The impact investment sector is evolving, and with this evolution, new and improved approaches to impact investing are emerging. One particular area gaining traction is impact reporting, the measurement of social and environmental returns. Nexii’s Kelly Notcutt took some time out to discuss developments with Advisory Board member and CEO of the SROI Network, Jeremy Nicholls.
Impact performance reporting is paving the way for high impact initiatives to demonstrate the attractiveness of viable, sustainable business models that integrate both impact outcomes and financial returns to investors. While financial reporting is a great way to measure the absolute financial return on investment, Nicholls suggests that on its own financial reporting fails to provide the level of information needed to give one the sense of the real value created by a high impact business or fund.
Impact performance measurement and reporting not only benefits social enterprises, but also investors and fund managers, who use the measurement metrics to determine the impact of their investments and keep enterprises accountable to their intended impact goals. It provides a level of information on value creation overall, “allowing us to make better decisions, whether they are investment decisions or internal management decisions” says Nicholls.
But what is impact reporting and how do enterprises begin to measure and report their impact performance?
Many believe that the foundation of impact reporting lies in having a clearly articulated theory of change, which outlines the purpose of an enterprise and provides the basis on which impact measurement and monitoring systems are developed. It is true that having a theory of change helps to identify what impact indicators - markers that could demonstrate output, outcomes and social performance – should be used to measure impact and produce performance reports. However, while impact indicators help enterprises track their intended positive outcomes, they are not necessarily attuned to, nor do they capture, the negative unintended, unexpected outcomes that may result because of an enterprise’s activities. These outcomes are also important to measure – both in terms of overall accountability and in terms of ongoing improvements to service design.
Together, these fundamental elements of impact measurement and reporting provide a high impact initiative with a roadmap to demonstrate key success milestones and beneficial impact returns for investors, while also highlighting areas of their work or strategy that need to be adjusted to refine, better deliver or scale such impact.
By integrating financial and impact reporting, a clearer picture of impact and value begins to emerge. It is a pity that the two reporting frameworks are typically perceived as separate, and even polar opposites. Nicholls believes that,
“Organisations need to align their financial reporting and their impact reporting. A private PLC will employ a chief executive and give them a really hard time in order to ensure they are creating as much financial value as they can. In the not-for-profit sector, we get the best chief executive but we don’t necessarily give them a hard time as to whether they are creating as much social value. It is up to the trustees to push for that answer, ‘are we doing as much as we can with the money we’ve got?’ We are maybe not as demanding as we need to be with impact reporting and measurements if we really want to make difference in people’s lives.”
Valuing social returns and financial returns with equivalent emphasis is still new, and impact reporting lacks common measurement standards and discipline, resulting in defragmentation that severely limits the flow of capital to high impact investment opportunities. In response to this and the scramble to track and report impact, a proliferation of tools, standards and indicators has emerged.
One of the many organisations and enterprises that have developed reporting tools is IRIS (Impact Reporting & Investment Standards). IRIS has created a library of standardised impact indicators for measuring social and environmental impact. Enterprises adopt a set of IRIS indicators applicable to them, and then report on their impact performance in a way that is consistent with the definitions of the adopted IRIS indicators.
While IRIS provides tools with which to measure impact performance, the SROI Network has developed a principles-based method to help enterprises understand, manage and account for their social, environmental and economic value and impact. This method uniquely incorporates the voices of stakeholders in determining the value of a social enterprise, and looks at what would have occurred if the enterprise did not exist. Such a method provides candid insight into the real value of a high impact business or fund and its outcomes, prompting the social enterprise to not only account for intended results of their activities, but also those that are unintentional and potentially negative. The SROI Network has also developed a database of impact indicators, Values Outcomes Indicators for Stakeholders (VOIS); this tool assists high impact businesses or funds in matching the relevant outcomes identified by stakeholders with indicators and values to measure and report on those outcomes.
Another well-known impact measurement and reporting tool is the Progress out of Poverty Index (PPI)[1], which was developed by the Grameen Foundation and is more applicable for the microfinance sector.
While some high impact businesses and funds have adopted the reporting tools of organisations like IRIS, the SROI Network and the PPI, others have opted for a customised approach and choose to set their own frameworks and indicators with which to measure their impact. Overall though, the propensity to measure impact performance has increased significantly, not only in the dedicated impact investment market but also in the traditional financial markets, where impacts are being quantified in terms of the cost of production on social and environmental systems. Such costs have not before been quantified or used to adjust the pure financial return on investment metric.
