The Down Low on Data & Impact Investment

One of the buzzwords in the current investing lexicon is “impact investment.” As with many hot topics, the phrase finds its way into keynote speeches or is the topic of networking conversations– but what does it actually mean? According to the World Economic Forum ‘impacting investing‘ is an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured.” A goal that is commonly referred to as the double bottom line (“DBL”).

Having spent the past few years working with some of the world’s largest venture capital funds providing outsourced valuation services, I’m well acquainted with the various methods of assessing and predicting financial return. As I read the definition above, I can’t help but think, “How does one measure social or environmental impact?”

Various standards have been developed (and are continuing to be developed) to answer this question (including the GIIRS Ratings/ IRIS metrics and the PPI to name a few). Despite the creation of these standards there is no industry wide consensus on what scale to grade social impact returns.  Which, intuitively makes sense – for instance it’s hard to directly compare the social impact of Oxfam’s WISE (Women in Small Enterprise) which helps support female micro-entrepreneurs in Latin America and the Caribbean and d.light, a social enterprise that delivers affordable solar-powered solutions. Both initiatives deliver very different solutions to very different social issues. However, what is clear is that the pressure on social entrepreneurs to access and report the impact of their efforts is becoming increasingly more important.

As the impact investment arena continues to mature and formalize, social entrepreneurs need to showcase the social or environmental impact of their endeavors in order to differentiate and make themselves a more attractive candidate to impact investors. When it comes time for investors to determine this impact, social entrepreneurs will hear two dreaded words: Due diligence.

Anyone who has worked for a financial services firm, investment fund, or has gone through a major merger, acquisition, or investment likely knows the chicanes of financial due diligence. A process in which every detail of a company’s financial records are passed through with the finest of combs. In order for investors to determine if an investment will return a DBL this same level of scrutiny will be applied to the records on social or environmental impact. This process will highlight the importance of clean, reliable, and accessible data.

Not only is data essential in the pre-commitment validation for impact investors, it is critical to the continued monitoring of investment performance. The gathering, validation, and presentation of clear, insightful, and actionable information will allow impact investors to assess what impact their investments actually make.  

By Brett Austin Cooper, Strategy & Operations Manager at Taroworks

Want more insight on data linked impact investment? Email Brett at brett@taroworks.org to learn more.