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Editor’s note: The last year has seen significant churn in the impact investing sector, most notably with the wind down of E+Co. Today we’re starting a new ongoing series, What’s Next for Impact Investing, in which fund managers and other practitioners discuss how they are building and evolving business models to achieve both maximum social impact and solid returns. The series wil be archived on the NextBillion Big Idea page.

Never before have impact investors had so many social measurement approaches and tools at their fingertips to evaluate the effectiveness of their investments. The growing list of platforms includes Theories of Change, GIIRS, IRIS, ESG Screens, Social Return on Investment, Cost Benefit Analysis, Sustainable Livelihoods and Case Studies.

Yet investors are keenly aware of their limitations and challenges, including comparability and cumbersomeness. As one investor recently told me: “We have yet to see something broad enough and smartly enough designed to take the end result seriously.”

In collaboration with Human Resources and Skills Development Canada (HRSDC), Purpose Capital conducted a comprehensive literature review and interviewed more than 20 Canadian impact investors (and their intermediaries) to better understand how they use metrics and the challenges they face in measuring impact. The resulting Guidebook for Impact Investors: Impact Measurement and report Social Impact Measurement Use Among Canadian Impact Investors were both published this week.

Over the course of the investment lifecycle, metrics allow investors to define their impact goals and parameters, select investments that fit those goals, understand whether their goals are being achieved and communicate their impact with stakeholders. As in the traditional investment universe, impact investors vary in their motivations, assets, risk and return expectations, and social impact objectives. This diversity is reflected in the measurement approaches they use.

Although our focus was on Canadian investors, there are many themes that apply to any nationality. Investors repeatedly indicated a preference for outcome and impact measurements, yet very few are able to collect this information and instead rely on outputs. Similarly, while many investors favor quantitative data, the importance of qualitative factors in decision making, like a venture’s narrative of social impact, was an ongoing theme. As one high net worth investor said: “I only select companies where the meaningful impact is an obvious part of their commercial offering. It’s so obvious that you don’t have to measure it.”

The use or lack of use of social metrics can make or break an investment decision. Many investors had previously chosen not to invest in an organization because it was unable to prove its social impact. That said, investors also stressed the importance of being flexible, particularly for early stage ventures that have not yet developed a track record.

Our Guidebook for Impact Investors: Impact Measurement provides investors with a toolkit to enhance their use of social metrics. The guide provides investors with a basic overview of social metrics for impact investing, an outline of the issues and challenges of social impact measurement, a summary of existing social impact measurement tools and a?description of how they are being used, and a set of diagnostic tools to help investors think through key questions and issues?related to measurement.

The second publication, Social Impact Measurement Use Among Canadian Impact Investors offers a broader audience an overview of the needs and priorities of Canadian impact investors as they relate to social impact measurement. The report covers impact investors’ knowledge of social impact metrics, the role that metrics play in investment decisions, the measurement tools used by investors, as well as, the challenges and opportunities investors face with regards to impact measurement.

Investors continue to struggle with the cost and resource-intensiveness of measurement. With limited resources available, many investors are reluctant to divert resources from operations to measurement. Some investors noted that they pick organizations that already view measurement as an intrinsic part of both the management of the organization and the monitoring of progress. They also want to see demonstrable evidence that investments made in the measurement of an organization’s impact are useful and cost-effective in the development of the venture.

On the basis of this research, the report offers several recommendations to investors and HRSDC to enhance the use of measurement amongst impact investors. Selected recommendations include:

1. Encouraging collaboration with other investors on due diligence, especially with a sectoral approach

Investors could collaborate with their peers to carry out due diligence. Such collaboration would also benefit ventures by streamlining measurement requirements. This collaboration is already happening to a certain extent. For example, Toniic, an investor-led network, carries out due diligence and syndication on behalf of its members including RSF Social Finance, KL Felicitas Foundation, and the Grassroots Business Fund. By working together and developing common standards where possible, impact investors could reduce the costs of measurement and develop harmonized metrics to enable greater comparability within a sector.

2. Supporting ventures as they strengthen their financial and social reporting

Government could support organizations as they develop and strengthen measurement systems. Through granting, training, convening and sharing of best practices, government could assist these organizations as they develop an understanding of what investors seek in terms of financial and social metrics and create robust measurement systems. Small grants to these organizations could assist with the upfront costs of creating measurement systems. One model for this approach is the UK’s Investment and Contract Readiness Fund, which supports social ventures as they prepare to access new investment and compete for public service contracts that require proof of social impact.

3. Creating incentives for investors and ventures to work together on social impact measurement

Investors are keen to look for synergies between their measurement needs and those of their ventures. While these needs do not always match, there are mutual benefits that accrue when these parties work together. For example, aligning an investor’s frequency of measurement with a venture’s could reduce a venture’s monitoring burden. Government could facilitate this collaboration by issuing small grants for investors to help build the measurement capacity of ventures or by offering tax credits to ventures that are able to certify their social impact.

4. Enhancing the sector’s understanding of investment structures that incentivize the alignment of financial and social returns

Investors recognize the value of social metrics, yet this value is not always reflected in the incentive structures of investment management. HRSDC or other government agencies could support research into fund structures that incentivize the alignment of financial and social returns. By tying compensation or returns to social and environmental performance, an impact-based incentive structure [PDF] raises an investors’ financial stake in the non-financial performance of their funds.

Moving forward, the measurement-related challenges investors face are likely to be overcome through greater collaboration between investors and with ventures and through creative solutions which align measurement with financial and operational priorities. By giving ventures a mandate to measure and investors an incentive to support this mandate, actors in the social finance space will benefit from better information about the impact we are collectively achieving.

For more information on Guidebook for Impact Investors: Impact Measurement and report Social Impact Measurement Use Among Canadian Impact Investors, please visit Purpose Capital and attend our Social Finance Connects webinar scheduled for 12 p.m. EST, Thursday (Feb. 28).

Hilary Best is an analyst with Purpose Capital, where she coordinates a variety of projects with social entrepreneurs and investors.

Note: A version of this article first appeared on SocialFinance.ca.