Impact generation addresses the potential for real change that the organisation and the investment opportunity together present. Essentially: if the investment is made and the impact plan proves to be successful, how much impact stands to be generated as a result? This is, in a sense, the impact equivalent of the prospective financial return of an investment, only while a return is bound up with the return of the investor’s capital plus interest, the impact generated is less returned than created anew.
Financial returns have an easy common yardstick in the form of money. With impact generation, there is no fungible currency, and different kinds of impact will be favoured by different investors. What however remains common is the need for investors and investees alike to be clear about what the prospective impact is. Analysis serves in effect to shine a light on the impact, and to provide a thorough and methodical process for working over it, and establishing its shape.
The impact of the organisation detailed in the plan can mostly be understood in terms of the direct impact on beneficiaries and their immediate circle (relating to the first two columns of the outcomes matrix), and wider impact on the community, the sector and society at large (relating to the third column of the outcomes matrix). There is also the investor impact — the impact of the investor and the investment capital on the organisation itself.
The impact plan defines:
- who the beneficiaries are
- what change they are anticipated to experience
- what products or services will be delivered to achieve this change, and in what volumes
These relate to the key considerations for understanding the direct impact:
How vulnerable or excluded are the beneficiaries, and how great is their need?
The context component of the impact plan defines who the intended beneficiaries are, and includes an assessment of their needs. Implicit in this will be a sense of the vulnerability of the beneficiaries, and while there is no absolute scale, generally a more extensive and urgent set of needs will suggest higher levels of vulnerability. The outcomes matrix can be used to compare particular needs or forms of vulnerability to a comprehensive set of human needs.
An important question for investors, irrespective of the particular needs involved, is whether or not the organisation’s approach is inclusive with respect to the beneficiary group. The way beneficiaries are defined will present a population of potential beneficiaries, within which some may be harder to reach than others. There may be a risk of the organisation “cherry-picking” beneficiaries (e.g. selecting only those most likely to achieve positive outcomes in order to enhance results), or excluding beneficiaries through presenting barriers of one kind or another. Ensuring that the organisation and the benefits it offers are truly open to its target beneficiary group covers:
Are beneficiaries aware of the organisation and the support it provides? Is the organisation communicating effectively its services and outcomes across the beneficiary group?
Can beneficiaries access the organisation’s support? Barriers to access may include:
- affordability (do the products or services present costs that may be exclusionary, or does the intervention rely on beneficiaries having access to expensive equipment, e.g. technology items?)
- comprehensibility (are there language barriers, or barriers relating to complexity or the difficulty of forms to be filled out?)
- transport (is there adequate access by public transport, and provision for disabled access requirements?)
- distribution (is support only available through e.g. online distribution, membership of a particular group etc., in a way that may prove exclusionary?)
Given the population of potential beneficiaries, are those actually being reached appropriately diverse (e.g. is there a fair representation of women, ethnic minorities)?
- hardest to reach
Given the context within which the organisation is working, and the relative challenges and needs involved, is it able to reach the hardest to reach beneficiaries — i.e. those most vulnerable, excluded and disadvantaged? Are there measures in place to ensure that it does reach the hardest to reach within its target population?
What does the impact mean for beneficiaries, and how great is the change effected thereby?
When seeking to make a change to a beneficiary’s life, it is of obvious importance that the beneficiary has a say too. The voice of beneficiaries is crucial not only in terms of basic democratic rights, but also as a means to ensure that the intervention is indeed wanted by beneficiaries, and that the proposed life changes are being experienced and valued. Measurement systems must therefore, wherever possible, take into account the beneficiary perspective, as this is the most powerful evidence of direct impact generation there can be. It is the basis for understanding what the change means for beneficiaries, and how much it means.
The question of the profundity or depth of the change achieved is at once the most challenging and the most vital for an investor. Again the role of analysis is primarily to map the change: to identify what the key outcomes are, and what these mean for beneficiaries as they pass from their lives before the intervention to their lives after it.
