The importance of impact measurement in impact investing

elea Blog

Impact measurement is one of the grounding principles of impact investing. To merit the name, impact investments must 1) intend to generate societal impact alongside financial returns, 2) create a change that would not have occurred otherwise, and 3) make a difference that is appropriately assessed and tracked. These criteria set impact investments apart from other forms for sustainable investments, such as Environmental Social and Governance (ESG) investing, which allows aligning portfolios with investors’ values but is not designed to generate social impact.

elea's perspective

In our recent white paper, entitled “The Impact of Impact Measurement”, we underscore the crucial role of impact measurement in impact investing, not only to distinguish it from other capital deployment strategies, but also to support impact investors in fulfilling their purpose. On the one hand, we draw lessons from the development and the consistent application of our own approach, i.e., the elea Impact Measurement Methodology (eIMM), reflecting on how it helps us fight poverty with entrepreneurial means. On the other hand, we put impact measurement into the context of the recent growth of the impact investing industry – which has reached USD 1.2 trillion in capital commitments in 2021 – examining how the sector can benefit from well-suited impact measurement practices.

Why impact measurement and management matter for the sector

  1. Mitigating mission drift: The growing influx of fresh capital in impact investing increased the diversity of investment strategies implemented to create societal impact and broadened the profiles of impact investors. As a result, the risk of mission drift, where financial returns progressively overshadow social objectives, has escalated. In this context, we believe that impact measurement not only serves as a reporting tool for investors, but it may also safeguard the dual objective of impact investing, i.e., generating social impact alongside financial returns. Indeed, by integrating impact considerations – as defined by their measurement methodologies – across their whole investment lifecycle, investors can ensure that their actions are consistently driven by impact, thereby protecting the credibility and effectiveness of impact investing.
  2. Contributing to impact investments' overall performance: Many impact investments are still in their early stages and have not yet realized their financial returns, which creates uncertainty about their aggregated performance as an asset class. To avoid frustrations, impact measurement can help manage expectations by providing visibility on realized social outcomes, thereby validating the distinct added value of impact investments. In other words, we believe that providing structured, robust, and steady impact reporting is an essential compensation for investors that accept potential lower financial returns (or higher risk) in exchange for impact.
  3. Ensuring accuracy, transparency, and accountability: In recent years, impact measurement methodologies have proliferated. While impact investors have inherited some tools from traditional philanthropy, they have also developed others to assess their impact in a distinct way. As a result, it has become difficult to grasp what “impact” means for whom. In this ambient noise, and in the absence of widely recognized impact standards, we see a risk that the notion of social impact gets diluted, inviting allegations of “impact-washing” in the sector. To foster transparency and accountability, we reckon that investors must, in response, carefully select and/or adapt impact measurement methodologies that fit their purpose to accurately track whether their non-financial goals are being met.

The figure above, extracted from our white paper, illustrates both the multitude and variety of impact measurement methodologies that are available to impact investors. The reference to “elea” in the chart stands for the elea Impact Measurement Methodology (eIMM). SROI = Social Return on Investment, RCT = Randomized Control Trial. 

Why impact measurement and management matter for investors

While impact measurement can benefit the sector, we are convinced that impact investors also derive concrete benefits from crafting or adopting impact measurement methodologies that suit their purpose. In fact, as a philanthropic impact investor committed to fighting absolute poverty with entrepreneurial means, we have experienced that ourselves with the elea Impact Measurement Methodology (eIMM).

The eIMM quantifies the impact we expect to generate by investing in ventures, expressed in “elea Impact Points” that allow comparing investments across various business models, sectors, and geographies. The eIMM integrates nine theories of change that reflect the distinct types of change the ventures create for people living in absolute poverty. Applied on a yearly basis to each venture of our portfolio, the eIMM enables us to track and report our impact performance in a granular way.

But going beyond mere reporting, we benefit in many ways from actively managing our impact across our investing activities with the eIMM. In our white paper, we provide the following concrete examples:

  • The eIMM informs investment decisions, notably through the categorization of different types of social impact according to their scope and depth. For instance, we use the eIMM to examine whether the impact of ventures is solely protective against economic shocks, or whether it entails further benefits, such as increased productivity and income for people living in absolute poverty.
  • The eIMM helps us optimize the use of resources. Each year, we use the eIMM to evaluate each of our investments, allowing us to spot any deviations from our initial impact projections. Such discrepancies are met with relevant value-creation efforts, i.e., our non-financial investments, which notably materialize through the board seat mandates that we endorse for many of the ventures we support. When eIMM assessments indicate little room for elea to further contribute to the success of portfolio ventures, it also serves as a signal for investment exits, which ensures the efficient use of both our limited capital and time.
  • The eIMM provides strategic guidance for our organization, as illustrated by the development of elea’s Vision 2030. By 2030, we have set the objective to impact 5% of the world's population living in absolute poverty, while keeping a balance between impact depth and scalability. To do so, we analyzed historical impact data from the eIMM to estimate the necessary investments and resources to reach this target, thus ensuring that it is both ambitious and realistic.

The figure above synthesizes how we calculate elea Impact Points by multiplying elea’s weighted (non-)monetary contributions with the assessed impact of a venture. A detailed description of each factor entering this computation is provided in our white paper. 

Sharing best practices to advance impact measurement

To conclude, we believe that the significance of impact measurement in impact investing can hardly be overstated. First, it contributes to differentiating impact investments from other sustainable investment strategies by ensuring that societal goals are intentionally pursued and effectively realized. Second, through rigorous impact measurement, investors can avoid mission drift, maintain the integrity of their investments, and substantiate the overall performance of the impact investing sector. Finally, as illustrated with the elea’s Impact Measurement Methodology (eIMM), impact measurement tools that are suited to the purpose of their user may also help investors to make informed decisions, optimize resource allocation, and support strategic planning. For that, we are convinced that impact measurement and management must be integrated.

The eIMM was specifically designed to meet elea’s purpose and needs, which limits the external validity of our learnings from it. However, we believe that customizing impact measurement tools shall not necessarily impede efforts toward harmonization and knowledge exchange. On the contrary, we actively encourage both. As a signatory of the Organizing Principles of Impact Management (OPIM), elea adheres to a rigorous yet flexible framework for impact management. By sharing the lessons drawn from our impact measurement methodology, we also aim to contribute to more transparency and accountability in the sector, foster exchanges of best practices, and invite expert discussions. In this spirit, we warmly invite you to read our whitepaper for more details.

The figure above, taken from our white paper, depicts the systematic integration of elea’s Impact Measurement Methodology (eIMM) throughout our investments lifecycle, as framed by the Operating Principles of Impact Management (OPIM). DD = Due Diligence. 

Read the full white paper

You can read "The Impact of Impact Measurement" (PDF) here or request a printed copy through our contact form.

Authors: Arnaud Schuele, Senior Associate at elea & Felix Wüthrich, Associate at elea