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Evaluating impact investing [Part 5/5 Perspectives in Impact Investing series]
Note from Global Partnerships: This is the fifth and final installment of our "Perspectives in Impact Investing" series, which presents the variety of perspectives of different actors in the impact investing space.
Part 5: Evaluating impact investing
by Srik Gopalakrishnan, Director, Strategic Evaluation, FSG
Over the past few years, as the field of impact investing has grown in size and complexity, a lingering question has followed in its wake, “How do you evaluate impact investing?” Finding a way to effectively evaluate impact investing is important not only to ensure that investment resources are being put to good use, but also to continue to find ways to develop, improve, and refine the approach. Below are three distinct but related ideas that those seeking to evaluate impact investing may want to bear in mind:
1. Apply the right evaluation approach: It is important to consider the particular context and circumstances of the impact investment while choosing the right evaluation approach. In other words, not every impact investment might warrant an impact evaluation. As Richard Gomes from the Shell Foundation pointed out earlier in this blog series, it took several years of piloting new technologies and testing business models before a viable approach was found for a clean cookstoves business with a global reach. This is often true of many social innovations; there is a period of trial and error before settling in on a “scalable” solution. In such cases, a “developmental evaluation” approach that provides real-time feedback in a non-threatening way may likely be the appropriate evaluation approach. As the social innovation matures, one could shift gears to move to “formative evaluation” approach, and ultimately move towards a “summative evaluation”. The graphic below shows how this progression may happen over time.
2. Go beyond performance indicators: Impact investors are naturally inclined to look for indicators of impact, just as they would look for indicators of financial return. While it is tempting to provide easy dashboards with impact and financial metrics side by side, one should recognize that the impact indicators, while useful, may be limited in their validity. Performance indicators, in general, are considered valid when the theory of change that underlies the initiative is “correct”, and they are collected in a rigorous manner (for e.g., triangulated using multiple measures). Neither of these conditions might hold true for social innovations, at least until they are reasonably well established. Hence, it is important to take a more holistic approach to evaluation - one that includes the examination of contextual and qualitative information, and avoids over-simplification of impact.
3. Expand the definition of “impact”: A characteristic of working in complex social systems is that unintended outcomes are as or more likely to happen as intended ones. A social entrepreneur who works on getting medical care in a timely and affordable way to villages in Africa might find that school attendance, and consequently learning, is improving, as children who were previously forced to stay home sick, are now able to go to school. This is a “ripple effect” benefit that may not be captured by a narrow definition if impact. As Loren Rodwin from OPIC illustrates earlier in this blog series, an initial investment in a promising social enterprise may act as a catalyst that attracts other types of funding. This could very well count as “impact” under a broader definition. On the flip side, there may also be unintended consequences that aren’t as desirable, but still need to be captured and understood in order to improve and replicate the initiative.
The salience of the above points is highlighted nowhere more eloquently than in the “origin story” of impact investing itself. In a recent article titled in the Stanford Social Innovation Review, my FSG colleagues tell the story of the Rockefeller Foundation’s role in fostering the field of impact investing. Rather than use traditional philanthropic tools of grantmaking, the foundation chose instead to convene key field leaders, build cross-sector partnerships, created a global network, and influence government policy, eventually spurring investments worth billions of dollars, a multi-fold return on the few millions that were spent by Rockefeller.
This would likely have been impossible if the foundation had chosen the wrong evaluation approach, focused solely on performance indicators, and stuck with a narrow definition of impact. It’s a lesson that the various actors in the impact investing field may want to keep in mind.
FSG is a non-profit consulting firm dedicated to discovering better ways to solve social problems. FSG meets its mission by working with philanthropic funders, non-profits, and corporations to develop high impact strategies, tailor operations, and measure and evaluate results. FSG offers a wide range of evaluation and learning services, which include designing and implementing developmental, formative, and summative evaluations; conducting retrospectives and strategic reviews; building organization-wide learning and evaluation systems; and developing shared measurement systems.
Read the rest of the Perspectives in Impact Investing Series
- Part 1: How wealth advisors can facilitate impact investments by Cynthia Muller, Senior Director of Impact Investing, Arabella Advisors
- Part 2: 4 ways to use grant funding to catalyze innovation and de-risk early-stage enterprises by Richard Gomes, Head of Policy and Advocacy, Shell Foundation
- Part 3: Investing for social and financial returns by Loren Rodwin, Managing Director, Overseas Private Investment Corporation
- Part 4: Challenges and opportunities for social enterprises by Sebastian Africano, Founder & Managing Director, Luciérnaga LLC