The rise of investors seeking to make a positive difference in the world has reached an all-time high. Growing steadily since its nascence at the turn of the millennium, the impact investment industry is currently estimated to be worth just over USD$502 billion and counting. At its simplest level, impact investing seeks to bring financial returns for investors while delivering a positive impact on society. The industry in itself is heterogeneous, and its myriad of different strategies and impact assessment techniques make it somewhat complex to untangle.
As both private equity managers (GPs) and investors (LPs) become increasingly conscious of their societal purpose and responsibility, the onus to accurately measure impact grows greater. Whilst a number of innovative methodologies have taken shape of late, assessing impact has proved problematic for the industry as a whole, given challenges in measuring impact output on a standalone and comparative basis. From this, two primary questions arise:
Can impact be measured reliably?
How can both GPs and LPs leverage impact assessments to make effective investment decisions?
What is impact investing?
The Global Impact Investing Network (GIIN) defines impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The term “impact investing” was coined by the Rockefeller Foundation, to put a name on investments which produced both financial and social returns. While social finance had been around in one form or another for roughly two decades by the time impact investing became a formal discipline, the concept began to gain traction from institutional investors in 2007, with concerted efforts from J.P. Morgan and the Rockefeller Foundation, and a number of other banks and GPs following suit.
Impact investing covers a wide spectrum, with varying risk and return expectations across financial and impact terms., as displayed below in Figure1:
Despite benevolent objectives, impact investments should not be confused with philanthropy. Impact private equity (PE) tends to occupy one of three main camps: negative ethical screening, positive ethical screening, or thematic impact. The most basic elements of the impact profile start with negative ethical screenings aimed at avoiding companies that cause harm, such as tobacco manufacturers or companies located in oppressive regimes. Positive ethical screening, on the other hand, aims to include investments that are an additive to society. This approach is often known as Environmental, Social and Governance (ESG) investing. Furthest from the poles of pure financial or societal gains are investments actively seeking to maximise both. Frequently, these investments are governed by the Principles for Responsible Investment (PRI), six voluntary investment principles supported by the United Nations that aim to develop a more sustainable global financial system. Sector themes favoured by impact investors are summarised in Figure 2. 
There are age-old preconceptions that impact managers continue to battle, such as the idea that the trade-off for investing in impact is lower financial returns. Data is proving this hypothesis wrong. In 2015, German Investment Fund DWS and the University of Hamburg reviewed whether integrating ESG into the investment process had an effect on corporate financial performance and found that 63% showed a strong correlation between ESG performance and positive returns.
Further, Bain’s analysis on impact in the APAC region, found that from a sample of 450 PE-led exits, which isolated those that either involved impact funds or focused on sectors that score high on ESG, including clean tech, ecology, renewables, education, waste or water, the median multiple was 3.4x for impact deals compared with 2.5x the broader market. This research also demonstrated lower variability in returns for impact-focused deals.
With a clear double mandate of both financial and social returns, the impact investment universe leaves a more narrow playing field for GPs by definition. Historically, scale has been limited as managers sometimes struggled to source a quality pipeline of true impact deals. Reflecting this historical trend, the median fund size currently sits at USD$29m. With the emergence of large scale impact funds over the past three years, the average impact fund size has been trending swiftly upwards. Currently, average fund size has been estimated at just over USD$450m, showing the disparity between the largest and the smallest and indicating the scale of the largest funds’ portfolios. For newer funds, deal sourcing appears not to pose the same problem as it has for some of their earlier peers. One leading impact GP noted to Titanbay in 2020 that, “[having] true alignment on impact has resulted in reduced competition and better entry multiples for our fund.”
The advent of scale in impact private equity is a relatively recent phenomenon. In 2017, TPG raised USD$2 billion for its inaugural “Rise Fund” in partnership with Bono and Jeff Skoll, and developed an evidence-based methodology for quantifying impact. Blackrock, Goldman Sachs, and Bain Capital  each cemented efforts in the space around the same time with dedicated impact investment units. A number of other industry titans have made big moves in the space, with Apollo Global Management announcing a USD$1 billion social impact fund  in 2019, and KKR closing its Global Impact fund worth USD$1.3 billion in February 2020. In addition, the private equity industry has seen a shift towards more socially responsible investing. A major driver in this trend has been the widespread adoption of the UN Sustainable Development goals (UNSDG), which are 17 goals to create peace and prosperity for people and the planet.
