to be classified as impact-first (E.T. Jackson and Associates, 2012). Most investors have both financial Readers are cautioned that the findings from key and impact goals that they seek to balance through informant interviews should be considered anecdotal their investment decisions. as the project’s sample size does not justify any broad conclusions about the perspectives of Canadian Most investors have both financial and impact investors as a whole. impact goals that they seek to balance through their investment decisions. 4.1 Who are Impact Investors? Of the key informants, four identified as finance- first investors, eleven identified as impact first As in the traditional investment universe, impact investors and six identified as balancing impact and investors vary in the nature of their motivations, finance goals. assets, risk and return expectations, and social impact objectives. In this section, the different types While not the focus of this report, it should be noted of impact investors are presented. that ventures themselves also engage in impact mea- surement. Ventures use measurement “to determine if they are making a difference, to market to custom- Characteristics of Finance First and Impact ers/stakeholders, to secure or maintain funding and First Investors to improve the services or products they deliver and their organizational processes” (Golden, Hewitt and Finance First Impact First McBane, 2010). - Seek to optimize - Seek to optimize social financial returns or environmental impact - Minimum requirement - Minimum requirement for social or environmen- for financial returns tal impact E.g. Banks, pension funds E.g. Foundations, family offices, impact invest- ing funds7 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  19. 19. 4.2 Why Metrics Matter reflected in the “proliferation of nonfinancial perfor- mance measurement tools and practices” (Thornley Investors use social impact metrics for a variety et al., 2010). of purposes. The way investors use metrics differs At the field level, social metrics are essential to substantially based on the purpose for which they are support the development of social finance tools and using them. “For some impact investing actors, social investment vehicles (Wisener and Anderson, 2010) measurement is important to prove impact. Others and to attract capital (Golden et al., 2010; Thornley et believe that improving the nature of the venture al., 2010). should be the priority of assessment” (E.T. Jackson and Associates, 2012). As Thornley and Dailey (2010) As will be discussed in the following sections, key suggest, “understanding investor preferences and informants indicated that they use metrics in many behaviors is critical to more effectively measuring different ways for many different purposes through- performance.” In this section, the importance of out the investment lifecycle. metrics to different types of investors is explored. While “impact-first funders … will generally require more sophisticated social or environmental measure- 4.3 Measurement Principles, ment tools to really quantify the degree of impact Approaches and Tools from their funding … Investors seeking blended There is no silver bullet when it comes to social financial and social/ environmental impact returns impact metrics. Indeed as E.T. Jackson and Associates will generally use outcome measures that are defined (2012) point out “…the ongoing market-building by a social purpose business, specific to its social phase of impact investing will likely continue to be mission and its execution plan, in reporting to their characterized by numerous impact assessment initia- investors” (Golden et al., 2010). According to Golden tives operating in parallel, sometimes in conflict and et al. (2010), “investors who are primarily motivated sometimes in cooperation.” Current literature urges by financial returns or investment-first investors in interested parties to shift to an “investor-centered the social capital market require impact measure- perspective [rather than using] particular metrics ments that are simple and easy for the average as the focal point of innovation … a more complete investor to understand.” understanding of investor preferences will lead to a These different ends mean that investors use metrics more robust regime of measurement” (Thornley et in different ways. “Each investor – be it a bank, a al., 2010). public sector pension fund, an insurance company, a The “right” approach to measurement, it follows, foundation, or a faith-based organization – places a is defined by an investors’ risk tolerance, desired different value on nonfinancial return. Further, their financial return, sector of investment, geography, and investments in different sectors reflect their various the quality of information the investor requires (Olsen missions and visions (such as investments in job and Galimidi, 2008). In this section, the different creation, support for emerging domestic markets, principles, approaches and tools investors use in or construction of affordable housing). These dif- measurement are explored. ferences are a significant barrier to any attempt to distill the interests, preferences, and aspirations of all investors into a single industry-wide nonfinancial performance measurement practice” (Thornley et al., 2010). The diversity of investor preferences is8 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  20. 20. 