Impact Investing Needs to Get Lean

I am a big fan of impact investing. I also believe that the traditional rules of economics that we use to guide modern businesses desperately need an update and that impact investing will be the only form of investing that the next generation will accept.

The good news is that over the coming years impact investing itself will grow a lot more sophisticated, as investors — and consumers themselves — expect authentic impact and will want to tap into the underlying value of impact.

The bad news is that meanwhile, impact investing remains a bit of a mixed bag. Impact investing is conveniently understood to be any investment that aims to generate some sort of positive social or environmental effects in addition to financial gains

In practice, the “impact” part itself is placed on a pretty long continuum, anywhere between “at least we didn’t kill anyone” to “we are awesome we saved the world” and everything in-between.
 
Obviously, among the great people and companies that are trying to (re)define investments with impact in mind, there are also those that see the marketing opportunity in associating their brand with impact, yet, are not necessarily doing much to provide the given impact. This is the murky world of greenwashing.

Neither consumers nor investors are stupid, so, after having been exposed to a few of these dubious marketing efforts, people have grown a healthy dose of suspicion around impact claims. To the tune of 52% of respondents to a recent Mintel survey in America showing negative association with impact communications from companies, assuming that marketing products as “ethical” is just a way for companies to manipulate consumers.

Obviously, this erosion of trust is the immediate consequence of the fact that most people today — and that includes investors — find it hard to tell the difference between claimed and real impact. That is because, sadly ALL impact investments have one thing in common: they struggle to gauge their impact.

RELATED: Inputs, Outputs, Outcomes

Not that impact investments don’t lead to impact. It’s just that the impact is hard to estimate objectively. Hard and expensive. Also, the impact investing community keeps things difficult with arcane, hyper-complicated impact frameworks, taken basically straight out of the traditional development’s toolbox. (shocker: this stuff doesn’t work in traditional development either).

This is a huge barrier to most investors, who expect clear, complex data related to their investments. This data is currently missing.

It also creates a serious dilemma for the businesses themselves:

Should they maximize scarce resources in growing the business 
OR
Should they invest in impact evaluation, even at the cost of potentially losing business/ shortening their runway.

On the one hand, investing in impact evaluation will increase the likelihood of receiving impact investing (and potentially build a loyal user base). On the other hand, it would be unfair to expect most businesses to invest shareholder money in impact evaluation under these terms.

Besides, wouldn’t it be better if that money would be invested in generating impact + financial returns, continuously? What if we could establish concrete, clear links between actions and impact so that impact monitoring and evaluation would be automated, just like any other performance metrics a business tracks daily.

I think that is possible today and I think that every impact-minded company should do exactly that — and, indeed any impact-investor should demand exactly that.

Get lean, already

You know those complicated impact tracking frameworks punted by donors and big impact investors? The multiple-tabs excel sheet listing 19 different outputs for each and every one of the 17 Sustainable Development Goals SDGs?

I think we should forget those. Just leave them to the academics and the World Bank types. Instead, as a business (and an investor), define a few simple concrete outputs and make sure they are verified and measured continuously.

Start with a basic, lean strategy. When you put together the Business Model Canvas, add a section there for your concrete impact outputs. Presumably, these outputs are assumed to lead to a higher level impact. Don’t get lost into endlessly complex assumptions and theories of impact. Find some widely accepted correlations, reduce those to practical units and measure those.

Then, as you set up your performance metrics for user acquisition, marketing etc, make sure you set up a few easy to measure impact outputs — concrete, unique events that are instantly measurable. Don’t worry about the high level outcomes.

Your investments should be reasonable. Put a sensor and measure air quality. Install a smart counter for electricity. Take before/ after pictures. Whatever makes sense in your business model.

Then just keep tracking that. Also, make those numbers public, for others to benchmark.

Then as you go, keep adjusting. If/ as higher level impact evaluations happen in your space/ industry, adjust some more (just as you would adjust any other assumption in the Canvas).

Over time, you will learn things and will be able to make better assumptions that will lead to better estimates of impact.

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