Social Impact Measurement Among Canadian Impact Investors

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1 Karim Harji, Hilary Best Purpose Capital February 28, 2013 Social Impact Measurement Among Canadian Impact Investors

Transcript of Social Impact Measurement Among Canadian Impact Investors

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Karim  Harji,    Hilary  Best  

Purpose  Capital  

February  28,  2013  

Social Impact Measurement Among Canadian Impact Investors

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Increasing Importance of Social Measurement

2012  

2011  

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•  Determine  investors  knowledge  about  social  impact  metrics  

•  Assess  investors’  reliance  on  social  impact  metrics  to  make  investment  decisions  

•  Identify  the  tools  that  investors  use  

•  Identify  frameworks  to  reduce  barriers  for  greater  investment  

•  Provide  recommendations  to  government  aimed  at  improving  the  use  of  social  metrics  

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Project Objectives

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Overview of Metrics and Impact Investing

Source:  Clark,  Rosenzweig,  Long  and  Olsen  (2004).  Assessing  Social  Impact  in  Double  Bottom  Line  Ventures  

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“Investments  intended  to  create  positive  impact  beyond  financial  return”  

Impact Investing: An Overview

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Provide  capital  •  Transactions  tend  to  be  private  

debt  or  equity  investments  

Businesses  designed  with  intent  •  Not  unintentional  positive  social  or  

environmental  consequences  

…  to  generate  positive  social  and/or  environmental  benefit  •  Should  be  part  of  the  stated  

business  strategy  •  Should  be  measured  as  part  of  

the  success  of  the  investment  

Expect  financial  returns  •  The  investment  should  be  expected  

to  return  at  least  nominal  principal  •  Donations  are  excluded  •  Market-­‐rate  or  market-­‐beating  

returns  are  within  scope  

Source:  JP  Morgan,  Rockefeller  Foundation  and  GIIN,  2010  

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•  Literature  Review  •  Key  Informant  Interviews    

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Methodology

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Knowledge Products

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RESULTS

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•  Investors  vary  in  their  motivations,  assets,  risk  and  return  expectations,  social  impact  objectives  

•  The  way  investors  use  metrics  varies  depending  on  their  purpose    

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Who are Impact Investors and Why Do Metrics Matter

Financial  First  Investors   Impact  First  Investors  

Optimize  financial  returns   Optimize  social  or  environmental  impact  

Minimum  requirement  for  social  or  environmental  impact  

Minimum  requirement  for  financial  returns  

E.g.  banks,  pension  funds,  investment  funds  

E.g.  Foundations,  family  offices,  impact  investing  funds  

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INVESTMENT LIFECYCLE  

Value  Definition  

•  Identifying  impact  goals  and  investment  parameters  

Due  Diligence  

•  Selecting  investments  which  fit  with  an  investor’s  impact  goals  

Monitoring  

• Understanding  whether  impact  goals  are  being  achieved  

Reporting  

• Communicating  impact  with  stakeholders  

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Measurement Principles, Approaches and Tools

Theory  of  Change  

ESG  Screens  

Social  Return  on  Investment  

Cost  Benefit  Analysis  

Case  Studies  

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•  Informants  favour  outcome  and  impact  measurements  but  very  few  are  able  to  collect  this  information  

•  Informants  found  it  less  helpful  to  measure  metrics  at  the  portfolio  level,  due  to  sector  specificity  

•  Limitations  

–  Comparability  and  standardization  

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Measurement Principles, Approaches and Tools

Investor  Perspectives  “[Outcomes  are]  complex  and  even  if  you  find  an  appropriate  metric,  there  is  so  much  analysis  …  that  needs  to  go  into  proving  that  a  certain  percentage  of  the  outcome  is  related  to  my  intervention.”    -­‐  Program  Officer,  Foundation,  QC  

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•  Key  informants  lacked  consensus  on  the  value  of  a  theory  of  change  

–  Non-­‐profit  investment  funds  and  foundations  were  more  likely  to  develop  theories  of  change  to  clarify  their  goals  and  shape  organizational  strategy  

–  Financial  first  investors  using  investment  thesis  to  identify  their  values  

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Value Definition

Definition:  Theory  of  Change    A  theory  of  change  is  a  map  that  describes  the  “process  of  planned  social  change,  from  the  assumptions  that  guide  its  design  to  the  long-­‐term  goals  it  seeks  to  achieve”  (Community  Foundations  of  Canada,  2012).    

