In accordance with a practical approach, this guide is structured as an investment process — progressing from the investor’s initial exposure to investment opportunities, through the screening and analysis, and on to making investment decisions and deals, monitoring and evaluating them, and reporting upon the impact achieved. The essential stages of this process, common to all impact investors, are set out and defined, with the key points relevant to each stage worked through one by one. There is also a preliminary stage about impact investment planning. These make up the main sections of the guide:
- Planning
- Screening and Mapping
- Analysis
- Investment Decision and Deal-Making
- Monitoring and Evaluation
- Reporting
A Book of Best Impact Practice offers value across five main fronts:
An important aspect of establishing best impact practice involves establishing standards, including common terms, concepts, frameworks, and where appropriate, indicators and metrics. At the same time, it is crucial to be aware of the limits of standardisation and compatibility, and where quantities and qualities — while being treated consistently — need to be allowed to remain different. When dealing with social and environmental values and benefits, while much can be quantified, often some of the most vital outcomes are best evidenced and accounted for using a degree of description. These outcomes need to be able to retain their place within the investor’s understanding of impact, and within the investment decision-making process. Equally, with outcomes and outputs that can be expressed in numbers, it is important to ensure these numbers are treated in a manner that is consistent with the true meaning and strength of the raw data (i.e. numbers are only aggregated when genuinely like-for-like quantities are involved, and margins of error, accuracy, and certainty are respected). Impact measurement is not a pure science, and there is no perfect unit of impact, nor absolute constant, to define how positive social change occurs. In efforts to be more rigorous around impact, there is a considerable danger of “false rigour” or “misplaced concreteness”, by which numbers are extracted and manipulated almost as much to present the appearance of a more quantitative discipline, as to gain a truer understanding of the impact itself. This can lead to conclusions that look more real than they are, while obscuring the holes over which they are built.
However, to acknowledge that impact processes do not all home in on a single standard measure or number does not imply a regression to wholly subjective judgements, or that the analysis need be unsophisticated or lacking in rigour. Social and environmental problems are complex, and are unlikely to be fully captured by purely quantitative, algorithm-driven processes or solutions. But this does not legitimise approaches based on statements like: “We know what the impact is when we see it”, “We get a good feeling for the people”, “What this organisation is doing seems really worthwhile”, and so on. Recent studies, in particular in the fields of behavioural economics and psychology, have demonstrated the alarming extent to which qualitative assessments made without ground rules (i.e. in the absence of well-defined processes and anchor points), and performed essentially “on feel” or by “gut instinct” — even by experts — are subject to massive biases and distortions. But studies also show the extent to which such biases can be corrected by — and therefore the deep value of — explicit structures that engage rational thought processes, and ensure a systematic appraisal of the problem is entered into.
In practice, such structures often look like checklists of things to think about: Has this aspect of the problem been considered? Is this element in place? Is there a scale to which to relate this to? And so on. A checklist may include simple “tickbox-style” questions (e.g. “Does the board meet regularly?”), but also must encompass more probing and nuanced questions (e.g. “Does the board share the vision of the organisation and the executive team?”).
The key to an effective and balanced treatment of impact throughout an investor’s activities is to formulate checklists that incorporate process mechanisms, quantitative data, and systematic and carefully defined qualitative assessments. These help ensure that the salient questions have at each stage been asked, and that the answers are treated with an importance — relative to each other — that is true to the investor’s original mission, and the explicit aims for the investment. While the result may not be a standard number or percentage, it will be a meaningful, and meaningfully complete, response to the impact aspect of impact investing. Furthermore, through the adoption of common practices, it will approach an impressive level of both internal and cross-investor consistency.