To help with this, the outcomes matrix can be a useful resource (in particular, the first two columns relating to individual beneficiaries and families). It presents a list of outcome areas that together describe the key ways in which a person can, on the one hand, suffer disadvantage and exclusion, and on the other, enjoy benefits and positive change. Derived from an understanding of fundamental human rights and values, the outcome areas set out the essential human infrastructure for experiencing life in a full, free and positive fashion.
When considering the change for beneficiaries, mapping the organisation’s outcomes to the outcomes matrix is potentially useful on three fronts:
- beneficiary perspective
The matrix is organised as a set of outcomes within the life of the beneficiary. As such, it adopts a beneficiary perspective, and so helps ensure that activities and outputs are always referred on from the perspective of the organisation, and its delivery of products and services, to what these will mean for beneficiaries, and what the experience of beneficiaries as a result will be.
- exploring change
While an organisation may be targeting a specific direct outcome, the holistic nature of people’s lives and experience means it is likely they will be effected in multiple other ways. The matrix gathers outcomes from across a wide range of fields, and organises and groups them systematically. The process of working through the matrix, and mapping onto it what the organisation is doing, can suggest further related outcomes that the organisation may also want to consider, or already be touching upon. It can also suggest connections to different outcome areas, and elicit other ways in which the change is playing out across the lives of beneficiaries. Thus the matrix can act as a tool to help explore the full implications of the change.
- relative change
Mapping the organisation’s outcomes onto the matrix sets them within a context of experience across the beneficiary’s life. This can help give a sense of the relative profundity of the change — relative to the beneficiary’s own needs (as disadvantage or exclusion may be apparent in a number of areas throughout the matrix, which the intervention may or may not be tackling); and relative to the overall potential for change.
In addition to the immediate beneficiaries, the impact of the organisation may also touch directly the lives of those closest to the beneficiaries (e.g. by providing respite for family members and carers, rebuilding family relationships, providing support and advice). These may similarly be mapped onto the matrix and understood as part of the direct impact.
In considering the change for beneficiaries, it is critical to ensure that the mechanism by which the change takes place is understood, including the conditions for change, with the impact plan being clear about the assumptions; and the context of change, with appropriate adjustments being made for the role of the organisation in its interactions with the context. This ensures that impact analysis is able to focus on the real change that stands to be generated.
How widely are the organisation’s activities, outputs and outcomes being rolled out, and what is the unit cost?
The scale of the intervention, in its most obvious sense, relates to the number of products or services delivered, and the number of beneficiaries reached. Typically this is shown by output indicators tracking the primary activities.
In considering beneficiary numbers, it is important for investors to check for the number of unique beneficiaries, and that data issues regarding double-counting are addressed. It is equally important to include drop off where appropriate, counting both the number of beneficiaries the organisation starts working with, and the number that complete the programme.
Ultimately interventions and impact are about outcomes, not delivery numbers, and the scale of the outcomes achieved is the true measure. However, more diffuse or personal outcomes, such as improved community cohesion, or enhanced beneficiary confidence, may be hard to quantify, and numbers that relate more to outputs may often be used as proxies for estimations of scale (with well-reasoned and, where possible, well-evidenced links to outcomes, and with clarity regarding the implied assumptions). Where there are explicit direct outcomes (for example, the number of beneficiaries finding employment following employment training), it is appropriate to consider the scale of the direct intervention relative to the scale of its success — i.e. the proportion of delivered outputs that are resulting in the desired direct outcomes.
A sense of the scale of the organisation’s intervention may also be relative to the scale of the problem it is addressing. If the organisation’s defined beneficiaries comprise a very select group (e.g. people with a specific need in a particular area), and it is able to reach all or a high proportion of this group, then the scale of the intervention may be considered effective even if the raw number is low.
From an investment perspective, the scale is ultimately proportionate to the capital involved: i.e. how much capital is required to achieve this much impact? What is the capital intensiveness of the organisation’s activities and intervention? For an investor looking to maximise the cost effectiveness of their use of funds, investee organisations that are able to generate impact at greater scales with less capital offer clear advantages.
