About ImpactPHL Perspectives:

ImpactPHL Perspectives is a multi-part content series that explores the many facets of the impact economy in Greater Philadelphia from the perspectives of its doers, movers, shakers, and agents of change. Each volume is written directly by a leader in this space to discuss best practices and share lessons learned while challenging our assumptions about financial and impact returns. For more thought leadership like this, check out the full catalog of ImpactPHL Perspectives.

Kusi Hornberger, Partner & Global Knowledge Lead at Dalberg

“How can I justify adopting an impact investing strategy if I have to choose among an alphabet soup of reporting standards, none of which clearly and consistently demonstrates results superior to not adopting them?” I recently received this criticism-tinged question from a leading finance professional at one of the world’s largest asset managers, raising a primary critique of both ESG and impact investing: Such investments cannot easily be gauged and compared using existing nonfinancial measures.

The question requires a clear answer if impact investing is to achieve its potential. Without raising the bar on impact management and measurement, impact investing will always be an bespoke, niche strategy. A recent INSEAD survey of Limited Partners (LPs) found that only 45 percent of general partner (GP) investees report any ESG or impact metrics, and most of them focus only on positive stories. The survey also found that less than one in six GPs report granular impact data. A recent report from BlueMark reviewed 31 impact reports from existing impact investors. It showed that fewer than half used standardized indicators cited any sources or defined their metrics, limiting the comparability of reported data. Given this poor track record, the consensus is growing that private equity funds could and should take the lead in first standardizing ESG and impact accounting and then embedding those standards and metrics into their daily operations.

The lack of common practices and standards means that, at present, impact performance reports and methodologies are primarily used to support fundraising and marketing efforts rather than for decision-making or to drive value creation. Therefore, most impact asset managers who are considering adopting or improving the approaches have little incentive to do so. The only organizations changing the paradigm are those being pushed to do so by their boards or shareholders. This trend will continue.

“The lack of common practices and standards means that, at present, impact performance reports and methodologies are primarily used to support fundraising and marketing efforts rather than for decision-making or to drive value creation.”

Yet once asset managers commit to adopting impact investing as a strategy, they confront a variety of impact measurement methodologies and inconsistent LP demands. As the Impact Management Platform System Map shows, private equity and venture capital funds use a wide variety of methodologies, raising this important and practical question: How can we improve, professionalize, and speed up the practice of measuring impact throughout the investment origination process?

This article’s four-step approach, developed by Dalberg, shows how a private equity fund can use the IMP framework to standardize an approach to incorporating impact measurement and management into its health and well-being sector investments.

Step 1: Define an impact Theory of Change (ToC) for each investment thesis

Creating a Theory of Change is an essential part of the process, as it lays out the impact strategy that the fund envisions for the sector. The ToC describes how investment activities tie to the intended impact outcomes that ultimately build to the impact vision the fund hopes to achieve. An example ToC is included in the figure below, showing the VC fund’s vision and focus for the health and well-being sector:

Figure 1: Theory of Change for a private equity fund investing in the healthcare sector

Step 2: Map the Theory of Change to relevant KPIs

The second step of the process connects the Theory of Change to relevant key performance indicators (KPIs) and the five Impact Management Platform (IMP) dimensions of impact.

KPIs are selected (using GIIN/IRIS+ metrics when possible) to operationalize and standardize tracking the Theory of Change. In this health and well-being example, the private fund selected metrics to help evaluate the portfolio company’s fit with the fund’s vision of impact and its engagement and results delivered. The fund asks questions such as “Does this company intentionally improve access, price, and service quality for the majority of the population?” and “What is the depth and breadth of health and well-being use cases this company covers?”

Step 3: Assess the KPIs against the IMP five dimensions of impact

After selecting the KPIs, the fund scores them against IMP's five dimensions of impact: What, Who, How Much, Contribution, and Risk. (Figure 2 briefly describes each IMP dimension.) To create a standard scoring template, each KPI is assessed against these dimensions; for the What dimension, for example, this might be understanding the equitable access to the company’s product or service (shown in figure 3).

Figure 2: The IMP's five dimensions of impact

Figure 3: Assessing KPIs against the IMP dimensions of impact

Step 4: Aggregate scores across the IMP dimensions to identify company impact

The fourth step creates a single comparable “impact score” by thoughtfully aggregating the scores across the KPIs to create an overall enterprise impact score across the IMP dimensions. This score can be used to assess and compare different investment opportunities, both existing and new. It also allows a fund to roll up a portfolio of investments to evaluate and assess performance at the investment thesis or sector level. Figure 4 shows a scorecard result for a healthcare portfolio company.

Figure 4: Aggregating KPI scores to identify an overall enterprise impact rating score

As impact investing strategies continue to grow in popularity in private markets, PE and VC funds should consider adopting standardized approaches such as IMP. A useful tool for private funds seeking to incorporate impact into their investment strategies, IMP provides a clear framework for a standardized process applicable to any sector that will help codify both investment intentionality and evaluation provides the tools needed to build toward comparability across funds. This will enable private funds to be more transparent about their impact investing strategies and help the enterprises they invest in to better understand how their impact performance is assessed.

While I believe this is a great approach to standardizing impact measurement—practical and replicable for funds large and small—it is certainly not the only one. The Impact-Weighted Accounts Project, for example, provides another novel approach private investors can use to standardize impact measurement. By continuing to work together to develop standardized impact measurement and management processes, we can create a more transparent and effective impact investing ecosystem that benefits both investors and society. Efforts like Impact Frontiers’ new open-access resource for impact capital managers on impact-financial integration is one such effort, but more will be needed.

Kusi Hornberger is the author of the new book Scaling Impact: Finance and Investment for a Better World and a Partner at Dalberg Global Development Advisors, where he leads its Finance & Investment Practice. In this role, Kusi has led more than 200 advisory projects on a wide range of topics related to blended finance, financial inclusion, impact investing, impact measurement and management, and innovative finance with leading donors, DFIs, family offices, foundations, and private investors.