4.3.1 Metrics Types and account for the differences in impact, region, size, and focus of each of their investments. For Investors have a variety of factors to consider when example, an investor at a private investment fund deciding what types of metrics to use. While they focused on sustainable agriculture said, “Our com- may prefer to measure outcomes and impacts, panies are so diverse that we need to measure at the they may opt to primarily use output metrics and investment level to capture their non-financial value.” to use outcomes and impact metrics only where strictly necessary. A few key informants measure metrics at the portfolio level. This level of measurement allows investors to While informants favour outcome and capture the impact of all of their investing activities, impact measurements, very few are able rather than just that of one investment. To do so, to collect this information. they identify a set of core indicators that are common to each of their investments. One metrics service All of the informants who collect social metrics provider justified this decision by saying, “While there indicated that outputs are the easiest to collect and is variation among industries, there is some com- standardize. As one service provider said, “Many monality between all of the companies in our universe companies coming into this field may not have that we can report on at the portfolio level.” thought about measurement before. They may never have measured outcomes. We need to make metrics Less than half of informants monitor metrics at credible, accessible and verifiable but it is unrealistic both the portfolio and individual levels, due to the to expect companies to jump into outcome measure- challenge of capturing the sector-specific nature of ment right away.” impacts at the portfolio level. As one investor said, “Each of our companies is too diverse. Measurements Investors want to get beyond outputs but outcomes at the portfolio level wouldn’t have any real value.” In are proving to be a difficult hurdle to tackle. As one this manner, an investor chooses a scale of analysis foundation program officer said, “I’m starting to which reflects his or her priorities and focus areas. think that I don’t even want to focus on outcomes. We should talk about it and be aware at the theory of change level but not at the measurement level. It’s 4.3.3 Principles, Approaches and Tools complex and even if you find an appropriate metric, Key informants were asked what principles, there is so much analysis and work that needs to go approaches and tools they use in their measure- into proving that a certain percentage of the outcome ment. Informants noted that their approaches vary is related to my intervention.” This approach is by investment, by sector, by size and by asset class. reflected in some of the major measurement initia- The following table summarizes their feedback on tives, such as GIIRS and IRIS, which only reflect out- the strengths and weaknesses of each framework. A put metrics. Moving forward, investors may choose to more thorough analysis of measurement frameworks adopt outcome metrics where they are strategically is included in Appendix B. One of the most common advantageous, rather than aim to measure these indi- frameworks used by is GIIRS. A sample GIIRS assess- cators across the board. For example, if an outcome ment is included in Appendix C. metric is essential to securing funding, customers or community support for a venture. Where outcome metrics are resource-intensive or not essential to a venture’s success, investors expressed a preference to work with output data that is easier to obtain. 4.3.2 Scale of Analysis Key informants differ on the scale of analysis they use when monitoring social metrics – ranging from the investment level, to the portfolio level, to both. At the investment level, metrics are collected only as they pertain to an investment in a single venture. At the portfolio level, metrics are collected from all of an investor’s investments to capture the overall impact of an investor’s activities. Most informants were able to monitor metrics at the investment level. This scale allows them to recognize9 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  21. 21. Table 1: Measurement Frameworks used by Key Informants1 TOOL DESCRIPTION USED BY USED FOR LIMITATIONS Theory A map that describes the • Foundations • Clarifying • Captures only of Change “process of planned social social objectives anecdotal evidence • Non-profit change, from the assump- Investment Funds • Determining appro- tions that guide its design to priate metrics the long-term goals it seeks • Ventures to achieve” (Community • Identifying long Foundations of Canada, term direction of 2012). Its focus is on activities an organization and outputs. GIIRS GIIRS Ratings & Analytics • Ventures • Benchmarking • Not suitable represents a set of third-party with other invest- for non-profits • Investment Funds assessments of the social and ment opportunities • Long survey environmental impact of both • Improving transpar- companies and funds. GIIRS ency assesses companies as well as funds and their portfolio com- • Improve a ven- panies on four performance ture’s operations areas: governance, workers, community and environment IRIS provides a standardized • Investment Funds • Increasing compa- • Doesn’t measure IRIS taxonomy and a set of con- rability outcomes sistent definitions for social, or impact • Increasing standard- environmental and financial ization • Not applicable to performance. IRIS is intended to projects outside co-exist with the Global Impact the Global South Investing Rating System, in order to provide a common language for output indicators. ESG ESG Screens are environmental, • Consultants • As a proxy for sus- • Doesn’t measure Screens social and governance criteria tainable management outputs, outcome which are used to filter out • Pension Funds or impact • Suited to a socially companies and sectors that are responsible investing considered harmful to people, (SRI) approach communities and the environ- ment from an investor’s portfolio or to include companies with leading environmental, social and governance track records. 