In the January-March Issue of Beyond Profit, Sarah Gelfand, Director of IRIS at the Global Impact Investing Network (GIIN), explains why the social investing sphere needs standardized reporting metrics and performance benchmarks in order to truly understand the social and environmental impact of investments.
In the fall issue of Beyond Profit, Adrienne Villani wrote about an increase in charities using quantitative social and environmental metrics to describe their work. Transparency is good practice for all organizations, and it’s especially necessary for those that rely on grants and donation funding. But a new class of social entrepreneurs is discovering additional reasons for reporting social performance as they increasingly pursue blended financing models, combining grants with traditional business loans or equity.
The economic downturn caused many investors to question the full impact of their investments, leading more investors to consider social and environmental components of investing in addition to financial expectations. These “impact” investors are diverse, and have a wide range of financial expectations—from a simple return of capital to sub-market and even market-rate returns.
Last fall, we launched the Global Impact Investing Network (GIIN) to help impact investors propel their work, and to attract more investors and more money to the field. Previous research from the Monitor Institute1 concluded that scaling the activities of impact investors and realizing the potential of this underleveraged sector requires industry building and cohesion. Specifically, the industry needs enabling infrastructure, similar to that which supports mainstream investing—such as standardized reporting metrics, performance benchmarking, ratings agencies, and auditors—around the social and environmental impact of investments.
Christina Leijonhufvud, head of JPMorgan’s Social Sector Finance Unit, expressed this sentiment in an interview last fall, “I believe we really need to nurture this market for double bottom line investing. That means very proactively recognizing social and financial returns inherent in investments. That is not an easy thing to do and we are not going to get there overnight. There is a lot of work that needs to go into the identification and measurement of social impact. I think if we can as an industry become more diligent about offering double bottom line products and backing that up with some degree of measurement, then I think there is a demand out there at the retail level for those products. If there is demand out there at the retail level, then the institutional level should follow.”2
Transparent reporting on financial and non-financial metrics by social and environmental enterprises is a step in the right direction. The next step is to standardize the reporting across the impact investing field so that investors can make fair comparisons between investment opportunities.
To this end, the GIIN is developing a common vocabulary and reporting framework called the Impact Reporting and Investment Standards (IRIS). To understand how critical this is to enabling benchmarking and comparisons, consider this example. Many impact enterprises currently report on the number of jobs created. But, some may be reporting only the number of full-time jobs while others also include part-time or seasonal jobs, each under the same label of “jobs created”.
Until reporting is standardized with universal definitions, no reliable statements can be made about, say, the average number of jobs created by African healthcare startups, nor can fair comparisons be made between the social value of these organizations and, for example, similar new businesses in South America. The absence of definitional consistency renders social and environmental performance metrics confusing to investors at best, and at worst, meaningless.
The current version of IRIS, which is posted and open for comments at iris-standards.org, includes definitions for more than 250 metrics. Many of these apply broadly to enterprises across the impact spectrum. Others apply to specific sectors, such as agriculture, education, energy, healthcare, and microfinance. The IRIS metrics incorporate established definitions wherever possible. For example, the microfinance metrics in the IRIS taxonomy are consistent with those developed by the Social Performance Task Force, a group of over 350 leaders from across the microfinance industry. IRIS will also be updated regularly based on stakeholder feedback, user experience, and evolving ideas among the impact investing community. Entrepreneurs choosing to adopt IRIS are not expected to report data for every IRIS performance indicator. Instead, they can look to IRIS as a source of standard definitions for the data they are collecting. Furthermore, aligning some data with IRIS does not prevent an organization from tracking and reporting additional metrics outside of IRIS; it only requires that they are named differently from the standard metrics.
IRIS was piloted by five organizations last summer. Collectively, the five organizations were IRIS aligned on 97 metrics that they were already tracking. Additionally, they were collecting data for 10 metrics that had similar definitions to an IRIS metric. Some organizations indicated that they may begin tracking new IRIS metrics or adjust data collection processes so that more of their metrics are IRIS compatible in the future. The pilot process exemplifies the way that IRIS draws on practitioner experience to strengthen the standards and ease the burden of converting data collection processes to align with IRIS.
By providing clear, consistent social and environmental data, IRIS opens doors in the social enterprise sector. It helps entrepreneurs attract funding by enabling impact investors to match their priorities and interests with businesses’ needs. IRIS also empowers organizations to understand their performance relative to their peers. Furthermore, IRIS saves new businesses the cost and effort of developing their own metrics, and it simplifies the often inconsistent reporting requirements from different investors.
Of course, there are many challenges inherent in a standardized reporting framework for a sector as varied and complex as impact investing. Some social entrepreneurs are reluctant to change the way that they have been reporting their performance. Others will feel that the standard IRIS metrics don’t fully capture their unique contributions and value. Performance metrics do have limitations, and they don’t replace the value of qualitative due diligence, but these challenges don’t displace the demand for better and consistent measurement.
Though IRIS is still in an early implementation stage, it’s not difficult to imagine how standardized metrics can lead to a healthy impact investing industry in which investment capital flows efficiently from investor to socially- or environmentally-motivated businesses. Consider the trajectory of The MIX (Microfinance Information Exchange, Inc.), a web-based information exchange using standardized reporting metrics for the microfinance sector. In 2005, 425 microfinance institutions reported performance data. In 2009, 1,500 organizations were contributing data. The number of monthly visits to The Mix was more than 40,000 in 2009, up from 10,500 in 2005. Most impressive of all, Microfinance institutions reporting data to the MIX were able to increase their borrowing by 45% annually between 2005 and 2008, and loan recipients in developing countries accessed 36% more capital per year during the same time.
It’s also easy to see how IRIS provides the necessary foundation for additional infrastructure. A Global Impact Investing Rating System (GIIRS) is being developed by B Lab, a nonprofit organization that has certified 220 socially and environmentally responsible U.S. companies as “B Corps.” GIIRS will provide impact enterprises and funds with ratings, similar to Morningstar investment ratings or S&P credit risk ratings. IRIS social and environmental performance data will be used to generate these ratings. Similarly, auditors and other industry professionals will be able to offer a variety of products and services related to these data.
IRIS is driven by the vision of a thriving impact investing industry that efficiently deploys private capital towards developing solutions to the world’s social and environmental problems. The vast majority of private money is tied up in investments with the single goal of profit maximization. Growing investor interest in double or triple bottom line is only part of the equation. Translating their enthusiasm into investments requires standardized reporting that empowers investors to make informed decisions.
Sarah Gelfand is director of the Impact Reporting and Investment Standards (IRIS) at the Global Impact Investing Network. Sarah previously worked in product development, business development, and strategic planning with several technology companies. Sarah also conducted public health research in malaria, HIV/AIDS, and cancer, among other areas. Sarah holds a BA in Applied Mathematics from Brown University and an MSc in Statistics from the University of Washington.
1 Investing for Social and Environomental Impact: A Design for Catalyzing and Emerging Industry. The Monitor Institute. January 2009.
2 Interview with Christina Leijonhufvud, Managing Director, Social Sector Finance Group (SSF)/Investment Bank (IB) at JP Morgan. Microcapital Monitor. Oct, 23, 2009.
