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:
- Screening and Mapping
- Investment Decision and Deal-Making
- Monitoring and Evaluation
A Book of Best Impact Practice offers value across five main fronts:
- for investors’ own use
The Good Investor offers individual investors a means to check their existing impact processes for thoroughness and consistency (or to develop an explicit process if one isn’t already in place). By sharing and making available the best knowledge, it enables investors to ensure the principles, techniques and methodologies they use, with regard to the impact of their investees, and to their own impact as investors, can draw on and accord to wider best practice. This will help produce consistent and meaningful results for their own use.
- for communication among investors
The Good Investor provides a common framework for understanding impact, through which investors can talk to each other in the same language, and with reference to a common set of key terms and principles. This can in turn lead to a greater compatibility of results, with the opportunity to share data and assessments, and to contribute to industry standards, knowledge building, and improving the sector. It also enhances the potential for collaboration and co-investing with a shared set of needs and interests, and potentially joint evaluation methods when investing in the same investee for the same outcomes.
- for investee organisations
For social purpose organisations seeking investment capital, The Good Investor sets out the essential impact investor perspective, allowing investees to gain insight into what investors are likely to need to see from them. This can help organisations when preparing for investment, and for developing a more reciprocal understanding with investors. The promise also of improved consistency and coherence among investors, in terms of language and requirements, as well as a move toward the use of more standardised forms, offers to investees the potential for a greatly simplified process, and a correspondingly reduced burden when approaching and reporting to different investors and funders.
- for sector credibility and attracting investment
The establishment of best impact practice serves to enhance sector credibility, and provides the basis for more investors, and more investment capital, to engage with impact, and to incorporate social and environmental outcomes into investment practices in a structured and meaningful way.
- for beneficiaries
Ultimately the advantages of best impact practice — through improving impact efficiency and communication among investors and social purpose organisations, and through attracting more, and more impact-aligned, capital into the sector — will fall to beneficiaries: those people, communities and environments that experience real positive change as a result of good investments being made.
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.