Measuring Impact
This post provides a step-by-step guide that you can use to implement your own impact measurement process.
By the end of this post, you’ll have a template you can use to either implement your own impact measurement framework or use our team to implement one for you.
There are three steps we’ll need to take to implement our impact measurement process. We’ll need to decide:
- Why to Measure
- What to Measure
- How to Measure
Below I describe each in turn. If you already have an investment policy that incorporates impact investing, then you can skip to steps 2 & 3.
Step 1 – Why to Measure
Before we can begin measuring impact, we’ll need to lay the groundwork. This means we’ll need to 1) define our values, 2) set some goals, and 3) document our investment process.
Defining our Values
The first thing all investors should do is define their values. This means exploring the core values that guide our life. This might also include writing a family mission statement.
I suggest coming up with two or three core values that your family subscribes to.
Click here for a list of examples.
Setting Some Goals
The next step is for us to describe our goals.
Once we’ve codified what our values are, it becomes much easier to narrow the focus of the impact we want to make by outlining specific goals. Making investment goals is key to evaluating our success (or failure) and will inform the tactics we use to achieve our impact.
Click here to read my blog post about making investment goals.
Documenting our Process
Once we’ve defined our values and our goals, the next step is to document our investment process. Essentially, this means writing (or updating) our Investment Policy (to include impact investing).
An investment policy is a written document that describes the strategy for an investment portfolio.
Click here to read my post about writing Investment Policy Statements.
Most impact investors carve out a portion of their portfolio dedicated to impact investments or charitable donations, while the rest of their portfolio is geared towards generating economic returns.
So, just because we’re making impact investments, doesn’t mean we have to get rid of our stock portfolio.
Impact investors also commonly incorporate Environmental, Social, Governance (“ESG”) into their investing process. This means focusing their portfolio on investments that reflect their values and screening out those that don’t. For example, investors who believe in environmental sustainably would likely exclude oil & gas stocks from their portfolio in favour of renewable energy stocks.
Step 2 – What to Measure
Now that we’ve decided and documented what impact we will measure by:
- defining our values,
- setting some goals and,
- documenting our process (our investment policy).
We’re ready to search for some impact investments (or charitable donations) that meet our criteria.
The next thing to do is for us to pick an objective metric we can use to measure the impact our investments will be making. The metric(s) we use will depend on the sectors we’re targeting and the goals we’re trying to achieve.
Here are some examples of quantifiable metrics we can use to measure impact along with the associated sector:
- Megawatts per hour (renewable energy generation)
- Housing units created (affordable housing)
- Acres of land (environmental preservation)
- Revenue generated (entrepreneurship from marginalized communities)
- Students graduated (scholarships)
- Number of mothers (family services)
- Calls received (mental health)
- Defibrillators installed (health services)
The possible metrics we might use to measure our impact is endless and must be suited to our values & goals.
Here are three principles to keep in mind when choosing impact metrics:
Impact Criteria #1 – Objective
The metric we use to measure our impact must be a fact, not an opinion. For example, a renewable energy producer can tell us exactly how many watt hours of electricity they generated. This is a fact. Whereas, the amount of greenhouse gasses this generation reduced is an opinion that requires estimation.
Impact Criteria #2 – Easy to Gather
The metric we use to measure our impact must be easy to gather. If the charity we donate or the company/fund/project we invest in must spend extra resources to generate the data we need to make our analysis, it puts onus on them and drains their resources. But, if we choose a metric that they already track and publish then it will be easy for us to collect the information we need to measure.
Impact Criteria #3 – Fungible
The metric we use must be fungible. To evaluate the success (or failure) of our impact investments or charitable donations, we must be able to compare the results to alternatives. This is the only way we can determine the efficiency of the investments we are making. So, we must be able to compare the output of a group of investments in the same sector using the same metric.
By this point we should have chosen a metric(s) we will use to measure the impact we are making. The metric should be relevant, objective, easy to gather, and fungible.
Step 3 – How to Measure
Now that we’ve decided which metric(s) to measure our impact by, the next thing we need to do is gather the information. We can do this by incorporating impact measurement into our current reporting process.
Incorporating Impact Measurement
Most investors already generate quarterly reports that are used to evaluate performance. To do this, they either use a 3rd party service, or they record to a database or spreadsheet internally.
Adding impact data into our current financial performance measurement system is easy. We just need to create another record in our database/spreadsheet and then add some additional tasks to our regular process (such as recording the metric provided by our donee/investee).
Once we have the impact data at our fingertips, we can begin to track our results. This might include adding a section to our regular quarterly report or generating a separate periodic impact reports.
Impact Reporting
Generating regular reports will help us become accountable for the results. We will clearly see how impactful the investments we are making have become.
Evaluating Impact
Once our impact measurement system is in place, we can begin to evaluate our progress. If we’ve done the work well, we’ll be able to clearly see over time whether we’re achieving our impact goals. Good data doesn’t lie.
Here are two tips that will help us evaluate our impact:
- Investing Process – Once we’re using an impact measurement process as described herein, we’ll need to narrow the focus of our investments to those that can report their results in a way we can digest.
If a charity or impact investment cannot provide us with a regular report of the progress they’re making (including the data we’ll need to measure their result), then it becomes a reason to avoid the investment.
To screen impact investments on this basis, we need to be explicit about our investment criteria at the outset of our discussions with potential donees/investees and ensure they commit to our reporting requirements before an investment is made.
- Benchmarking – This will help us avoid impact cheerleading. Because if we don’t benchmark our impact results, we won’t be able to evaluate our effectiveness.
Practically speaking, this means keeping data on several alternative charitable programs & investments that could be made along with the ones we have in our portfolio. Because we need to compare the alternative investments we could make with the same dollars to evaluate their individual efficiency.
Too many charities and impact investments are simply cheerleaders for the impact they make. As a result, they often fail to evaluate their efficiency. As impact investors, we should be asking ourselves, “sure, but at what cost?”
Just like stock market investors benchmark their returns to indexes, donors and impact investors need to judge their results by comparing them to alternatives.
Rinse & Repeat
Once our reporting process gets into the regular habit of measuring our impact, it will become easier to understand where we can make improvements.
But without an impact measurement framework, we’ll never actually know whether our capital has been well spent or not.
Our family office
We would like to work for more charitable foundations and wealthy families making impact investments to help them develop and maintain their own impact measurement process.
We are willing to provide an initial consultation that will produce examples of how we would apply the impact measurement process described in this post to your organization for free in exchange for considering our ongoing services. Please contact our office for more information.