Meaningful Business (MB:) Why is impact measurement important for you as a business?
Patricia Nader (PN:) Good Karma Ventures (GKV) is a growth-fund investing in mission-driven companies. We exist to bring together talent, resources and knowledge behind visionary solutions committed to tacking the biggest problems in Brazil, generating a positive and measurable impact on society without compromising on returns. We have made a commitment to be a top-quartile fund while also generating at least 2x our fund size in social-environmental impact. That said, impact measurement is crucial for us and we are investing significantly in having a state-of-art measurement system. We need to know the financial value of the good generated by impact investments for each dollar invested.
The principle of value creation is also very important. It needs to help the investee thrive and access data that provides new insights into its business models and stakeholder groups. We go beyond monitoring a set of different indicators to assess the real improvements brought about by the company. Impact-related metrics tend to be most useful when they are directly relevant to the investee’s core business activities.
MB: How much does a company’s ability to accurately measure impact play a part in your investment decisions?
PN: More than evaluating the companies’ ability to measure impact, we analyse the company’s intent, interest and willingness to implement impact measurement in their day to day. Impact measurement can be time – and resource – consuming, so if the management is not fully committed to it, it will not be implemented.
During the due diligence phase, we work with company leadership to develop a strategic plan that identifies a clear set of objectives and initiatives to achieve full impact and business potential. It is essential to build action plans together with the company’s management, as well as what will be measured. During this process, it becomes clear to us whether the team believe in and is committed to impact measurement. If a company already accurately measures impact, it’s a bonus point for us. However, part of our value creation is to assist companies in implementing a continuous and disciplined system to track, monitor and report impact metrics.
MB: What are the biggest challenges right now in accurate measurement and reporting of impact?
PN: In my opinion there are two main challenges today in this arena: lack of comparability and lack of benchmarks.
• Lack of comparability: Even though it is very important to monitor metrics that are specific to a company, they are usually very particular to that sector. This does not allow comparisons among different companies in the portfolio, especially in an outcome level. That is why we decided to rate and monetise impact: we can translate the impact each company creates into one score and multiple, allowing us to compare companies from different industries. IRIS+ is doing a great job in bring standard metrics.
• Lack of benchmarks: Measuring is important, however, if you don’t have benchmarks to compare to, it makes it hard to improve and evolve. It is somewhat easy and straightforward to compare operational and financial metrics among companies, especially listed ones, allowing managers and investors to benchmark their performance. If we don’t even have standard impact metrics, just imagine benchmarks. The field is developing, and organisations such as 60 Decibels are bringing comparability and benchmark within certain industries.
MB: With many frameworks out there, which would you recommend that offer an accurate assessment of impact?
PN: Currently I don’t think there’s one framework that offers consensus among industry practitioners. In the last year, we have seen an array of new frameworks and tools appearing, each one complementing each other. In our case, when I joined GKV, my first mission was to design our Impact Measurement and Management Strategy. Even though I had previous experience in the impact industry, I was overwhelmed with the amount of standards, frameworks, principles, ratings etc. within the ESG and Impact space.
After a thorough process of deep diving over 20 of these and benchmarking with +15 impact funds globally, we selected the ones where we saw the greatest consensus and a great fit with our strategy. As guiding principles, we became signatories of UN’s Principles for Responsible Investment (PRI) and IFC’s Operating Principles of Impact Management (OPIM). Combined, both of them form the backbone of our ESG and Impact framework.
Going to a deeper level, to assess impact before, during and after investing, we are using two frameworks: Impact Management Project (IMP) and Theory of Change. Additionally, IRIS+ is evolving continually to provide a generally accepted impact accounting system. Based on these frameworks, we have developed different tools (rating systems, measurement, dashboard) that we use during the due diligence to screen and assess companies and during post-investment, to track, monitor and support the companies.
I would say that rather than looking for one unique framework, which we still don’t have, companies and funds should choose and adapt the ones most widely in use today.
MB: What can start-ups and SMEs, with limited resources, do to provide accurate and thorough measurement of their social/environmental impact?
PN: To start off, I would like to say that there are a few myths regarding impact measurement, which we believe to be flawed:
i) “Impact activities harm an organisation’s core business”: Impact management and measurement are core activities for a purpose driven company. Many of the core functions that are essential for effective operations – a clearly articulated strategy, collected data, customer research and feedback to inform product design, systems to strengthen financial performance – are fundamental aspects of impact management. Therefore, an organisation may have the key elements needed to understand and strengthen its impact, but simply not know it!
ii) “Large, expensive, multi-year studies done retrospectively are the only way to assess impact”: There are a number of easy processes and tools that can give organisations a solid, real-time understanding based on quick feedback of their performance and impact estimation. Many of them can be integrated into team work and not be a one-off and onerous exercise. Rigorous evaluations, such as randomised controlled trials, are important tools for measuring the effectiveness of a program or product. However, rigorous assessments should only be done after considering a range of factors and motivations; and they may not need to be large, expensive, or multi-year.
Impact measurement should have the depth and complexity that business maturity allows. I think this quote by Keynes summarises what I believe: “It is better to be roughly right than precisely wrong.” Even though the business is at an early stage, there is information being generated all the time and there is a huge amount of data behind the operation that can support the entrepreneur to understand the results of the solution presented in the user’s life. As the business gains scale, it becomes more timely to conduct an impact assessment, including hiring experts to produce robust measurements capable of assessing the causal effect of the solution’s impact.
My suggestion would be for a company to start with a one-day Theory of Change workshop with its leadership team, which is a collaborative cause/effect reflection on the impact that the company intends to promote through its solution and what resources are needed for the change to occur. A strategic impact map is useful here, as it allows the business management to have a clear path between the value proposition (inputs) and the purpose (impact) and which metrics can be established to monitor the results ( outputs and outcomes) are being achieved.
MB: How can organisations be better incentivised to measure their impact?
PN: This is a tough question for which I don’t have an answer. I think that companies that have impact embedded in their business model are naturally compelled to measure their impact. Usually the business KPIs that the company will measure are the same as they would to measure impact, what might change is the interpretation of the data. In that sense, mission-driven companies should be incentivised in measuring, since it will provide strategic guidance for them.
So managing the impact of the business is a way to create more value for investments. A good impact analysis serves at least two purposes: if it indicates that a significant impact is achieved, it becomes a powerful communication and positioning tool for the business; and if it indicates that the impact has not been achieved, this is essential information for the redesign of products and value proposition.
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