1 This table is intended to capture the comments of key informants on specific measurement frameworks. It is not intended to be representative of the entire sector’s perspective on these frameworks.10 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  22. 22. Social Return A set of guidelines for the • Chartered Banks • High level analysis • Labour intensive on Investment measurement of non-financial • Filtering invest- • Aggregated figures (SROI) impact per investment. SROI ment opportunities mask assumptions involves the calculation and errors of “social cash flows” for outcomes describable in • Difficult to access monetary terms, and a net geographically present value calculation of appropriate these to arrive at a return on proxy information investment (ROI) ratio. • Difficult to prove attribution Cost Benefit An analysis in which the • Government • Payment by • Doesn’t capture Analysis costs and social impacts of results contracts any indirect non- an investment are expressed financial impacts in monetary terms and then assessed according to net present value, the benefit- cost ratio or the internal rate of return. Sustainable Sustainable Livelihoods is • Non-Profit • Capturing the • Not easily Livelihoods an asset mapping process Investment Funds complexity of comparable which measures the specific employment issues financial, social, personal, physical and human assets an individual or community may have. The framework then helps to identify what assets must be built through the intervention and re-assess these assets to measure progress towards poverty reduction. Case Studies A description of the • Investment Funds • Communicating • Not a precise inputs, activities, outputs, to stakeholders measure of impact outcomes and impacts of • Conveying impact in an intervention. a simple way • Capturing broader community level impact11 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  23. 23. 4.3.4 Limitations standards. Others fear that increased standardization of metrics would result in a “cookie cutter” approach Investors are keenly aware of the limitations and of minimal utility. challenges of existing measurement frameworks. These include comparability, standardization, and cumbersomeness. 4.3.4.2 Other Limitations With regards to existing measurement frameworks, 4.3.4.1 Comparability and Standardization investors find many of these tools cumbersome. As one investor put it, “We have yet to see something Amongst investors, there is a desire for comparability broad enough and smartly enough designed to take and consistency in measurement. “In business, we the end result seriously.” have established generally accepted principles of accounting and an international legal infrastructure As one foundation program officer identified, “There to help manage the reporting of financial returns. A is a misperception that there is one number that we comparable standard for social impact accounting can use for every activity we do that would be slightly does not yet exist” (Clark et al., 2004). Confusion adapted depending on context. This is impossible.” exists around the language used by different actors This challenge can be alleviated to a certain degree in the field of impact investing (Clark et al., 2004; through greater education around the uses and Thornley et al., 2004) as well as the vastly different limitations of measurement. measurement systems required to reflect the impact potential of a diversity of products and investment opportunities (Thornley et al., 2010). 4.4 When Investors Use More than half of key informants indicated that they, or their ventures on their behalf, use a customized/ Social Metrics proprietary measurement system. Investors choose to Investors use metrics at different times and for differ- use customized measurement approaches for several ent purposes throughout the investment lifecycle. In reasons. First, as stated earlier, investor preferences this section, we explore the stages of the investment differ significantly meaning that they may seek to lifecycle and how metrics are used at each stage. measure very different indicators than their peers. Most key informants felt that existing standardized metrics frameworks do not meet their needs, due to 4.4.1 Value Definition the nature and diversity of their investments. As one By definition, an impact investor’s investment deci- investor put it, “We are supportive of the idea [of a sions are guided by an intention to have a positive social metrics framework] but have not seen anything social or environmental impact. In order to make that makes sense for us.” Many of the informants investment decisions that fit their values, investors indicated that they are currently in the process of must first clarify their social and environmental developing or improving their measurement frame- impact objectives, the factors and stakeholders