NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

As a first-timer at the Aspen Network of Development Entrepreneurs (ANDE) Metrics Conference in Washington D.C. last month, I was surprised to see a packed room on the first morning of the conference. After all, this was a conference about a very niche topic – the techniques used to measure social and environmental impact within the embryonic industry of impact investing. Impact investing is a broad term that describes profit-seeking investments that also generate positive social and/or environmental impact. While the two-day conference provided much food for thought, three things stood out:

1. Social and environmental impact measurement needs to inform business strategy

In the earlier days of social and environmental impact measurement there were generally two incentives for businesses – proof of concept (i.e. showing why the company will have a positive impact) and reporting to investors (i.e. showing investors that the company is having a positive impact). But based on the discussions at this conference the focus seems to be shifting. A third incentive was discussed: using impact metrics to inform core business strategy. In fact, this need to connect impact evaluation with business strategy was one of the themes running through the whole conference.

Connecting performance evaluation with strategy is a given in the private sector, but not always in the social sector. So, for a social enterprise where there are social and environmental goals, it is equally important that performance against these goals is measured and used to inform strategy. The information gathered to measure social and environmental impact can be very valuable, so impact measurement should not be conducted in a silo. In fact business strategy should inform the impact measurement system itself, and vice versa. “Test, learn, test, learn” as one participant put it. Mission Measurement – a strategy consulting firm that has helps organizations use impact measurement to inform strategy – shared an example of the frameworks they develop for clients which enable organizations to improve the efficiency of their activities in order to maximize their impact. As Mission Measurement showed, the more closely aligned business strategy is with impact evaluation, the more positive impact the business will be able to have and the easier it will be to assess this impact. It becomes a virtuous circle.

2. Measuring the positive impacts of social businesses is a journey, not a destination

After listening to some of the entrepreneurs talk at the conference, it was evident that the need to measure social and environmental metrics, in addition to financial metrics, can be burdensome. “How many studies are ‘enough’ to satisfy those (investors and others) who want to see evidence of positive impact?” one participant asked. There was no concrete answer, but it exposed a degree of concern from the entrepreneurs about the burden of proof their businesses are expected to have regarding their impact. How far do they have to go when assessing social and environmental impact? From the discussions, the answer seemed to be that measuring social and environmental impact will develop as the business grows and that the level of evaluation ultimately required will depend on the type of investor asking.

Impact evaluation requirements from multilateral investors are generally the most stringent. For example, the Multilateral Investment Fund (part of the Inter-American Development Bank Group) commissions independent impact evaluations on about 25 percent of the projects it funds. These are conducted at considerable cost, but they are necessary for providing the objective analysis to satisfy the donor countries. Other types of investors (individuals, organizations, foundations, etc.) generally do not require independent evaluations of such rigor and will often rely on self-reported impact metrics based on sales, secondary research, and assumptions. This second group of investors typically wants to see the self-reported impact evaluations gradually improving over time to provide increasing levels of certainty in the companies’ true impact.

An interesting example of a social business whose measurement techniques are becoming more sophisticated as the company grows is d.light. The company sells solar lanterns (to replace kerosene lanterns) in India and Africa and has an aggressive goal of improving 100 million lives by 2020. When d.light first started, it made conservative assumptions about the number of lives improved by the sale of each lantern, which enabled the company to estimate the total number of lives improved using units of sales (and some other pieces of information such as the location of the sale). This was a satisfactory situation at first, but now that d.light has grown it has the capacity to begin to unpack these assumptions. It remains to be seen what the outcome of their new efforts will be, but it is an admirable undertaking and I look forward to hearing of their progress at next year’s ANDE Metrics Conference.

3. Access to affordable clean energy is a key that unlocks many doors

On the final afternoon of the conference breakout sessions addressed metrics for specific impacts – energy, health, agriculture, education, gender, job creation and poverty alleviation. I joined the energy group and we started out with a basic question – what story do you want to tell? If your business provides clean energy solutions, what impacts would you expect to see as a result? We quickly realized that providing energy access can lead to a huge range of positive impacts and that clean energy is not necessarily the end in itself. Clean energy access is a means to an end – it is a development enabler.

(At left: An ANDE roundtable event early this year at OxfordJam. Image credit: ANDE)

Access to clean energy can play a vital role in enabling positive impacts in all the other categories of impacts discussed at the conference. However, these impacts will be specific to local conditions and dependent on the behavior of the end user. Positive impacts cannot always be taken for granted. This is the challenge of social businesses that provide energy solutions. The real question (and the question that d.light is endeavoring to answer) is: What do people do with the energy access once they have it? What actual impact does it have on their lives? And is that impact net positive or negative? Resolving these questions requires a new level of sophistication, which it seems social businesses are now starting to embrace.

Looking ahead

Businesses like d.light are leading the way in taking impact evaluation to the next step. By aligning impact evaluation with strategy they can reap the rewards of a better understanding of their markets and what really works for their customers. And in doing so they can demonstrate that the burden of impact evaluation can be outweighed by the benefits.