by Connor Schoen
In trying to quantify impact, coauthors of “Unpacking the Impact in Impact Investing”, Paul Brest and Kelly Born (Stanford Social Innovation Review), divide their metrics into three separate categories: enterprise impact, investment impact, and non-monetary impact. First of all, with enterprise impact, Brest and Born discuss how to most effectively measure the investee’s social impact (“social” being used here and throughout this piece to incorporate all aspects of traditional ESG considerations). They highlight product impact (result of their actual good or service), operational impact (effects on employees and local community through operations), collective impact (aggregate impact through partnerships with other NGOs, the government, etc.), and sector impact (wider expanse of their effects on the sector as a whole) as four key considerations when evaluating the investee’s overall social impact. Brest and Born also lay out a simple, mathematical tool for assessing social value: social value = (social benefit/production cost).
Regarding investment impact, the authors first lay out the basic types of investors in order to separate classifications of how they should consider impact in their investments. Primarily, investors can either be socially neutral or socially motivated, and they can be concessionary (willing to sacrifice financial gains) or non-concessionary (unwilling to sacrifice financial gains). Ultimately, the basic classification of investors affects the major considerations driving investment decision-making and, thus, what metrics are preferred in making these decisions. For non-concessionary, socially motivated investors, for example, their program-related investments should be focused on allowing below-market-price investments/resources, providing loan guarantees, allowing for more favorable conditions and flexibility, etc.
Finally, nonmonetary impact encompasses everything from improving social enterprises’ operational environment to bringing more capital to their sector/mission from socially neutral investors to securing and protecting the enterprise’s social mission. These nonmonetary factors are critical in considering how an investor should measure his/her impact.