Measuring the Impact of our Investments

 Photo by  Denys Nevozhai  on  Unsplash

Sharing our quest to measure the social and environmental benefits of our investments

Effective measurement of the social and environmental benefits of our investments is a significant challenge for all impact investors. In fact, more than one article has referred to impact measurement as the “quest for the holy grail". At Deetken Impact, we are continuously refining and improving our approach so that we can report richer and more meaningful information to our investors.

This is a snapshot of our journey to measure and report our impact. We hope that by sharing it we can support other impact investors who are tackling the same challenge, and learn from those who are developing and refining their own methodologies.

 

Early Days

When we first began to invest in impact back in 2007, our approach was straightforward. We focused on qualitative information and anecdotal evidence to help our investors understand why our portfolio companies were so different from mainstream investments. e would describe how one of our investees, a financial institution in Honduras, for instance, offered its clients preventative health screening services in addition to business loans, and that for many of its clients living in rural areas this was the only time they were able to see a medical professional.

 

Impact Measurement 1.0

Several years ago, we took a major step forward to formalize our approach with the deployment of a customized social impact measurement and evaluation tool focused on microfinance and SME lending. For the first time, we could quantitatively compare the impact of different investments in our portfolio. This was tremendously valuable as a decision-making tool for Deetken Impact.

 

Impact Measurement 2.0

We recently undertook a complete refresh of our impact measurement methodology, which was motivated by several factors:

1.       Our investment mandate had broadened over time to include businesses outside of the financial services space, such as renewable energy projects.

2.       We noticed that some information we were collecting from our investee companies was more meaningful than other information. We wanted to streamline our data requests to make ongoing reporting quicker and easier for our partners.

We wanted to align our approach with international frameworks including the Sustainable Development Goals and IRIS, an initiative of the Global Impact Investing Network. We viewed this alignment as an important way to support the impact investing ecosystem while ensuring that our impact measurement and reporting was as understandable and transparent as possible for our investors.

 

Step 1 - Defining our Impact Goals

The first step in our refreshed approach was to carefully define our impact goals. It was important to us to align these goals with the Sustainable Development Goals (SDGs), a global agenda to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. The SDGs comprise 17 core goals that range from ending hunger to stemming climate change.

We are strong supporters of the SDGs as a useful framework to communicate and align impact objectives across a broad group of stakeholders including governments, NGOs and non-profits as well as investors.

One of the funds we manage, the Deetken Impact Fund, makes investments in financial institutions, renewable energy projects and social enterprises. These investments drive impact outcomes which are well-aligned with the SDGs, as shown below.

Deetken Impact Fund – Impact Goals

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Step 2 - Developing our Impact Thesis

We wanted to be clear about how and what impact is generated by our investments. Like the thesis statement of an academic research paper, this statement anchors our analysis and is ultimately what we seek to measure.

To share an example, this is the impact thesis for the Deetken Impact Fund:

“The Fund acts as a partner and steward for our portfolio companies, each of which has been carefully selected for its contribution to one of our four impact goals. Where appropriate, we provide these companies with customized business advice and technology transfer designed to foster sustainable and durable business growth. By helping to grow this group of impactful businesses, the Fund drives increased business activity such as lending to micro and small enterprise, installation of new renewable energy capacity or greater outreach of health care services for low income women.”

Deetken Impact Fund - Our Impact Thesis

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Step 3 - Defining our Measurement Framework

We had two primary objectives for our measurement framework: we wanted it to be streamlined and user-friendly, and we wanted it to be aligned with IRIS.

IRIS is a catalogue of generally-accepted performance metrics that leading impact investors use to measure the social and environmental performance of their investments. Where the SDGs set big, broad goals for long-term change, IRIS provides metrics for measuring more specific, near-term results. We “cross-walked” our SDG targets and IRIS metrics to translate our goals into something that could be tracked and measured. Through this process, we selected a concise set metrics for each of our investment sectors.

Importantly, most of our selected metrics are quantitative and can be “rolled up” from the investee company level to the aggregate portfolio level for the purposes of consolidated reporting to investors.

 

Step 4 - Measuring our Impact

So how does all this work in practice?

We use our selected metrics to conduct an impact screening of each portfolio company candidate. The candidate metrics are assessed by Deetken Impact on a relative basis alongside the metrics of comparable companies. For ongoing monitoring purposes, our selected metrics are informed by data which can be readily provided by investee companies on an ongoing, consistent basis.

Deetken Impact Fund – How We Measure Impact

 (1) We support the UN's 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs). The SDGs comprise 17 goals that range from ending hunger to stemming climate change. The DIF targets 4 goals within this set: SDG3, SDG4, SDG7, and SDG8.  (2) IRIS is a catalogue of generally-accepted performance metrics that leading impact investors use to measure the social and environmental performance of their investments.  (3) While loan acceleration is an important protection, we rarely view this approach as an appropriate remedy. We take price in our reputation for highly constructive negotiations with portfolio companies, in which we focus on solutions that preserve our capital while maintaining the stability of our investee's business. 

(1) We support the UN's 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs). The SDGs comprise 17 goals that range from ending hunger to stemming climate change. The DIF targets 4 goals within this set: SDG3, SDG4, SDG7, and SDG8.

(2) IRIS is a catalogue of generally-accepted performance metrics that leading impact investors use to measure the social and environmental performance of their investments.

(3) While loan acceleration is an important protection, we rarely view this approach as an appropriate remedy. We take price in our reputation for highly constructive negotiations with portfolio companies, in which we focus on solutions that preserve our capital while maintaining the stability of our investee's business. 

 

Impact Measurement 3.0… and Beyond

As for many impact investors, impact measurement is a balancing act between our desire to deeply understand the nature of our impact and the ability of our investee partners to track and report on meaningful metrics.  One way to think about impact measurement is as a spectrum from the most practical to the most rigorous approach, as illustrated below.

Impact Measurement Spectrum

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At this stage, we have made good progress towards measuring the outputs and outcomes of our investment portfolio. However, we remain keenly interested in deeper measurement of social impact and have been actively working with some of our investees to develop tools for assessing causal relationships between our investments and our impact goals. For instance, we recently worked to implement the Progress out of Poverty Index (PPI) methodology at one of our portfolio companies in Mexico. PPI is an innovative way to evaluate a sample of clients before and after they receive services by the organization by using straightforward but revealing questions to track how living standards may have improved. The objective is to understand, from a longitudinal perspective, the impact of our activities on client incomes, lifestyle and overall well-being.

Effective impact measurement will always be one of our most challenging responsibilities. But we believe that by sharing best practices and continuously working to gather better and more meaningful impact data, it needn’t be as daunting as King Arthur’s quest.