What is Impact Investing?
Section 1 | BVCA Impact Investor Knowledge Hub
A critical component of any impact investment strategy is understanding, measuring, and reporting on the impact achieved.
Over the years, there have been various helpful tools designed to make this easier at both an enterprise and investor level. There have been efforts to codify the underlying principles behind this kind of approach, like the Impact Management Project, Principles for Responsible Investment and Social Value International’s Seven Principles of Social Value. And there have been efforts to develop indicators that can help to measure and report on performance, like the Global Impact Investing Network’s IRIS metrics or the Global Reporting Initiative’s sustainability reporting.
However, particularly as the industry has expanded in size, it has become clear that a single unifying architecture is needed to bring all this together in a coherent way – one that can apply across all asset classes and across all types of organisations. This will make it easier for investors and asset owners to compare impact performance across different enterprises, strategies and funds which should in turn accelerate the growth of the sector.
Impact measurement particularly in venture can be challenging, given the limited resources available to early-stage companies and the high degree of ambiguity in a company’s scaling journey. However measurement can be hugely valuable through providing accountability, generating insights for product development, and communicating with others including customers, investors, and regulators. In order to strike a balance, it's important to focus on value-add and proportionality while trying to maintain rigour appropriate for the company’s maturity.
Sustainable Development Goals (SDGs)
At the United Nations Summit in 2015, 193 countries agreed to adopt the Sustainable Development Goals (SDGs): 17 ambitious global goals for the year 2030, covering key societal challenges like poverty, hunger, health, education, clean water, affordable energy, global warming, and social justice.
The SDGs have contributed significantly to the growth of the impact economy. As well as raising awareness of pressing societal and environmental issues, they provide a helpful framework for investors to think about how they can avoid harm, benefit stakeholders, and contribute to solutions – and therefore align their impact investment strategies with their impact goals.
The Impact Management Project (IMP) and Impact Frontiers
The Impact Management Project (IMP), was a global initiative set up to find a common consensus on how we measure, manage and report on impact across asset classes. It was launched in 2016 and brought together over 3000 practitioners globally to agree some standard definition which enable stakeholder across the value chain to align their impact goals and establish a framework for sharing data on impact performance. The resulting consensus was the development of the ‘impact management norms’.
This gave investors a standard method to understand their impacts on people and the planet and reduce the negative and increase the positive. Since its conclusion in 2021 Impact Frontiers have taken on the stewardship of the Impact Norms and the resources developed by IMP have been transferred to the Impact Frontiers.
Impact Management Norms
- Five dimensions of Impact – this outlines the impacts of enterprises on people and the planet across five dimensions: what, who, how much, contribution, and impact risk.
- ABC of Enterprise Impact – this provides a form of impact classification based on ‘Acting to Avoid Harm’, ‘Benefiting Stakeholders’, or ‘Contributing to Solutions’.
- Investor Contribution – this considers the positive and negative impacts of the underlying enterprises/assets, as well as the investor’s own contribution.
- Investment Classification – this outlines the classification of enterprises’ impact on people and the planet (the A, B or C method), alongside the investor’s strategies to contribute to impact.
- Impact-Financial Integration – the integration of financial management is key to impact investing. The Impact Frontiers are working with investors to establish new methods to integrate impact with financial returns and share these methods with the industry.
Social Return on Investment (SROI)
SROI is a methodology used to communicate the social and environmental impact of an investment by comparing these impacts against the financial cost of the investment. It also enables the effectiveness of the investment to be assessed and identify areas for improvement to be considered.
The SROI Network's approach to measuring social impact is built on the Social Value International Principles:
Principle 1
Involve Stakeholders:
Inform and involve all key stakeholders (those that experience the change as a result of the activity) on what gets measured and how it gets measured and valued.
Principle 2
Understand what changes:
Map out and articulate the positive and negative impacts of the outcome and how these changes are created as a result of the contribution.
Principle 3
Value the things that matter:
Value outcomes based on stakeholder preferences. Assigning financial proxies can help identify preferences and enable the value of the outcome be compared against the cost of the activity.
Principle 4
Only Include What is Material:
Only include information and evidence which enables all stakeholders draw a reasonable conclusion about the impact.
Principle 5
Do not overclaim:
Only claim the value that the activities are creating.
Principle 6
Be Transparent:
Document and explain your decisions and methods and scenarios used to show robustness and explain how it will be communicated and discussed with relevant stakeholders.
Principle 7
Verify the Result:
Independent assurance helps remove subjectivity and judgement and ensures the decisions made were reasonable and responsible.
Principle 8
Be Responsive:
Pursue optimum Social Value based on decision making that is timely and supported by appropriate accounting and reporting.
Explore other sections in the Knowledge Hub
Size of the Market and Demand
Section 2 | BVCA Impact Investor Knowledge Hub
Useful Resources
Section 4 | BVCA Impact Investor Knowledge Hub