For social entrepreneurs, impact investors are a crucial source of funding. So, it probably goes without saying that whatever can create the most value for such investors likely is also a good thing for mission-driven ventures.
According to a new report, one such value-booster is measuring impact, which not only directly increases a company’s economic results, but also indirectly influences its long-term viability.
Those are the conclusions of The Business Value of Impact Measurement, a study published recently by the Global Impact Investing Network (GIIN). “We wanted to understand the different ways impact investors use impact measurement data as a strategic and operational tool to drive business value for themselves and their investees,” says Abhilash Mudaliar, Research Director at the GIIN.
The study also found that the importance of impact measurement for business results is a top-of-mind issue for many investors. Ninety-seven percent of respondents noted that measuring social and environmental performance is “very important” or “somewhat important,” because doing so can improve the financial performance of investments and inform investment decisions. Further, 80 percent of the survey’s respondents reported that they use data on social and environmental performance to inform business decisions.
Specifically, the report zeroes in on five significant drivers of value that investors and companies get from impact measurement and management:
Impact data helps companies understand their customers and, as a result, develop products and services better tailored to their needs. That‘s especially important when it comes to gathering data on the impact products and services have on customers’ and the broader community’s lives and well-being. Crucial data like customer income levels and access to health care or other services can be gathered before investments are made and used to measure future impact. Investors and companies can also turn to the information to fine-tune business strategy by, say, further segmenting customers.
Case in point: When the Gates Foundation recently invested in an East African social enterprise providing solar lighting to areas without electricity, an assessment revealed the product wasn’t reaching the poorest segment of the target population, according to Mudaliar. So they created a product at a lower price point. That not only made it affordable for more customers — it also increased revenues.
Improving operational effectiveness and efficiency.
Investors can use impact data to improve operational areas ranging from HR to accounting. Example: LeapFrog, which makes equity investments in high-growth, purpose-driven financial services businesses in emerging markets, uses a proprietary measurement framework. It aggregates financial and operational metrics, like scale and reach, on a quarterly basis. By analyzing the data, the organization has been able to figure out ways to help companies pay more promptly — a vitally important issue when serving low-income people who lack the cash savings to pay for emergencies.
Investors find impact measurements help them improve everything from deal sourcing to selection. “For some investors, data related to impact criteria — such as customer savings, job creation, and ecosystem quality — support decision-making about where to allocate capital by providing additional insights into market gaps that represent attractive opportunities,” says the report.
Marketing and reputation building.
That better understanding of customers can help create more effective marketing campaigns. In addition, the report says, “The value of this information for impact investors and their investees extends beyond simply telling a positive story about the impact they have had. It also helps investors and companies earn trust with key stakeholders, which provides them with loyalty, license to operate and goodwill that can speed and smooth operations.”
Strategic alignment and risk mitigation.
Impact data can ensure that investor and company activities are aligned with the mission, as well as help identify risks early. One microfinance asset manager, for example, requires the companies it invests in to conform to various social performance management practices, such as monitoring how much their customers have borrowed from other microfinance institutions. “It helps them identify the potential for over-borrowing before it becomes a problem," says Mudaliar.