While supporters celebrate the influx of capital and focus on impact, sceptics are concerned that the industry may be seeing a rise in ‘greenwashing’, especially where impact methodologies are overly opaque. As more money flows into impact investing, measuring the ultimate scale of impact achieved predominantly remains a matter of educated guesswork.
How is impact measured?
The earliest proponent of expanding measurement of returns beyond financial was John Elkington, who introduced the theory of Triple Bottom Line in 1994. A company’s triple bottom line seeks to gauge its level of commitment to corporate social responsibility (CSR) and environmental impact over time in addition to financial results. Over the past 25 years, the social finance space has seen a proliferation of measurement techniques, each with its own benefits and limitations. No matter which assessment tool is chosen, the ultimate goal is to increase efficacy and transparency across the investment process. See the Appendix on page 8 for a condensed list of measurement methodologies.
Unlike international accounting standards which now follow GAAP (generally accepted accounting principles), to date, there is no industry accepted framework to quantitatively measure impact. Some internationally standardised metrics are fairly widespread, such as IRIS+, <IR>, GRI Standards, and the B impact score. In addition, there exist a number of third party goals and guidelines for companies to follow and aspire to achieve such as the UNSDG, Principles for Responsible Investment (PRI), and Boston Consulting Group’s Total Societal Impact framework. In many cases, GPs use their own bespoke metrics and scorecards in conjunction with the other methods.
Impact assessment methods can be grouped into four categories, below. Experts believe different methods are better suited to different stages of the investment process, and thus are often most effective when used in concert.
Expected Return: Outcomes-based measurement tools comparing the financial cost of a project with its measured or expected outcomes, discounted to the present value. More commonly used expected return metrics include Social Return on Investment (SROI) and Impact Money Multiple (IMM).
Theory of change: Theory of change and logic model explain the process of intended social impact. Specifically, a logic model is a commonly used tool for mapping a theory of change of an organization, intervention, or program by outlining the linkage from input, to activities, to output, to outcomes and ultimately to impact.
Mission alignment: Mission alignment methods measure the execution of strategy against mission and end goals over time. Examples include social value criteria and scorecards used to monitor and manage key performance metrics.
Experimental methods: Experimental methods are after-the-fact evaluations using a randomized control trial or other counterfactual to determine the impact of the intervention compared to the status quo.
The choice of impact measurement tools has significant consequences for GPs. The primary objectives—screening potential targets, and honing investment strategy and operations to ensure that values are aligned with companies and LPs—are impacted to varying degrees by the methods employed. Like financial modelling tools, some impact methodologies have an inherent bias towards projects with more certain results, which can discourage investors from tackling more challenging impact problems. Some standardised metrics implicitly encourage comparisons between projects in different sectors. However, direct comparisons between different sectors is difficult, if not deceptive. For example, can one accurately compare returns on educational methods and carbon productivity? Behind all measurement techniques in the end, is the underlying principle of focus. As John Elkington once said, ”What you measure is what you get, because what you measure is what you are likely to pay attention to.”  As the impact method chosen will have a considerable influence on decision making, GPs will want to spend time getting the assessment strategy right.
Why does effectively measuring impact matter?
There are numerous gains when impact is measured effectively. On an investment level, effective measurement provides discipline to decision-making and focuses investors on creating long-term, sustainable impact. For organisations, it also offers an opportunity to speak a common language. Investees and beneficiaries are more readily able to determine their progress and can participate via more targeted involvement in the impact strategy. Accurate measurement tools enable limited partners to perform more detailed analysis and comparison of potential and current investment opportunities. For the industry as a whole, effective measurement and communication of impact outcomes lead to increases in private sector trust, which will be key to continue scaling the space.
Without credible, comparable impact measurement, some investors worry that impact investing may be marketing teams latching onto a burgeoning trend in investor expectations. The trend is expected to continue gaining momentum as more generational wealth becomes overseen by millennials. There is an emergent fear that the market may move towards a degree of greenwashing, choosing to meet investor demand with slick marketing rather than the standards necessary to build an efficient and effective impact strategy. Greenwashing can occur in a variety of forms, from focusing solely on positive contributions whilst neglecting to share negative ones, to misleading investors on the scope of a company’s impact.
Given the importance of effective impact assessment, separating the wheat from the chaff becomes critical for investors in the impact space. Key questions to explore when analysing a manager may include alignment on thematic strategy, target metrics (across multiple bottom lines) and proposed methodology for driving and assessing impact. Transparency and auditability of these impact metrics have yet to become the industry standard. However, third party audits of impact results from companies like B Lab are also starting to gain traction. In addition, some countries (such as France and the United Kingdom) have mandated certain types of ESG reporting, while others (notably, the United States) remain opposed to mandatory ESG disclosures. A growing number of companies and private equity managers alike have opted to voluntarily share impact metrics, but without a common international language, comparison remains relatively convoluted.
