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To Measure Impact Investments, You First Need to Define Them

You can’t manage what you don’t measure. It’s such a fundamental rule of business that it hardly bears repeating in the day-to-day work of running a small firm, a major corporation or an investment fund.

But there are times when a business moves into lesser-known territory, where all the usual measurement tools come up short. I see this happening more and more as businesses embrace things like sustainability and corporate social responsibility — even happiness and quality of life. Terms like triple bottom line or third metric attempt to quantify some of the important benefits of their work but do not fit neatly onto a balance sheet.

Another one of those terms is impact investing. Now, impact investing is a term very dear to me and very core to the work of the Overseas Private Investment Corp. (OPIC), the U.S. government’s developmental finance institution. But it’s also a term that, without the backing of some solid measurement tools, runs the risk of being misunderstood as one of those nonserious, touchy-feely activities that businesses engage in solely to improve public perception.

Impact investing seeks to address common challenges such as access to education, financial inclusion, housing, health care and climate change while at the same time generating sufficient returns to constitute viable investments. An even shorter definition is that impact investments seek to do well by doing good.

But how do you quantify that?

At OPIC, we found there was no simple way to determine which of our investments were, in fact, impact investments. So when we took a look at how we could best assess which of our projects were garnering positive returns for both the target communities and the investor, we used the following three-pronged analysis:

Does the project aim to have a positive developmental impact? Because OPIC’s mission is to support development, we consider every project’s potential developmental impact at the outset and ensure that all the projects we support meet this standard.

Is the investment in a high-impact sector? From there, we looked at how we might define a smaller subset of our portfolio, so we counted only those projects that were in what we term high-impact sectors, which often face challenges raising capital, such as low-income housing, microfinance and renewable energy. Last year $2.7 billion out of OPIC’s $3.9 billion in financial commitments was in those economic segments.

Was the investment made with impact intent? Finally, we sought to isolate a much smaller group of investments that clearly had impact intent, that is, the implicit aim of the project was to address a social or environmental challenge while also generating financial returns. Last year $222 million of OPIC’s commitments fell into this category.

This final definition separates all those projects that might happen to have a positive social impact from those that were designed from the outset to do good as a core part of their value proposition and business model. The latter is a very tough standard to meet, and one that I think all impact investors should be able to agree upon.

Some of OPIC’s most successful investments to date fall under this narrow rubric. We supported multiple funds managed by Global Partnerships, a Seattle nonprofit fund management firm that invests in low-income communities in Latin America. The first of these funds has already been repaid in full.

My hope is that if we at OPIC can track the performance over time of that small group of projects that are indisputably impact investments, we can help show that impact investing works, not only by generating positive social benefits but also by generating financial returns.

Elizabeth Littlefield is the president and CEO of the Overseas Private Investment Corp., a U.S. government developmental finance body that manages an $18 billion portfolio, in Washington.