impact investing

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

Ensure healthy lives and promote well-being for all at all ages.png

 

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.

Pro Mujer in Argentina

Pro Mujer client posing in her storefront (Argentina). Image courtesy of Pro Mujer .

Pro Mujer client posing in her storefront (Argentina). Image courtesy of Pro Mujer.

Fostering Successful Entrepreneurship among Women through Lending, Training, and Health Promotion

At Deetken Asset Management Inc. (DAMI) we are committed to achieving double (and in some cases triple) bottom line results - delivering strong and stable returns to our investors through investments that have a positive social and environmental impact. Our partners at Pro Mujer share this mission. With over 25 years of micro-lending in five countries (Peru, Bolivia, Nicaragua, Mexico, and Argentina), Pro Mujer is one of Latin America’s leading developmental organizations focused exclusively on women clients. Deetken has been providing much needed capital and technical assistance to support Pro Mujer’s lending activities for over six years, and we consider Pro Mujer International (based in New York City) a strategic partner. 

Each of Pro Mujer’s operations faces its own opportunities and challenges. Argentina’s underserved northern region is no exception, where people face poverty, experience poor health outcomes and have little access to financial opportunities.  The economic depression in the early 2000’s resulted in the closing of many banks and increased unemployment and poverty throughout the country. Since then, Argentina’s economy has been slowly recovering, but the impact is still being felt in the country’s poorest regions. Although the economy has been improving since 2003, it is still difficult for banks and microfinance institutions to borrow capital, which in turn creates strict lending requirements.

There are few microfinance institutions like Pro Mujer in Argentina. Most financial institutions are unwilling to provide loans to those with low incomes, the so-called bottom of the pyramid. There are several reasons for this:

  • The country has high inflation caused by interest rates, a result of a previously closed economy and a history of protectionist policies. This means that outside capital was, and still is, hard to come by. The limited capital and high interest rates heavily contribute to the lack of microfinance organizations.
  • Many of the poor work in the informal sector and are unable to provide physical evidence of their income to qualify for loans. Those who do have the proper documentation typically do not require a large enough loan to meet the minimum requirement for established banks.
  • Unlike Canada, loan interest from an independent financial entity in Argentina is subject to a 21% value-added tax. Rate subsidies and tax deductions are only available to businesses in the formal economy, making it expensive for business in the informal economy to get a loan. For a business to transition from the informal to formal economy, they are subject to a 35% business income tax and immediate retroactive taxes and penalties. This is a deterrent that prevents most informal entrepreneurs from transitioning out of the informal economy.

These dynamics make it very difficult, if not impossible, for many families to escape the poverty trap. This is where Pro Mujer comes in. By providing access to affordable loans for low-income women entrepreneurs, the organization is serving a segment of the population that would otherwise have a very hard time accessing credit. In addition to capital, Pro Mujer offers a comprehensive program focused on helping aspiring women entrepreneurs to build their capacity as business owners while also enabling access for themselves and their families to health care and educational training.

In order to receive a loan through Pro Mujer, women are required to attend training in business management, life-skills, and health care. Health care training includes educational classes on preventative care and nutrition. This approach is not only altruistic: it is good business.  Pro Mujer’s involvement goes beyond the exchange of a loan.  By promoting health, business, and personal competence, Pro Mujer creates the foundation for the success of its clients. The results have shown that this approach works: default rates for loans are extremely low and currently stand at less than 0.5%.

Pro Mujer in Argentina administers the majority of their loans using a group structure that resembles a small corporation. This method has proved to be very beneficial for both Pro Mujer and its clients.

Group Lending

Pro Mujer takes an active role in each investment. One method they have found particularly effective is “group lending.” For a majority of the loans administered in Argentina, the recipients are required to have a working management structure where women are responsible for both their personal success and the success of the group. The management structures reinforce accountability, leadership, risk management, and focused responsibilities.

A lending group consists of four small groups with two representatives in each group: a group leader (la "Jefa del Grupo") and support member. The support member is appointed to the main group and given one of four roles: president, cashier, secretary, or health promoter.

A lending group consists of four small groups with two representatives in each group: a group leader (la "Jefa del Grupo") and support member. The support member is appointed to the main group and given one of four roles: president, cashier, secretary, or health promoter.

The group is required to attend reoccurring sessions that consist of a meeting, educational training, hands on training, and loan disbursements. A Pro Mujer advisor supervises the sessions, providing assistance when needed.

Meeting

During the meeting, the group handles all processes, roles, and responsibilities in accordance with the group management structure. Any outstanding issues or concerns are addressed and managed with the guidance of the Pro Mujer advisor, if necessary. Typically, the atmosphere of the meeting is positive and each woman is encouraged to contribute. The group members rotate through the four roles: president, cashier, secretary, and health promoter, providing each woman with a range of experience in leadership and communication. Members of the group receive regular evaluations of their performance in each role, which increases confidence and helps Pro Mujer’s clients to become more invested in the performance of their group.

Training

The lending meeting is then followed by an hour of mandatory training, including a 20-minute microteaching session. This training enhances the professional and personal growth of each group member. Pro Mujer believes that the educational and hands-on training provides the women they serve with the tools to develop as successful business women. Training topics range from business planning and budgeting to empowerment and confidence building. Women learn to develop “Living Plans” which help them adapt to the stresses and complications of raising a family while operating a household and a business.

Health

Argentina provides free public health care, but care is difficult to access outside of an emergency and typically involves long wait times. In addition, preventative care is virtually non-existent despite the high incidences of preventable diseases in women, such as diabetes, obesity, and cervical cancer.

Pro Mujer provides all members and their families with access to life-saving primary health care. This component is important as it provides security to families, alleviating the stress of worrying about their family's health care and allowing Pro Mujer members to focus on building their businesses.

Pro Mujer’s health care program offers a variety of services, including:

  • Preventative and immediate health care, including health screenings with a nurse and follow-up with an onsite doctor
  • Life and incapacity insurance to protect members and their families in the event of a critical illness
  • Health and lifestyle educational training, including on topics such as nutrition and exercise

These services are conveniently offered at Pro Mujer Service Centers, which minimizes the time entrepreneurs are away from business activities. Pro Mujer charges a small service fee to all clients. For many of the women served by Pro Mujer, the health care dimension is one of the biggest draws to the organization.

Looking Forward

The Argentinian government has begun to make changes to meet their goal to improve the economy and reduce the impact of high inflation. In addition, the government realizes the benefit (e.g. generating tax revenue) of easing the transition from the informal to formal economy.  Pro Mujer in Argentina sees this as an opportunity to collaborate with the government and other organizations to help their members take their businesses to the next level. 

Despite the challenges of operating in a complex context, clients of Pro Mujer in Argentina are building businesses and successfully managing their loans. The program is enriching their lives, allowing them to feel empowered, to provide for their families, to contribute to their communities and to set a powerful example for the next generation of business owners.  We are proud that the partnership between Pro Mujer and DAMI is contributing to these important outcomes.