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

Impact investing and impact measurement are booming. Despite recent challenges, impact investors manage more than $1.1 trillion, a figure that is only expected to grow. Meanwhile, the impact measurement and management of ESG, sustainability and impact investing is growing rapidly, projected to expand from a $7.6 billion industry in 2020 to $31.2 billion by 2030. 

From my perspective as Head of Impact at Acumen, these are exciting times: The once-nascent field of impact measurement and management (IMM) is growing and maturing. We’re seeing more articulated impact strategies and more impact reports and disclosures, for which regulations and standards are rising and norms are being established. The impact work that in the past may have been underfunded and under-emphasised is now the remit of full-time impact professionals, not interns or consultants. In fact, impact and sustainability professionals are increasingly reaching C-suite positions. IMM features more prominently at conferences, and IMM resources are being shared by key sector organisations. IMM programmes, courses and webinars are now attended by more than just the IMM professionals who are doing the work. Today, not only are impact investors taking IMM more seriously, so are mainstream banks, pension funds and corporates. 

For someone who has spent the last dozen years measuring and managing impact, these trends are incredibly promising. But those years have also made me eager to ensure that we do not miss our moment. This is our opportunity, while the spotlight is shining, to build momentum around impact management, not just measurement. It’s time for us to move beyond the notion of impact data as a box to check, to encourage the widespread use of this data to inform effective action. And we must act intentionally, because alongside the positive trends, there are some threats as well. 

The rise in expectations from impact data

Rarely does a month go by without an organisation being accused of greenwashing, purplewashing, bluewashing or rainbow washing. I like the fact that these discussions are shedding light on impact, and some great sector initiatives are gaining momentum in response, such as the Impact Management Platform, Principles for Responsible Investment and impact Reporting Norms. Yet most of this commentary comes off as judgemental, divisive and unhelpful, and it undermines trust in the broader sector. Regardless of the validity of these criticisms, they may help promote a creeping, reflexive scepticism that all impact players must be lying, at a time when truly impactful movements are having their efforts hijacked by cynical political agendas, as ESG is experiencing across the U.S. As a result, the fear of reputational risks may stifle the appetite among investors and companies to share their data, let alone their findings and lessons learned. 

In response to these “washing” debates, the solutions I hear proposed are usually variants on a theme: “we need more impact data,” and “we need more rigour and standardisation and verification of our data.” While the sector indeed needs all of this, unless we unpack the expectations we have of this data, they will remain unrealistic and unmet. 

For example, these discussions are often based on the notion that by getting more and more data, we will somehow be able to better “prove” impact — i.e., that the right metrics and charts will demonstrate that all the desired outcomes, according to every stakeholder’s unique parameters, are being achieved. But data points themselves cannot answer all impact questions. Gathering data cannot serve as a proxy for trust, analysis or insight. And gathering data without recognising the varying needs of the data collectors and users comes at a cost, with the risk of little utility.

When impact data adds burdens and costs without utility

At Acumen, we invest patient capital in innovative social enterprises to solve problems of poverty. We engage directly with our entrepreneurs, and they tell us about their experiences attempting to meet the impact reporting requirements of various investors in their businesses. To take one (anonymised) example, “John” is an entrepreneur who has worked for the last decade on his agricultural company, which focuses on providing quality inputs and access to markets to smallholder farmers. Last year he was excited to welcome his first institutional investors; now he has business partners that help him run the business and navigate the macroeconomic and local headwinds. 

But this year each of his investors requested slightly different data points on metrics that included: unique lives impacted; net income increase per farmer; jobs created, maintained or improved; Co2 emissions from his operations; biodiversity of the soil related to his business; and the value chain and family-level impacts of his company in terms of food security, consumption stability, gender dynamics and resilience. Many of these impacts are not easily attributable or visible to the company. And he feels drained and frustrated by the back-and-forth process of having to translate his data to indicators based on the investors’ strategies (rather than his), then demonstrate how these data points reflect the improving household or health dynamics of his farmers. The data he’s expected to report is not used for insight or to enable his company to make a greater impact. In fact, it has the opposite effect, pulling time and focus away from the business without providing any return.

I am well aware that at Acumen, we’re one of the investors who ask businesses like John’s for data — just this last month my team reviewed and aggregated the impact data from more than 100 portfolio companies. We recognise the burden this causes, and try to reduce it — for instance, by ensuring that we focus on data that is already available for business operations, as well as data that adds value to companies, investors and, in turn, our partners and funders. We also work with impact data partners like 60 Decibels to collect information, taking some of the pain away from the entrepreneurs we invest in, and offering results that they consider valuable. Yet we recognise that the pain persists. 

So we’ve seen how the worrying rise in the expectations investors and other stakeholders place on impact data can get in the way of the very impact they’re trying to convey. To address this, I argue that IMM needs to shift from “data as an end” to “data as a means.” Data cannot build trust. But it can enable us to have even more impact, if we let it. 

Great expectations but real limitations

Impact investors provide capital to scale social businesses and their positive influence on the world. Our intentions are to ensure that our capital generates the most impact possible, but we have limited visibility into that impact, as well as limited ways to govern it. Further restricting our influence over these decisions, as investors we raise capital from funders who themselves have different impact aims, expectations and data requirements. All of this flows down to the entrepreneurs, whose efforts become focused on compliance, reporting and validation aimed at satisfying these multiple stakeholder expectations, often causing them to miss the most important impact drivers that they would otherwise be focused on. 

In short, the impact reporting and evaluating approach has defaulted to data. Then more data. And not just any data will do: The expectation is that quantitative data — ideally collected by a third party and independently verified — is what will prove impact and appease both stakeholders and critics alike. 

