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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
• 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
“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
• Literature Review • Key Informant Interviews
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Methodology
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Knowledge Products
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
• 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
• 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).
• 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
• 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.
• 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
• Working closely with ventures • Participatory framework design • Incentivizing measurement • Values-‐based investing
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Best Practices
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
• 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
• 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
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
• 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
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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