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•  Most  informants  use  metrics  in  the  due  diligence  phase  to  capture  long  term  value  and  reduce  risk  

•  Informants  identified  the  fit  of  a  venture  within  their  impact  parameters  as  a  key  criterion  for  investment  

•  Investors  favour  quantitative  data  but  value  qualitative  factors  such  as  compelling  concept,  relationship  with  entrepreneur  

•  Informants  had  previously  chosen  not  to  invest  in  an  organization  because  it  was  not  able  to  convince  the  investor  of  its  ability  to  achieve  its  social  objective   15

Due Diligence

Investor  Perspectives  “We  have  turned  down  numerous  promising  opportunities,  even  going  to  the  length  of  doing  an  on-­‐site  (and  costly)  due  diligence  trip  and  killing  the  deal  because  we  weren’t  convinced  the  fund  manager  understood  the  importance  of  ESG  value  add.”    -­‐  Manager,  Investment  Fund,  ON  

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•  Investors  monitor  their  investments  to  ensure  that  financial  and  social  objectives  are  being  met  

•  Informants  argue  that  metrics  should  be  monitored  on  an  ongoing  basis  and  integrated  into  management  

•  Informants  are  divided  about  frequency  of  monitoring,  depending  on  their  organization  and  stakeholders  

•  Challenges  related  to  data  acquisition  and  capturing  impact  

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Monitoring

Best Practice: Working Closely with the Venture  A private equity investor we spoke with works closely with the companies in which they invest. They assume a board seat after investing in a company to develop a strong working relationship with their investees. They provide more than just capital - ongoing mentorship and support to their investees.  

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•  Metrics  help  investors  to  understand  and  communicate  the  value  achieved  by  an  investment  

•  Increases  accountability  to  stakeholders;  increasing  pressure  to  do  so  

•  Marketing  value  of  metrics  

•  Challenge:  capturing  the  full  range  of  outcomes  related  to  their  investment  

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Reporting

Investor  Perspectives    “If  we  tell  our  investors  that  we  invested  x  dollars  and  saved  y  GJ  of  energy,  does  that  really  resonate  with  them?  We  need  to  think  through  who  the  audience  is  for  these  measures  and  right  size  them,  as  opposed  to  picking  something  off  the  shelf.”    -­‐  Manager,  Investment  Fund,  ON  

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•  Working  closely  with  ventures  •  Participatory  framework  design    •  Incentivizing  measurement    •  Values-­‐based  investing      

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Best Practices

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CHALLENGES

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•  Expensive  and  resource-­‐intensive  

•  Many  investors  are  reluctant  to  divert  resources  from  operations  to  measurement  

•  Investors  pick  ventures  that  integrate  measurement  as  part  of  their  business  

•  Investors  are  open  to  subsidizing  measurement  but  have  not  had  to  

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Costs of Social Measurement

Investor  Perspectives  “[Measurement]  is  not  an  “additional”  cost.  It  is  part  of  their  unique  selling  proposition,  not  an  add-­‐on,  so  the  business  must  incorporate  this  information  into  its  sales  presentations.”      -­‐  High  Net  Worth  Individual,  ON  

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•  Third  party  provides  provide  credibility  and  help  to  address  investors’  lack  of  capacity  and  expertise  

•  Managing  impact  data  in  house  is  popular  for  investors  with  limited  resources  or  a  customized  approach  to  measurement  

•  Many  investors  leave  measurement  to  the  venture  and  emphasize  the  importance  of  using  data  that  is  already  collected  

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Use of Third Party Service Providers

Investor  Perspectives  “It’s  important  that  we  have  a  third  party  evaluator  so  that  loan  recipients  do  not  feel  their  responses  threaten  their  loan  status.  Validation  is  also  important  for  our  credibility.  "    -­‐  Manager,  Non-­‐Profit  Investment  Fund,  Ontario  

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•  Investors  downplayed  the  role  of  metrics  in  their  ability  to  achieve  their  social  and  financial  objectives  

•  Investors  are  concerned  with  ventures  diverting  attention  from  value  creation  to  measurement  

•  Investors  worry  that  a  focus  on  measurement  may  slow  the  sector  down  

•  Investors  are  still  placing  capital,  using  metrics  where  they  are  helpful  

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Competing Priorities

Investor  Perspectives  “Is  [measurement]  the  best  use  of  ventures'  time,  money  and  capital?  We  have  a  responsibility  to  use  that  data  and  not  just  collect  it  because  it  fits  somebody’s  framework.”  –  Manager,  Credit  Union,  BC    

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RECOMMENDATIONS

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•  Clarify  why  metrics  matter  

•  Collaborate  with  other  investors  on  due  diligence  

•  Share  sector-­‐based  strategies  for  metrics  

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For Investors

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•  Incentivize  collaboration  between  investors  and  ventures  on  social  measurement  

•  Encourage  the  creation  of  policy/regulation  that  advances  social  impact  measurement  

•  Encourage  the  use  of  non-­‐financial  indicators  in  government  procurement  and  reporting  

•  Develop  an  understanding  of  ventures’  use  of  social  metrics  

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For HRSDC and Other Government Agencies

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ABOUT PURPOSE CAPITAL LINKS TO REPORTS ON SLIDE

Purpose  Capital  develops  growth  and  investment  strategies  that  matter  to  the  world.    

•  Research  •  Strategy  +  Design  •  Investor  Advisory  +    

Portfolio  Management  •  Financial  Structuring  +  

Intermediation  

To  access  the  knowledge  products  associated  with  this  presentation,  please  visit:  http://www.purposecap.com/    Karim  Harji  [email protected]    Hilary  Best  [email protected]      

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