Social investment grows up, as UK groups lead with ways to measure impact

Social investment, where a positive social or environmental impact is as important as a financial return, has generated great hopes among many investors, but it is going to have to demonstrate measurable returns, comparable to financial yardsticks, if it is to retain investor confidence, according to analysis from New Philanthropy Capital (NPC).

Tris Lumley, head of NPC’s development and fundraising, said the sector faces a “huge challenge” if it is to fulfil its promise to make social impact as important as financial returns, which are well understood, easy to communicate, and standardised.

“Social returns are none of these things. The measurement of social impact remains fragmented, poorly understood, rarely implemented robustly-and standardisation is an elusive goal,” said. “There’s a danger…that social impact becomes a tokenistic part of the equation. We must seek to avoid this at all costs…”

To counter this, London-based NPC has forged a partnership on impact and social investment, called Evidencing Social Value, along with Big Society Capital and Deutsche Bank, to create models to measure the effectiveness of delivery.

“There will be those who violently object to the simplification required to capture the social sector in 65 outcomes,” noted Lumley. “But if we are to make progress on measuring, managing, and investing in social impact, some simplification is essential to ensure we’re speaking the same language.”

But this is just one of several initiatives to tackle the same challenge.

The Social Investment Business Group (SIB), which has invested £160m of loans over 10 years, says financial metrics have until now centred mainly on the amount of money put to work and the level of bad debt but there is now more interest in integrating social impact assessment into every stage of the due diligence process, including ways to map, monitor and reward impact.

“The emphasis is on an outcomes/beneficiary focus and the evidencing of outcomes (both qualitative and quantitative), tracking the progress of an organisation or programme against the social mission and including the perspective of the beneficiary when it comes to judging performance,” said Jonathan Jenkins, chief executive of the SIB.

SIB has worked with Investing for Good to build a model which classifies investees according to their commitment to social impact measurement and their use of systems to measure impact.

A survey of 350+ of current investees indicated that when analysed by their risk rating (using a proprietary scale) there was no relation between the organisation’s commitment/ability to measure impact and the financial risk of the investment. Conversely, not all investments with the lowest financial risks would automatically provide the most effective impact.

SIB’s research also found that the investee’s area of outcome focus (health, education etc) is more important than the size of the organisation when it comes to the commitment and ability to measure impact.

Over 80% (83%) of micro-organisations were found to be less committed and less likely to measure impact, but the larger the organisation, the greater its commitment and ability to measure its impact. However, when the data set was analysed by outcome area, some had a stronger commitment and ability to measure than others.

Jenkins said the early research is promising for investors in the emerging social investment market. “It shows a growing commitment from key social finance intermediaries to invest in building robust impact evidencing systems, an important part of the evolution of an asset class that could be worth over £1bn in 2016.”

“This is early days and the Group will have more detailed analysis of its portfolio, recommendations on the pipeline for investors and new product to announce in the very near future.”

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