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Differentiating the Impact Investment process

To improve social impact measurement and reporting, we need to adapt expertise in the monitoring and evaluation of development programmes to the impact investing context

Impact Investing can differentiate itself by the quality of bespoke social impact measurment (image credit: ow.ly/8zKt30czpzR).

In today’s impact investing landscape, the measurement of social impact remains an evolving subject. Often, impact investment processes either don’t allocate adequate attention to monitoring and reporting social impact or get bogged down by only measuring and considering quantifiable outputs, ultimately to the detriment of the deal or the entrepreneur. At the same time, impact investors are increasingly attempting to track their performance against the UN’s Sustainable Development Goals (SDGs); according to the most recent Global Impact Investing Network Annual Survey, 26% of respondents reported that they actively track their investments’ performance against the SDGs, and 82% of those target SDG 8 specifically (Good Jobs and Economic Growth).

GIIN are tracking the prominence of SDG’s in impact investment measurement approaches. (Source: https://thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf)

What does the process of social impact measurement look like in the investment context?
This leads us as development professionals and impact investors alike to ask: how exactly should we approach social impact measurement when it comes to our investments? As impact investors, are we expected to go above and beyond SDG 8?

Palladium has responded to this global challenge by developing an integrated approach to social impact measurement which draws upon concepts and frameworks from the field of evaluation adapted to the investment process. By combining our experience in the evaluation of development projects – through our in-house team of Research, Monitoring and Evaluation (RME) specialists – with the technical expertise of our Impact Investment team, we have developed an approach that balances rigorous social impact measurement with metrics that are useful for both investors and entrepreneurs. The process is also conducted in a capacity-building framework with an interest in improving the potential investee’s ability to secure future investments.

Through this integrated approach, we efficiently and effectively adapt a standard impact measurement process to the particular context of each investment. Our in-house experts engage in each step of the investment process to develop investment-level measurement strategies. These are based on learnings from the evaluations of different thematic projects, as well as an independent verification that is integral to the governance process under which our investments are made.

This engagement starts at the due diligence stage. The Impact Investing team works closely with an RME expert to support pipeline businesses in identifying the potential and appropriate social impact for their business models, while taking into account the investee’s capacity and motivation to report on social impact metrics. This process involves developing a specific social impact framework for each investment, underpinned by an evidence base established through the evaluation of numerous development projects across a diverse range of sectors and contexts over nearly 40 years. This allows us to develop realistic and measurable social impact targets based on evidence that is appropriate to the specific nature of each investment.

By doing so, Palladium Impact Investing ensures a lean yet robust approach to monitoring during the investment process which is both:

1. Logical, feasible and useful for businesses with respect to their own management, growth and sustainability; and

2. In line with our monitoring and reporting requirements.

Differentiation in practice
We have recently used this approach to support the investment process for an agribusiness processing company; from the time of origination, to portfolio management, and finally reporting.

Phase 1: One of Palladium’s RME experts first analysed the investee’s business model and developed a social impact framework adapted from our experience measuring the social impact of similar agribusiness interventions in similar contexts on Palladium’s donor-funded programmes. The framework outlined the key steps in the ‘causal impact pathway’ linking investment to impact, identifying critical risks and assumptions at each step. Importantly, these risks and assumptions were based both on information provided by the potential Investee as well as our experience implementing and evaluating similar projects.

Phase 2: This framework was then used as a basis for discussions with the Investee during the due diligence phase. From here, the RME expert further contextualised the causal impact pathway with the Investee and facilitated agreement among all parties on measurable results which could be realistically expected from this investment within the proposed timeframe. Once the social impacts were agreed, the RME expert identified results indicators to measure progress (both IRIS metrics and Sustainable Development Goals (SDGs)) and proposed targets that were relevant and realistic for the business to report against. This co-creation and co-development of targets between the Investee and our RME experts ensured alignment and ownership. This merits particular mention, as our experience (both successes and failures) indicates how critical it is to gain Investee buy-in, both at this phase and throughout the entire process.

Phase 3: At this point, Palladium assessed the Investee’s existing reporting systems; including to what extent the Investee had the capacity to report quality data as described under the investment mandate – both in terms of the agreed social impact metrics as well as being in line with Palladium Impact Investing’s reporting requirements. Where challenges for scale existed, we created bespoke recommendations and a plan to strengthen the Investee’s reporting capability. Palladium Impact Investing used this exercise to leverage existing reporting mechanisms that the Investee could utilise and to ensure that reporting was not overly burdensome, while also generating value-add data for the business.

This follows a pattern we’ve observed in much of our work: a more robust system to improve the traceability of inputs and showcase a business’s social impact (in terms of market opportunities created for smallholder farmers and particularly women – depending on the agricultural commodity and value chain) will eventually make this business more attractive to other potential investors in the future and allow business managers to further understand their supply chains.

Phase 4: Within this reporting mechanism, impact indicators were developed in line with SDGs and reconciled with IRIS metrics. This was done in order to align our investment process with the SDGs; in line with a growing number of impact investors tracking their performance against them. By strengthening the investee firm’s ability to articulate their value proposition as related to social impact and the SDGs — supported by robust evidence and analysis — we will now be better able to facilitate conversations with potential co-investors and attract further impact-focused capital, while simultaneously seeking to address the SDGs through the allocation of capital.

GIN’s survey demonstrates that impact investors have a broad and varied impact investors’ interest in the SDGs. (Source: https://thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf)

Placing measurement at the heart of successful impact investing
The ultimate goal of this approach is clear. We want to maximise Palladium’s value add for the Investee, better understand and quantify the impact we are seeking to deliver together, and come up with a measurement framework fit for purpose for both Palladium and the Investee. Crucially, this must not be overly burdensome, but rather adapted to the investee’s capacity and goals.

Our commitment to demonstrating impact is fundamental to our investment process and thesis. It is one of the ways that we design and deliver Positive Impact at Palladium. By participating in deals on this basis we want to contribute to building a stronger ecosystem and ensure our capital contribution focuses on markets and segments often overlooked by investors.