With various ideas of what constitutes impact and a lack of an industry-specific, regional or global standard of measuring and reporting, a great variety of impact reporting has resulted. Without comparability, investors have expressed the challenge they face in evaluating impact investment opportunities. Comparability and consistency are characteristics of a developed marketplace, and investors are seeking both in order to make well informed, performance-based decisions – both as it applies to financial return and impact achieved. Just as traditional markets evolved to be able to provide this type of information, impact investing will also have to develop and decide through trial and error which methods and standards of measurement are most meaningful, comprehensive and efficient. Robust impact reporting standards will begin to take shape, and through a developmental and iterative process, impact reporting frameworks will be tested, different approaches combined and measurement tools inclusive of the complex process of impact performance measurement and reporting.
A single standard of measurement may well emerge, one that is largely supported due to the nature, accessibility and inclusiveness of its development. The process of dynamic development and refinement is likely to be slow and gradual, similar to that which ultimately led to the acceptance of accounting standards between the period of 1840 and 1940[2], the adoption of which was claimed to be just as impossible as social enterprises embracing and implementing a standard reporting framework.
A common misconception surrounding standardisation concerns uniformity; for standardisation to be implemented, one constricting framework will be applied across the board, leaving little room for variations and ultimately unfairly devaluing one enterprises’ impact while valuing another’s. As social enterprises are vastly diverse in nature and purpose, and operate within a variety of contexts and situations, it is essential for emerging standards and impact reporting to value flexibility but maintain consistency.
“We need to understand that there is huge diversity and variability in the value being created by businesses that have a social purpose”, says Nicholls. The starting point of standardisation for Nicholls is not overarching impact indicators or frameworks, but rather principles. Nicholls explains,
“Our approach has been to say, ‘Let’s standardise our principles but let the outcomes and the metrics of those be hugely context specific’. The outcomes, indicators and their relative importance, will be context specific and variable. Increasing take up will result in pools of shared outcomes and indicators. In financial reporting these pools are markets.”
In this way, standardisation will occur from the bottom up. A top-down standardisation of principles, including those surrounding impact reporting metrics, stakeholders and outcomes, seems highly unlikely. “There is a huge number of products and services and ways of measuring their benefits, no one would ever dream of having only one type of measurement for such a variety of products and services,” says Nicholls.
Flexibility also allows the application of principles, and subsequent emerging standards, to better adapt to innovations in the sector[3]. Ultimately, judgements on how principles are applied will reflect flexibility, cater for a multi-faceted sector and can adapt to an ever-evolving industry. Impact reporting frameworks that provide a selection of outcomes and related indicators allow social enterprises to choose indicators that are valuable to them and consistent with their theory of change. When such flexibility and selection is combined with consistent reporting, it provides more honest insight into the impact of a social enterprise. Nicholls also believes consistency in how we account for social value is “fundamental to getting a much higher level of investment into the areas that we think create more value.” Impact performance measurement and reporting that is transparent, consistent and robust attracts investors.
Understanding the nascent stage of impact investing, Nexii’s platforms do not impose one specific set of metrics and measurement frameworks. Instead, Nexii takes the consistency approach and give enterprises the freedom to choose suitable metrics that are consistent with their theory of change, will best measure and reflect their impact performance, and that take account of the principles of integrated reporting including stakeholder representation. Nexii only stipulates that social enterprises be committed to ongoing impact reporting, and seek the services of a Nexii-approved intermediary to assist and advise the social enterprise in their commitment to ongoing performance measurement.
It is essential that intermediary advisors are supported in their efforts to build standards and frameworks, and collaborate around shared learning designed to build the sector. Intermediaries play a vital role in actualising the standardisation metrics in impact investing. Nicholls agrees that,
“Intermediaries can act as clearing houses, and drive the conversation, because the are trusted by both members. The can encourage appropriate standardisation, and act as a compromise between investors and social enterprises.”
This ensures that a balance is struck between the interests of impact investors, social enterprises and those who lives are affected. For standardisation to move forward in the sector, it is essential that intermediaries step forward, test, refine, develop and critique the emerging reporting standards, helping to improve existing systems, while also dispersing information to impact investors and social businesses alike, thus providing a balance to interests in impact.
Jeremy Nicholls is the chief executive of the Social Return on Investment (SROI) Network and a Nexii Advisory Board member. Formerly an accountant, Nicholls’s work has increasingly focused on understanding and managing the value of the impact of organisations’ activities. He wrote ’There is no business like Social Business’ with Liam Black and co-wrote the UK Government supported ‘Guide to SROI’. Nicholls is the chair of FairPensions, a director of the FRC Group and a director of Social Evaluator. He has also lectured at several universities, including Said Business School at Oxford University, Cambridge University and the University of Western Australia.
