4.4. Double Bottom Line 

Impact enterprises simultaneously pursue financial returns and measurable social and environmental returns. While all investing creates some degree of impact in society, not all investing involves active measurement of non-financial metrics, thus posing a challenge for institutional investors approaching the impact investment sector. There are several underlying reasons why the double bottom line is a challenge for institutional investors.

First, lack of widely agreed-upon standards in measuring and reporting social and environmental outcomes makes it difficult for investors to compare the social impact of an investment portfolio or evaluate how one social investment performs relative to another. In traditional investing, most investors think about financial return within the bounds of a similar construct. Revenue, EBITDA, profit-after-tax and free-cash flow are all widely understood quantitative metrics that assist in evaluating the financial performance of a company. Similar acceptance of common standards is not present for social and environmental performance. Does an investment that results in reduced poverty in rural India socially and environmentally outperform an investment that drives reduced greenhouse gas emissions in urban China? Or, more simplistically, is a significant direct impact on the life of one individual more valuable than a slight indirect impact on the lives of many individuals?

In order for impact investing to become more mainstream, investors will need to be able to categorize and compare the social impact of diverse investments. This will be a fundamentally challenging task given the varying opinions of what constitutes “impact”. However, there are many emerging efforts to attempt to drive standardization of measurement and reporting of social and environmental outcomes. The Global Impact Investing Rating System (GIIRS), introduced in Section 3.2, creates a standardized scoring system for investors to benchmark and compare the social and environmental performance of various funds and companies. The Impact Reporting and Investment Standards (IRIS), introduced in Section 2.2, provide a set of standardized metrics that can be used to describe an organization’s social, environmental and financial performance. Like financial accounting standards, IRIS provides a basis for performance reporting. Similarly, the Global Reporting Initiative provides organizations with a comprehensive sustainability reporting framework, enabling them to measure and report their social and environmental performance.⁸¹ While these initiatives are progress for the sector, mainstream investors face is a lack of common acceptance of these standards. Many investors track social and environmental performance independently without using standardized systems. In order for impact investing to become a mainstream investment approach, investors will need to accept and use common frameworks and standards – similar to the way they accept and align to financial accounting frameworks such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Second, measurement of social outcomes often requires a long-term commitment, which may not fit into the investment horizon or investment approach of institutional investors. An investment that results in improved enrolment of girls in schools in rural Kenya drives long-term benefits such as improved employment rates, increased tax revenues and healthier families. To quantify the social value of this investment, rigorous measurement, evaluation and analysis are required over long periods of time, which may not be compatible with the investment horizon of most institutional investors. Thus, public-private partnerships will be necessary for social outcomes to be measured over the long-term given that the primary credible counterparty for long-term societal benefits is the government (municipality, state, or nation) of that society.

How one identifies a social enterprise is of absolute importance. There are many people who talk about social or environmental impact, but cannot define what it is.

 

Nick O’Donohoe, Chief Executive Officer,
Big Society Capital, United Kingdom

Third, measurement can be complex and costly and may deter institutional investors from becoming impact investors. As one hedge fund manager explained, “It is hard enough for me to do my job, let alone two jobs.”⁸² In addition, certain aspects of impact investing are fundamentally difficult to measure. In the example described above about improved enrolment rates, another very likely outcome is the improved well-being and happiness of the girls enrolled in school. This is an important outcome that was created as a result of the investment, but is fundamentally challenging to quantify and measure. To work around this challenge, certain impact investment funds invest only in impact enterprises whose fundamental business model is tied directly to its social and environmental performance (e.g. a company that manufactures and sells portable cook stoves that result in reduced carbon emissions and improved health conditions of low-income populations). In these cases, if the business is performing well financially, then it is delivering on its double bottom line. However, many impact enterprises do not have close linkages between the financial and non-financial bottom lines, thus complicating the ability to measure and report on social and environmental performance. 

Fourth, and perhaps most importantly, the designation of causation must be cautiously attributed. For the example listed above, did the enrolment rates cause increased happiness, or were there other factors at play? In order to attribute causation with some degree of certainty, the investor (or impact enterprise) will need a control group to evaluate the counterfactual (i.e. what the outcome would be without an investment made). Measuring impact in a way that is consistent with rigid scientific principles is costly and may make the investment uneconomic. As such, one of the key objectives of measuring impact involves providing some limited degree of certainty that the desired outcome has been achieved.