How investors can generate deeper insights into social and environmental impact while bringing concrete business benefits to investees.
Over the last few years, impact investors have made many efforts to standardize “output metrics”—data about products, services, and business practices—so that they can draw better comparisons across companies (see IRIS and HIPSO). But while these metrics are useful for portfolio monitoring, they have two important shortcomings. First, they are typically effective in capturing the scale of social impact but are less telling of its depth. Outputs can tell us about the nature of products and services, and the number of people they reach, but not about their effect on people’s livelihoods and well-being.
Second, this approach tends to view businesses as data providers, rather than data users. Yet companies also need data as they build their business lines, explore new markets, and target customer segments. By collecting data directly from people, companies can better understand who they want to source from, sell to, and staff up with. They can also learn how customers are using their products and services, and about the material effect of those products on their lives. In this way, measurement not only shows the impact a business has already created, but also allows for impact management—the integration of social and environmental performance at each stage of the investment cycle.
A Deeper Look at Impact
The CDC Impact Fund invests in funds and other intermediated vehicles that deliver high development impact, particularly to underserved populations. In-mid 2016, we began piloting insights studies, which we called “deep dives,” to complement existing data reporting and get a deeper, bottom-up understanding of how people engaging with portfolio companies were experiencing change. In the first year, we undertook deep dives into five portfolio companies in Ghana, Nigeria, and Kenya to cover companies operating in the agriculture, energy, and ICT sectors (see reflections from our first study here). Our North Star was to develop a measurement approach that was light-touch but in-depth, and that could generate value for investors, investees, and end-beneficiaries alike. Here’s a look at the approach we developed and what we learned.
1. Match the research methods to the investment context. We found success in remaining methods-neutral. That is, we didn’t prescribe a particular data collection methodology or choose a single research partner. Instead, we developed a set of five engagement principles:
2. Anchor around business decision-making needs. Collecting impact data is a means to an end, not an end in itself; what we do with the data is what matters. We therefore designed these studies to feed into businesses’ future decision-making by capturing both descriptive information (such as units purchased or increased income) and predictive information.
3. Draw clear boundaries to make findings actionable. Attempting to measure the net impact of a company—its full range of positive and negative impacts on social and environmental issues—can be extremely expensive and lengthy. Instead, we tried to focus on selected parts of a business and a few affected groups, particularly ones that were experiencing the most impact or that we knew less about.
4. Make sure you are ready to mobilize quickly. If you can’t collect data within a company’s preferred timeline, it’s best to postpone the exercise altogether. We try to conduct deep dives when companies face strategic and product decisions, and feed information back to them as fast as possible so that they can act. Traditional impact assessment methodologies haven’t been great at providing real-time or quasi-real-time data to investors and companies. Delays reinforce the oft-held perception that impact measurement is too slow, academic, or “unbusiness-like” for purposes other than reporting. Our quickest deep dive took six weeks, while our longest took six months. Having re-approved research partners and enumerators, and using tried-and-tested approaches, can help speed the process and make the exercise more relevant to company operations.
5. It’s never too early to think about impact. We often hear fund managers saying it’s too early to measure impact. But measurement can be just as useful at the beginning of the business life cycle as it can during the growth phase. Collecting customer data as soon as a new product or service launches, or when a company markets it to a new segment or geography, provides a window into likely future impact. It also comes at a time when the company has to make decisions about whether to pivot or persevere in strategies such as marketing tactics and distribution channels.
6. Adjust language to the business reality. Some investees in the CDC Impact Fund portfolio self-identify as social enterprises, while others think of themselves as “finance-first” businesses that generate impact through the nature of the products and services they sell. When discussing deep dives with companies, it’s useful to adjust language to match the mission of the company.
7. Standard measurement should remain rigorous. Generating rapid insights does not mean throwing good research practice out the window. This is particularly important if investors are using findings to make recommendations to companies about business operations and strategy. With the online Kenyan newspaper Hivisasa, for example, we conducted phone surveys with a representative sample of readers and even ran a randomized control trial to measure behavioral changes.
8. Ensure that findings are actionable. Interpreting sometimes-contradictory customer feedback and data, and translating it into actionable recommendations for investees often took us as long as the data collection process itself. Investors and intermediaries need to play an active role in helping companies think through how they can turn data into actions that drive both commercial success and greater impact, particularly in cases where deep dive findings challenge fundamental assumptions underpinning the business strategy.
Written by Martina Castro & Matt Ripley
Publication date: October 30, 2019