Good News: IRIS Report Shows Many Impact Investing Recipients Are Profitable; But More Study Needed
Just a few years ago the idea of common indicators for the impact investing space was still abstract and vague. In 2010, the JP Morgan report on the state of the impact investing industry indicated that only 2 percent of impact investors used third party systems for social impact measurement; the vast majority applied proprietary systems. But the quest for a common language and comparable metrics has come a long way already and just recently another milestone was achieved: The team of Impact Reporting and Investment Standards (IRIS) released its very first performance data report contributing to data-driven market intelligence for the impact investing industry.
The report provides insight into data collected from close to 2,400 mission-driven organizations. Almost 1,900 of them are microfinance institutions thanks to a partnership with Microfinance Information Exchange (MIX); the remaining organizations stem from the portfolios of seven pioneering impact investors and reported their results through ANDE and PULSE.
The good news for profit-seeking investors: The report shows that the majority of organizations that submitted data are profitable, specifically 70 percent of the microfinance institutions and 63 percent of portfolio organizations across a variety of sectors and regions.
The IRIS report outlines a variety of ways in which data might be analyzed further. For instance, when clustering organizations by their impact objective and looking at profitability, IRIS data seems to indicate that organizations with certain impact objectives (e.g. environmental objectives such as natural resource conservation) might be more likely to be profitable than others (e.g. social objectives such as agricultural productivity). However, at his point in time the ability to draw strong conclusions is limited. Due to small sample sizes that result when forming sub-clusters and due to the high variability within indicator results, it is not possible to make generalizations. Another consideration is that even though IRIS provides a standardized language for indicators such as “wage per employee,” the results for that indicator will vary widely depending on whether an organization specifically aims to provide high quality jobs or instead focuses on the provision of socially beneficial products.
Overall, the IRIS report shows that organizations differ widely in terms of sectors and regions. One does see a sector bias towards the financial services sector due to the MIX partnership and towards agriculture in Latin America with Root Capital’s investees on board. Nonetheless, a wide swath of sectors – from agriculture to education to health and water – are represented, which emphasizes the various possible areas of involvement for mission-driven organizations. The IRIS report explains the lack of data from North America through data collection partnerships still to be established with investors focused on that region. It would be interesting to see whether future reports will also feature more data from the Middle East and North Africa as no organization from that geography outside of the financial services sector is represented in the current report.
Though the amount of data and thus the ability to draw meaningful conclusions is still limited, this first IRIS report gives a glimpse at what is possible: it shows the potential of IRIS to build data-driven market intelligence for the impact investing space. Analysis will become more meaningful with an increasing number of data points available, both within and across reporting periods. Just like financial measurement frameworks, IRIS data and definitions are likely to develop over time and become stronger the more data and contributors it counts in its repository.
IRIS does not include an indicator for the “smile on people’s faces” (something I heard an impact investor once say would be ideal to measure impact), but it is likely to contribute to more transparency, credibility and comparability in the sector. The performance data report is only a snapshot showing a fraction of mission-driven organizations, of course. Nonetheless it constitutes another step toward building crucial market infrastructure by providing a common language on impact assessment and by enabling performance comparisons and benchmarks. May the journey continue.