LPs need also be aware that not all impact is created equal. To simplify, LPs have two primary choices when it comes to ethical investing, the first being the exclusion approach and the second being the best-in-class approach. The exclusion approach avoids investments into companies and industries that are not aligned with an investor’s values. The best-in-class approach seeks to identify companies that excel in implementing ESG standards and can focus on industries that target sustainable or positive impact such as healthcare and education. As investors begin to focus more broadly on matters of impact across their portfolios at large, it will become increasingly challenging to assess an impact private equity strategy on a standalone basis. Some leading GPs, for example, have begun benchmarking their funds versus their buyout peers, arguing that investors can do equally well financially, by doing good.
The reality is that impact is intertwined in all types of investing, and that any investment choice carries with it some form of societal impact, good or bad. The degree to which impact measurements can be relied upon on a standalone and comparative basis will depend on a number of factors, from robustness to transparency to auditability. As for how the industry as a whole will adapt to increasing investor demand for reliable impact standards, it appears that only time will tell.
Glossary of selected impact measurement tools
B Impact Score: Assessment designed by non-profit B Lab which measures a company’s positive impact on its workers, community, customers and environment. Companies scoring 80+ (out of 200) qualify to become a B Corporation.
Blended Value: Concept that value is a combination of economic, environmental and social factors. Five “silos” in which blended value is purported to be most apparent are: Corporate Social Responsibility (CSR) programmes, Social Enterprise, Impact Investing, Strategic Philanthropy and Sustainable Development.
Carbon Productivity: The value generated per carbon unit used, for example in the form of raw materials such as coal.
Double Bottom Line (abbreviated as DBL and 2BL): An evolution to the Triple Bottom Line theory, BBL is a social entrepreneurship framework for measuring performance combining financial and social returns.
Environmental Profit & Loss (abbreviated as EP&L): Form of natural capital accounting pioneered by TruCost, Puma and Kering which quantifies environmental impact of an activity.
Environmental, Social and Governance (abbreviated as ESG): Criteria used by socially-minded investors to screen investment opportunities.
Full-Cost Accounting (also known as true-cost accounting, total value, and total impact): Accounting method which recognises economic, environmental, health and social costs and benefits.
GRI Standards: Global standards for impact reporting on issues such as climate change, human rights and corruption set by the Global Reporting Initiative.
Impact Multiple of Money (abbreviated as IMM): Methodology using social science research to estimate a company’s potential for impact before making an investment.
Integrated Reporting (abbreviated as <IR>): Communication tool used by some businesses to share a holistic view on how their strategy, performance and assets will create value over the short, medium and long term in the context of its external environment.
Impact Scorecard: Non-standardised measurement tool for impact results.
IRIS+: Impact measurement and management system built and distributed by the Global Impact Investing Network (GIIN).
Logic Model: Graphic representing a hypothesis of how an intervention produces its outcomes.
Net Positive: Sustainability concept aiming for a company to put more back into the environment than it takes out.
United Nations Global Compact: Voluntary initiative based on CEO commitments to implement universal sustainable and socially responsible principles, and report on their implementation. The ten principles focus on impact areas of human rights, labour, the environment and anti-corruption.
Quadruple Bottom Line (abbreviated as QBL): An evolution to the Triple Bottom Line theory, framing performance on four dimensions: profit, people, planet and purpose, where purpose is held to mean spiritual progress.
Social Return on Investment (abbreviated as SROI): Outcomes-based measurement tool comparing the financial cost of a project with its measured or expected outcomes, calculated as a ratio of the net present value of benefits to the net present value of the investment.
Triple Bottom Line (abbreviated as 3Ps,TBL and 3BL): Sustainability framework for measuring corporate performance in three dimensions: profit, people and planet.
Shared Value (also known as Creating Shared Value, or CSV): The combination of social value and economic value. Creating Shared Value is a business model designed at Harvard Business School to solve social issues profitably.
Theory of Change (abbreviated as TOC): Methodology for planning and evaluating social outcomes.
Total Societal Impact (abbreviated as TSI): Collection of measurements developed by Boston Consulting Group to assess the holistic impact of a company’s products and services, operations and corporate social responsibility initiatives.
22) The Economist
23) Measuring Impact
25) About B Lab