The most basic calculation of relative scale in this regard is a figure for unit cost — for example:
* Note the capital intensiveness of the organisation’s approach is defined by the capital required to finance activities. This includes direct inputs as well as the capital needed for the organisation’s operating expenses and the financing of its assets (i.e. capital drawn upon for the running of activities). Often this figure will be different from the size of the investment that an investor is considering.
† Or the most appropriate scale-related number (e.g. number of desired outcomes achieved). Ideally this figure is adjusted for the context of change, and represents the real change, rather than just the total number of observed outputs or outcomes.
However the unit cost figure cannot be treated as a pure ratio, in itself indicative of higher or lower performance across different organisations. This is due to the fact that the quantities used will rarely be the same. However consistency can be applied wherever possible to both the beneficiary denominator (through organisations using the same standard indicators), and to the financial numerator (through using consistent accounting techniques for calculating the financial inputs and capital requirements). This can support a degree of comparability, and be used as a guide for investors when considering the relative capital intensiveness of the impact plan.
Addressing the scale of intervention and its capital intensiveness will not automatically yield an irreducible number. Rather analysis will be a balance between:
- the number of unique beneficiaries being reached (guarding for double-counting and drop off)
- the proportion of outputs leading to the desired outcomes, and the extent to which these represent real change
- the proportion of the target beneficiary group being reached
- the capital intensiveness of activities and operations
In addition to the direct impact upon the immediate beneficiaries and those around them, there will also be a wider impact upon the context in which the organisation is active, the community, and on the sector and society at large. Organisations operate within local, national, and sometimes international economies, as well as within networks and communities of knowledge and understanding. Certain aspects of an organisation’s activities, and in some cases its core activities, may focus on these (e.g. providing community or sector support, engaging in campaigning and advocacy, participation in policy formation), rather than directly on individual beneficiaries and their families.
Organisations also, through their own operations, have an internal impact on both people (e.g. their own staff) and the environment.
These form three common forms of wider impact:
What is the contribution to the local and national economy?
Wider economic impacts come about as the organisation’s activities and direct impacts play out in the wider economic context (beyond any direct economic impacts upon beneficiaries, such as providing direct financial assistance). These may occur on three main fronts:
- cost benefits
Positive change in the lives of disadvantaged people can often lead to significant costs benefits to society. Cost benefits typically come in the form of:
- savings in direct expenditure — e.g. if beneficiaries are able to come off benefits
- avoidance of potential costs — e.g. if the intervention is able to avert costly negative outcomes, such as reoffending or health problems
- increased revenues — e.g. through tax income generated by beneficiaries moving into work
For an organisation to claim it is having significant cost benefits, and for this to be counted amongst its wider impact, some degree of evidence and methodical cost benefit analysis is necessary, including a robust treatment of any deadweight or displacement effects. However costs benefit analysis, even in the best of circumstances, is notoriously mercurial, and attempts to provide explicit ratios are often best treated with caution. Cost benefits that are assumed rhetorically, but not accounted for, may be considered less substantial still.
Less often accounted for are cost losses to the public purse that come about through an organisation’s activities — for example, through providing support for beneficiaries to claim benefits and entitlements, and accessing government-funded programmes. These needn’t be counted as negative impact, but there is a tendency in cost benefit accounting among social purpose organisations to claim the benefits, and skip the losses. Both should be included for a balanced picture.
- direct spending
The organisation’s direct spending will have an economic impact through its choice and use of suppliers. Organisations may focus their spending on local suppliers, or mission-aligned suppliers, as a means to contribute to those economies.
- recirculation, new spending and local value
Money injected into a local economy through the organisation’s activities may be recirculated, as well as potentially attracting in new spending and investment, and providing a boost to local value.
What is the contribution to the wider understanding and awareness of the problem, and of how to solve it?
In addition to tackling the problem directly, the organisation may have significant impacts in relation to how the problem is understood, what can be done about it, and in communicating the need for change more widely. This can be a powerful way for the organisation to spread the benefits of its mission and results, as well as a means to keep informed itself.