that work. As investors develop track records and experi- influence these objectives, and the possible avenues ence in the field, they will continue to adapt their for achieving these objectives. tools and approaches. One tool that is commonly used by investors during Customization has resulted in a diversity of measure- this phase is a theory of change. A theory of change ment methods which have contributed to investor is a map that describes the “process of planned confusion in the field of measurement. According social change, from the assumptions that guide its to Thornley and Dailey (2010), “investors feel design to the long-term goals it seeks to achieve” overwhelmed or misinformed by the lack of con- (Community Foundations of Canada, 2012). It explains sensus around what constitutes a robust or action- how stakeholders and their actions can influence a able methodology.” system to produce a set of short term and long-term In the face of this challenge, investors differ on the results. In addition to clarifying how activities lead to proper course of action. Some view this lack of com- outputs and outcomes, a theory of change articulates parability as a shortcoming of existing metricsframe- assumptions about the process through which change works and see the need for adoption of measurement will occur. standards. These investors identified the need to first As impact investors are intentionally trying to gener- build agreement on the importance of metrics before ate impact with their investments, a theory of change the sector can coalesce around a common set of can be useful in describing the various inputs that go into an investment and how they interact to deliver12 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S
  24. 24. financial and social returns. Some investors use a 4.4.2 Due Diligence theory of change as a first step in understanding the While traditional investors try to manage risk and vision, aims and motivations that influence invest- return as they construct their portfolio, impact inves- ment decision making and therefore, the indicators tors build on this framework by incorporating impact that they will want to measure. as a consideration. Most key informants use social While the literature suggests a strong role for impact metrics in the due diligence or investment theories of change in the investment process, our key screening phase, though these metrics are used in informants lacked consensus on its value. Of our key different ways depending on the type of investor. For informants, half had developed a theory of change. example, institutional investors tend to use metrics to Most of these individuals were from foundations and screen out unwanted sectors or organizations, reduce non-profit investment funds. These individuals said risk and capture long-term value. Investors making that the theory of change had helped to clarify the direct investments tend to use social metrics to vet high impact opportunities and identify alignment with investment parameters. Investment Lifecycle Ongoing Value Definition Due Diligence Monitoring Reporting Measurement Example Measurement Example Metric: Example Metric: Example Metric: Example Metric: Framework: Theory Number of jobs Employee retention Increases in family Increases in family of Change created income assets goals of their investments, to shape the long-term Risk reduction is a key role for metrics in the due trajectory of their organization and to achieve buy-in diligence phase. Metrics can be used to identify from partners. potentially risky investments and by extension to limit an investors’ exposure. For institutional investors, the Financial-first investors, such as those representing risk screening process is commonly achieved through investment funds, chartered banks, high net worth the use of environmental, social and governance (ESG) individuals and government, were less likely to have screens which are used to eliminate investors or sec- developed a theory of change. These individuals tors whose poor performance in such indicators may identified theories of change as being imprecise, be indicative of risks to financial returns. not very pragmatic or not suitable for their purpose. Instead, these investors tend to express their values Impact investors also take on a social risk – that of through an investment thesis – a statement of beliefs not achieving their desired social objectives. Investors that guides their decisions throughout the invest- who have a lower bar for social due diligence may be ment lifecycle. willing to take on more risk by investing in ventures whose impact has not been fully captured. Conversely, investors who are looking to reduce their social risk may use a more formal measurement system, such as GIIRS or IRIS. Metrics can also help investors to capture the long- term value inherent in many impact investments. E.T. Jackson and Associates (2012) notes “many investors are recognizing the limitations of their financial return models when they fail to take into account longer-term drivers of economic and societal value creation. Instead, the impact-motivated practices of these investments can be seen to deliver long-term value, rendering this a source of strength, rather than of vulnerability. This also applies to institutional capital whose trustees and managers are under13 S O C I A L I M PA C T M E A S U R E M E N T A M O N G C A N A D I A N I M PA C T I N V E S T O R S

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