Five Dimensions of Impact Investing

Family offices, often responsible for managing the wealth and investments of wealthy families, are increasingly incorporating impact investments into their portfolios. Recognizing the importance of not just financial returns, but also social and environmental impact. These investors are redefining the very essence of “returns on investment”. The Global Impact Investing Network’s (GIIN) five dimensions of impact investing offers a framework for family offices to measure and evaluate their impact. Here’s a closer look at how its done.

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Benefits of Impact Investing

Impact investing offers several key benefits that appeal to investors looking to generate positive social and environmental outcomes alongside financial returns. Firstly, it allows investors to align their financial goals with their values by directing capital towards enterprises that address pressing global issues, such as renewable energy adoption or community development. Secondly, impact investing can mitigate risks associated with regulatory changes and societal shifts towards sustainability, potentially enhancing long-term profitability. Thirdly, it fosters innovation by supporting entrepreneurial ventures that create scalable solutions to societal challenges, thereby contributing to economic growth and job creation. Moreover, impact investing promotes accountability and transparency through rigorous impact measurement frameworks, ensuring that investments deliver measurable social and environmental benefits.

Five Dimensions of Impact

The GIIN has outlined a framework for evaluating the ESG impact of investments, known as the five dimensions of impact. These dimensions provide investors with a comprehensive view of the potential effects their investments can have. They are: What, Who, How Much, Contribution, and Risk.

Five Dimensions of Impact: What Are We Measuring?

What: This dimension asks what outcomes the enterprise is contributing to, whether they are positive or negative, intended or not. It basically identifies the specific social or environmental effects that the investment aims to achieve. Examples might include creating jobs, reducing greenhouse gas emissions, or improving health outcomes.

Example: Let’s say a family office wishes to invest in clean energy in Southeast Asia. The “What” will focus on outcomes such as reduction of carbon emissions, enhancement of renewable energy capacities, and the overall betterment of air quality in specific regions. The outcomes must be measurable.

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Who Will We Impact?

Who: This relates to the stakeholders that experience the outcome. It involves understanding which individuals or communities are affected by the enterprise’s product, service, or operations. It might consider questions like, “Who benefits the most?” or “Are the benefits reaching those in underserved or vulnerable populations?”

Example: In the context of our clean energy investment, the “Who” would involve pinpointing the communities or populations that stand to benefit. This might be households in a rural community getting access to electricity for the first time or urban areas where cleaner energy sources lead to better air quality and health outcomes.

How Much Impact?

How Much: This dimension quantifies the depth, scale, and duration of the impact. It includes:

• Depth: How much change stakeholders experience due to the outcome.
• Scale: The number of individuals or entities experiencing the outcome.
• Duration: How long stakeholders experience the outcome.

Example: Our family office might evaluate:

• Depth: By how much has the reliance on non-renewable energy sources decreased?
• Scale: How many households or communities now have access to this clean energy?
• Duration: Is the clean energy project sustainable? Will these communities have access to this energy source for just a few years or indefinitely?

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Contribution: What If We Did Nothing?

Contribution: This evaluates how the enterprise’s and investor’s efforts lead to outcomes that are better than what would have occurred without their intervention. It’s essentially a way to measure the added value or difference made by the impact investment. It aims to address questions like, “Would this impact have happened anyway, even without the investment?”

Example: If the family office funds a startup that brings solar energy solutions to remote villages, they would assess whether these villages would’ve received such solutions without their funding. Or, did their funding accelerate the process, making the impact felt sooner?

How Risky Is the Outcome & Process?

Risk: This refers to the likelihood that the impact will be different than expected. We need to account for different types of risks including financial, reputational, time, and the likelihood the desired outcome is achieved.

Example: In the clean energy scenario, potential risks might include technological malfunctions, political instabilities leading to project discontinuations, or the possibility that the energy solutions might not be as widely adopted as anticipated. Can the capital required to make this investment be done with reasonable valuations?

Family Office: Limited Resources

For family offices with limited resources to make impact investments, measuring and then evaluating impact can be especially challenging. Note, the areas of focused listed below can also be outsourced. Here are some areas to focus on when people and financial resources are limited:

Benchmarking

Compare outcomes with industry standards or similar projects. For instance, if the focus is on improving education, benchmark student performances against national or regional averages.

Stakeholder Interviews

Engage directly with stakeholders, like local community leaders, to get their perspectives on who benefits the most from the initiative. The insights gained using this method can add colour to impact reporting that may help stakeholders understand the impact investing process better.

Dedicate Personnel or Pay Consultants?

With resources, a family office can have a team or individual responsible solely for impact investing. Their expertise and focus will ensure rigorous evaluation. Or, when resources are tight, family offices should use an external impact investing advisors and/or a firm to measure, evaluate, and report on outcomes.

Continuous Learning

Encourage the family office team to attend workshops, webinars, and conferences on impact measurement to stay updated with global best practices.

Collaboration

Find other impact investors and then share insights and resources with them. Let’s say there are two family offices with similar investment goals. But, one of the family offices has a dedicated impact investment manager who will source, evaluate, and make recommendations on which impact investments to make. And, the other family office has better analytical resources used to measure, evaluate, and report on impact. Both family offices could work together by having one family office make recommendations on which impact investments to choose, and the other on reporting on outcomes.

External Audits

Periodically engage third-party organizations to audit impact measurements. Their impartiality will lend credibility to the assessments.

Collaborative Impact with Markdale Financial Management

Family offices, being at the forefront of this transformative shift, are challenged with not only selecting the right investments but also ensuring their tangible, lasting impact. Our family office recognizes the power of collaboration in this journey. We are keen to align ourselves with other family offices, pooling our expertise, resources, and commitment towards a shared vision of sustainable, impactful change.

Our rich experience in measuring, evaluating, and reporting has fine-tuned our ability to grasp the nuances of impact investing. We believe in the GIIN’s framework and have seen its efficacy firsthand. We offer this expertise to fellow impact investors, ensuring that their investments are not only impactful but are also validated, quantified, and communicated effectively.

But our vision goes beyond mere collaboration. We see a symbiotic partnership where family offices, like ours, can coalesce, sharing their unique strengths, to drive an impact far greater than the sum of its parts. Please contact us to learn more about the impact investing services we can share with other family office impact investors.

If you’re an investment advisor specializing in impact investing, please contact us or message me on Linkedin. As our family office is eager to collaborate with like-minded professionals committed to driving positive change using impact investments.

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