Too many people struggle to make ends meet because they’re denied opportunities to prosper. We can make a big difference by giving investors who want to do good the tools they need to create quality jobs and strengthen communities. One of the ways we’ve done that for 20 years is through a little something called impact measurement and management – IMM. It means identifying the positive and negative effects that business actions have on people and the planet, and then figuring out ways to mitigate the negative and maximize the positive in alignment with your mission.
Many of our fellow community and impact investors – whether they’re individuals or big institutions, public or private – don’t do social or environmental impact measurement. Some don’t have the knowledge within their organizations to do it, or the resources to fund a third-party consultant like us. Many, though, don’t like to admit it, but they think it’s not worth the time, and that it’s a distraction for the people they invest.
We couldn’t disagree more. If a company says it’s going to do good, great! But unless we measure the social or environmental impacts associated with our investments, there’s no easy way to differentiate impact investing from traditional investing that puts profits ahead of people and the planet. Not just that: there’s a growing body of evidence that IMM practices can enhance financial performance.
In a recent piece for ImpactAlpha, our team drew from our decades of experience evaluating the social and environmental impact of billions of dollars in investments to work through some of the prevailing myths about IMM and explain how working this neat little acronym into investing decisions can improve your investments and deliver deeper impact.
Community investors like us know that building impact measurement into the start of the lending process, and doing it along the way, can make a big difference to your bottom line, your brand, and the success of the communities you invest in. One way we’ve seen IMM play a role in our own work is by reducing risk. We make loans to small business owners who create good jobs for working people – but we also do deep dives into what that means.
When a business owner gets funding from us, we check in with them on a regular basis to measure the kinds of jobs they create and who they create jobs for. We also pair our entrepreneurs with pro bono mentors. What we found through our IMM was that our businesses out-performed similar businesses in the state, and across the country. In fact, during the first year of the Recession the companies we invested in and paired with free advisors actually had job growth levels at 12%, while average companies across California and in every other state reported job losses.
Basically, IMM showed our mentor program working so well we ended up making it a contract requirement of our loan products, and found that it helped to not only mitigate repayment risk but expand the pool of businesses we could work with. We also use that analysis to make big decisions in how our programs work. For instance, if the folks we lend to said they were creating living-wage jobs in lower-income parts of town, but those jobs didn’t appear, or didn’t pay well, then we’d course correct before we got years down the road.
We’ve also seen impact measurement create good things in places that not everyone may expect, like raising funds in the first place. Our friends Humanity United have raised $23 million to invest in early-stage technology companies fighting human trafficking and other abusive practices in corporate supply chains around the world. They engaged with us before they started the fundraising process, and we developed a social impact evaluation framework and strategy that demonstrated to investors their commitment to ensuring impact over the life of the fund.
The fund is meant to address the use of slave labor, poor working conditions and other worker abuse that plagues the networks that companies use to assemble products before they are shipped to consumers. While global corporations have taken steps to tackle the problem, such as imposing codes of conduct and subjecting themselves to social audits, the practices persist. Social audits can be gamed, and only by laying out strict IMM practices for the fund can investors be certain their money is doing what they want it to do.
You might even say that IMM is what makes a social impact investment a true social impact investment. Steve Case launched his Rise of the Rest fund to support entrepreneurs in areas away from the big coastal hubs. He said, “We’re fans of impact investing but we actually didn’t position this as an impact fund. First and foremost, our goal was to generate top returns.” When Case made that statement, he drew swift criticism from many investors across the space, given the growing body of evidence that impact investments can deliver market rate returns.
We believe an important next step in supporting the impact investing field is the creation of a free impact due diligence toolkit offering practical guidance and information that could be used by any investor to assess the expected impact of their investments, and thereby better align them with impact objectives. We intend to develop such a toolkit in the coming year. Stay tuned!