Wider knowledge impacts may be apparent on four main fronts:
- sharing information with other organisations
The organisation may engage in:
- publishing and communicating results and sharing evidence
- contributing to standards and best practice
- participating in sector learning, e.g. through conferences and networks
- partnerships with other organisations
- representing the issues to government and business
The organisation may engage in:
- advocacy and campaigning
- participating in policy discussion and policy development
- partnerships with government or business
- raising public awareness
The organisation may engage in:
- communicating the need for change more widely and promoting public awareness of the issues and solutions
- participating in public events
- being active and present in the media
- pioneering innovation
By developing, doing or promoting something new, the organisation may inspire other organisations to follow, and create a game change in the dynamics of the problem. The organisation may present:
- the development of an innovative new approach, which has the potential for replication by other organisations, and the means and planning to find evidence for how well it works
- the championing of a new approach, through: applying it to new fields; promoting the model and evidence for how it works; and fostering its uptake and replication elsewhere (e.g. through finding partners, franchising, and seeking to influence the mainstream)
What is the incidental internal impact of the operations of the organisation?
Operational considerations are those that apply to the organisation’s running of itself, and the impact this has on people and the environment. This relates chiefly to the question of responsible management of staff and environmental processes, and typically covers:
- impact on staff and volunteers
Including a review of the organisation’s:
- terms of employment (including wages, wage equity, training, leave, safety, discrimination)
- volunteer policy
- the presence of fair and democratic processes
- impact on the environment
Including a review of the organisation’s:
- environmental policy
- adoption of environmental measures and monitoring (e.g. energy use, recycling, building management, transport)
Extensive treatment of internal aspects of the organisation’s operations, and the impacts they may have, is available to investors through numerous sources. These are often thought of and labelled as ESG (Environmental, Social and Governance) concerns.
Alongside what the investee organisation is doing through its activities, the investor will have an impact on the organisation itself through the process of investing. Being at a remove from the front-line, this is the most direct form of impact the investor will see, and through it, may touch upon many aspects of what the organisation is able to achieve, in particular with respect to its capacity, resilience, and its ability to sustain and grow its impact into the future.
Investor impact is apparent chiefly across four fronts:
What is the scale of the investment (relative to the project or organisation)?
The most immediate impact of the investment, and aspect of its significance, is its relative scale. The point of comparison may be:
- for project-specific investments, the capital required for the project
- for investments in the organisation more generally, the financial size of the organisation
The percentage contribution of the investment (to either the project or the organisation) forms a baseline for the extent to which the investor can link impacts achieved by the organisation back to the investment. For example, if an investor has capitalised 25% of a project, it may chose to think of itself as having facilitated 25% of the impact generated. The claiming of the impact of social purpose organisations by their investors is a challenging area (see reporting), and it is rarely appropriate to attribute the impact to the provision of capital. However, the significance in terms of scale of the investment is useful for gaining a sense of the role it is playing in relation to the organisation, and its generation of impact.
In relation to scale, it is important to ask if the investment is of sufficient scale to fulfil the organisation’s capital requirements, and for it to be able achieve what it is setting out to achieve (typically this is what is detailed in the impact and business plans, and is used as the basis for analysis elsewhere).
Does the investment grow the organisation and its impact, and strengthen its financial position?
A second measure of the significance of the investment is its contribution to the growth of the organisation (as projected in the impact and business plans). The growth can be viewed in relation to:
- growth in financial turnover
- increase in strength or resilience of the organisation
- growth in impact-generating activities and delivery of services
- growth in outcomes and impact
For the investment to be truly an investment in impact, these all need to move in step. Even if the investment does not directly capitalise activities, its relationship to organisational performance, financially and ultimately in terms of impact, must be made clear.
Increasing the strength or resilience of the organisation may not be immediately apparent in terms of financial growth, but may be observed through the enhanced stability of the financial position (demonstrated e.g. through adequate reserves, positive cash flows, better management of credit), and this may in fact be the primary objective of investments that have a strong focus on investor impact.
