Towards a Unifying Framework of Impact Assessment in Impact Investing

In this study, we define a SPO as an organisation that seeks to generate a measurable and positive social impact, whether this be a charity (that embraces social impact as its sole mission), or a hybrid organisation, like a co-operative or a social enterprise (that seeks to generate social or environmental impact beside a financial return), or a for-profit firm (that embraces a CSR strategy that designs for and integrates social impact in its business model). For sustainability of these for-profit firms, social impact and financial return would tend to correlate positively so that its social impact tends to grow as it scales its financial performance. Therefore, a SPO is not defined by its legal constitution; it can take on different organisational forms. Moreover, what makes an organisation a SPO is dynamically determined by its nature as this innovates over time. For example, a co-operative can effectively cease to be a SPO if it drifts from its social mission to become more like a finance-first organisation. On the other hand, what was a social enterprise can also cease to be a SPO when it successfully attains its social goals and exits its social mission.

United Nations Sustainable Development, Knowledge Platform, https://​www.​un.​org/​sustainabledevel​opment/​development-agenda/​

The Rockefeller Foundation conceived the term “impact investing” at Bellagio in 2007. Impact investing is defined as “investments made into companies, organisations, and funds with the intention to generate measurable and beneficial social and environmental impact alongside a financial return (Network 2019f).

For example, general partners of an impact investment company could co-invest with international development agencies, government or quasi-government agencies as well as philanthropic organisations in a blended finance funding partnership. In this context, blended finance is the term given to the use of public or philanthropic capital to leverage private sector investment in SPOs. This funding structure would necessitate the impact fund to account for the generation of both social and/or environmental impact as well as financial returns. What is significant, however, is that the blended finance partnership structure allows for differentiated financial pay-offs. For example, individuals, foundations or multilateral agencies and governments may provide grants that have −100% return expectation. Mission-related investments of foundations and family offices, non-profit funds and individuals could join as venture philanthropic investors that have below-market return expectation. On the other hand, private equity funds are commercial impact investors that require market or near market returns. By leveraging private sector resources in this way, blended finance provides a stable funding mechanism that underpins impact investing to be a feasible strategy to attain the UN SDGs. What remains as a key challenge is the accounting and reporting of the social and/or environmental impact that may be attributable to such impact investing. Impact investors—especially philanthropic individuals, family offices, foundations, multilateral agencies and governments—need an evidence-based justification for why they are making grants or forgoing market rate returns when private equity funds are enjoying market or near market returns on the same investment.

Quantitative indicators (vis-à-vis qualitative constructs) tend to be more objectively measured, easier to manipulate and communicate, and cost less. While measurement is essential for management and control in an organisation, an undue focus on quantitative indicators to proxy for the desired outcomes can be counter-productive. For example, Campbell’s Law states, “The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.” And, Goodhart’s Law says, “When a measure becomes a target, it ceases to be a good measure” (Hoskin 1996).

While Clark et al. (2004) advance the notion of “social return” as what impact is, we note this does not imply necessarily a quantitative measure of impact in $ or % as is often associated with how financial return, a common referent, is being measured.

Sometimes, the market may be confused by for-profit firms that are excluded by way of the negative screening in socially responsible investing—those in the alcohol, tobacco or gaming, also referred to as ‘sin stocks’, as well as weapons manufacturers, nuclear power producers or companies that use child labor—when these also have effective CSR programs generating positive social impact. We call these socially ambiguous grey stocks. See Lam et al. (2015).

This is drawn from 18 out of 42 impact investors or funders—we exclude 2 from the total sample of 44, as one is not in operation yet and the other provides its annual report in a foreign language, and we were not able to review it.

The recent scandal surrounding funds misuse accusations leading to the eventual collapse of the Abraaj Group—which invests in private equity, private credit, real estate as well as impact investing in healthcare and clean energy—reminds us that adequate financial and social accounting is important and needs to be enforced, to go beyond warm glow. So that the intended socio-environmental impact can materialise and the targeted groups can live sustainable improved lives (Louch et al. 2018; Primack 2018).