In theory, this looks like accountability. But in practice, data collection and onerous validation are taking over the entire impact budget (if there is one to begin with). One fund manager we’ve worked with shared in a group discussion that their team of impact and ESG professionals was entirely occupied with compliance reporting, as opposed to actively managing impact. 

For impact-focused early-stage businesses, this burden is even higher, and they have fewer resources to bear it. Management teams at these innovative enterprises are often asked to prove impact in demanding and resource-intensive ways, including Randomised Control Trials, verifications and certifications. This creates real problems for companies when that data is:

• Unavailable; 
• Only attainable through dedicated research projects;
• Outside of their control;
• And my least favourite: of little or no use to the company itself. 

There is a cost to this mismatch. Another fund manager recently told me at a conference that they removed the “impact” designation from their fund, not because they wanted freedom to have less impact, but rather freedom to have more. They believe that impact scrutiny and reporting is too onerous and time consuming, and that they can fundraise more freely without that label, as impact funding tends to be more difficult to access, due to every funder imposing their own impact requirements.

As I said at the start of this article, impact measurement is booming. Consulting firms are adding impact divisions, and selling infographics, tools and systems, advisory, verification, and sometimes even management services. Software platforms now offer real-time impact data, visualised and animated for websites. But all this money and time spent on verifying and presenting does not, by itself, yield insights. Data still needs interpretation by those who understand the context.

How do we get better at using impact data for action? 

Ernest Hemingway wrote that “the way to make people trust-worthy is to trust them,” and the same applies to impact-focused businesses. It all comes back to trust, and to giving these companies the benefit of the doubt. If we start from trust, and we respect those who are intentionally focused on impact, then we begin on the same side. 

Trust is earned, and it can also be built. The foundational blocks are communication, and an understanding of the ways impact data can affect a business’ strategy, pathways to impact, and assessment of which things matter and which approaches must change. To develop this understanding, impact data needs to be interpreted with a clear understanding of its nuance and context. 

With this in mind, I have a few principles for how to measure what matters, and how to use that data and IMM as a means to greater impact:

• Aim for credibility and utility: Specify what needs evidencing, and to what extent, for whom, and towards which action. If you don’t know what the company will do with a data point, ask whether you ought to be collecting it.
• Collaborate and partner with investee companies and funds by supporting them in sharpening and managing their impact strategy and credibility. Practically, think about incentivising impact actions by the management teams, giving them the benefit of the doubt that they know best, and allowing them space to prioritise impact in the most effective ways. And consider supporting them with data collection resources. 
• Focus on analysis and insights: Data points themselves will not provide conclusive answers. But sound decisions and analysis depend on the thoughtful use of data, as it can strengthen examples, framing and storytelling in ways that can more effectively communicate impact. 
• Put your budget where your priorities are: Increase the IMM budget, yes, but be strategic in how you use it. That means 100% of your budget should not be focused on getting the data right for reporting purposes. As a rule of thumb, I like to divide IMM resources into quarters, with one quarter dedicated to each priority function: 25% for impact strategy and IMM design, 25% for data collection, 25% for analysis and insights creation, and 25% for communication and action planning. 

Putting IMM principles into practice 

We are trying to put these principles into practice at Acumen via our East Africa Education Facility, which includes a performance-based finance component. Together with our funders, including UBS Optimus Foundation, and selected portfolio companies, we have moved away from trying to gain expensive, unattributable, externally-gathered evidence on children’s learning outcomes. These remain our ultimate impact aim, but we recognise that they are outside the sphere of control of the company and not easy to attribute to its actions. Instead, we use external/secondary evidence of children’s learning outcomes from the impact pathway or intervention, and optimise our primary data collection to capture the impacts for which the company is accountable and attributable. This allows us to integrate impact measurement and management into these companies’ operational models, and to offer financial rewards via a performance-based finance mechanism.

One of these portfolio companies, Ed Partners Africa, aims to improve education in Africa by providing loans to improve school infrastructure, operations and classroom teaching. In our initial performance-based finance design for this business, the aim was to measure learning outcomes and find ways to attribute that to Ed Partners’ loan. However, while these loans boost student access and enable improvements to the learning environment (as per their strategy), learning outcomes still depend on other factors outside of the scope of the company, such as school operations, teaching, students’ capabilities, the resources of schools and families — and also family logistics, poverty levels, food intake and health. 

Realising that we were demanding too much data from the wrong place, we worked with Ed Partners to focus on indicators that were within their control and business operations. We supported them with expertise on how to obtain this data, and will provide them with performance-based finance — in this case a grant which is only paid when they hit the impact milestones they agreed upon with Acumen. This allows them to be respected, supported and incentivised to magnify impact. As David FitzHerbert, co-founder of Ed Partners puts it, “Acumen has been very thoughtful in designing this performance-based grant: It provides clear and simple outputs for Ed Partners to achieve, and clear incentives which help keep us focused on delivering the desired outcomes over the next four years.”  

Despite the challenges I’ve discussed above, the social business sector needs impact data. But we also need to acknowledge that impact data itself will not prove impact, make decisions, answer our questions or improve the outcomes for people living in poverty. Investing in (impact) data management systems can help, but this won’t resolve the need for analysis — that is, people interrogating and discussing data to understand its meaning and implications. Ultimately, it’s people who make the decisions that make impact happen. Let’s treat them as the key drivers of impact, and set them free to do precisely that.

Julia Mensink is Head of Impact at Acumen.

Photo courtesy of Antoni Shkraba.