In such cases, and with clearly defined measures in place regarding the strengthened financial position that is anticipated, the effective impact may be high. For example, helping an organisation manage its cash flow, or providing a bridge between other pieces of capital or funding, may prove vital to an organisation’s or a project’s continuing existence. In cases where there is a risk the organisation would otherwise fold, — in effect presenting a counterfactual of -100% growth — the impact of simply stabilising and strengthening the organisation, with no new growth, but safeguarding the impacts that are being achieved, is high — in effect +100%. For this to work however, the investor must be assured that the organisation is an effective generator of impact, and the impact plan must still be worked through with care to ensure that investing in the organisation’s strength and resilience is indeed investing in impact.
Is capital available to the organisation from other sources? Is investment capital new to the organisation? Is the investment leveraging in further capital?
The level of investor impact is sensitive to the organisation’s access to capital on other fronts:
- other sources of finance
Here the key question is: in the absence of the investor, does the organisation have access to other sources of finance? This is effectively a question of investor deadweight, by which the investor’s impact is naturally greatest when there is no other capital available to the organisation (in which case, in a “what would have happened …” scenario, the investment opportunity would otherwise close empty). Alternatively, other sources of finance may be available to the organisation, but on less attractive terms or rates, or without the same level of support, understanding, and shared values (e.g. a mainstream investor with no explicit interest in impact may be harder for the organisation to negotiate with than an impact investor). The real investor impact (i.e. the impact adjusted for what would have happened otherwise) in this regard is clearly at its least when the organisation could easily access other sources of finance on equal or better terms. This consideration may play a significant role in the investment decision, as some investors may be especially motivated to invest in a “ground-breaking” fashion — extending access to credit to organisations that are typically excluded from mainstream finance. They may therefore may chose not to invest in an opportunity when they know there is another willing investor ready.
experience of investment capital
Impact investing remains a relatively new approach, and often the application of investment capital to social purposes presents organisations with new ways to finance their operations. This implies an investor impact in the form of expanding the range of financing options available to organisations, and potentially developing the financial infrastructure of the sector. Key questions relating to the extent of investor impact on this front include:
- is this the organisation’s first experience of investment capital? Had it considered using credit previously?
- is the financial structure or vehicle being used new to the organisation? Does it represent a new idea for the sector? Is the investor integral to the development or structuring of the investment?
- will the organisation as a result be able to plan for the future more effectively with credit in mind?
The investment may have a further investor impact by leveraging in additional investment through an explicit financial structure, or securing further investment through the use of joint agreements that bring other investors into the deal.
Does the investor offer valuable expertise on financial and impact issues, and access to relevant networks?
Impact investors and their investee organisations often have a close relationship, involving support and advice in addition to the actual capital. Experienced impact investors may have valuable expertise to offer, and useful networks to share:
- financial expertise
The experience of taking on investment capital, and the relationship with the investor, may have a significant positive effect on the organisation’s financial accounting, planning, management and discipline. This may in part happen simply through the need to comply with the investor’s requirements, but also through the investor spending time with the organisation, and offering business and financial support and advice.
- impact measurement expertise
Similarly, the investor’s input and requirements around impact can help the organisation develop its impact accounting. Through working through the impact plan and the measurement system with the organisation, and ensuring appropriate indicators and reporting mechanisms are in place, the investor can play an important role in the sometimes challenging task of ensuring the organisation has a thorough, systematic, rational and transparent approach to its impact. It may also be able to support the organisation in resolving to commit the necessary resources to impact measurement (for example, through building an impact measurement budget into the business plan for the investment).
The investor may have a further impact through its knowledge of relevant communities and networks, and forging links where appropriate. These may include:
- knowledge of the social business community, and potential partnerships or sharing of information with like-minded organisations
- knowledge of investor networks and sources of credit, helping the organisation gain access to further credit, with potentially enhanced credibility and capacity to attract new investment by virtue of its connection with the investor
- contact with commissioners and other potential clients and revenue streams, leading to enhanced market access