Sponsored by GIIRS
This story originally appeared in our March 24, 2011 e-magazine. Click here to subscribe.
The official launch of GIIRS won’t come until July 2011, but Beyond Profit got an inside look at the beta tour.
A November 2010 report from J.P. Morgan and the Rockefeller Foundation declared impact investments an emerging asset class. With new potential comes new challenges.
Impact investing puts a spin on the traditional idea of investing where decisions are made based on financial as well as social and environmental considerations. As a result, measuring returns goes beyond the traditional financial metrics to include tracking social and environmental performance.
Measuring impact can be a tricky proposition though. The issue is that no unified system to measure impact exists, which leads investors and others to rely on anecdotal evidence. The Monitor Institute report “Investing for Social and Environmental Impact” recommended a rating system to standardize metrics.
“[A] basic rating system would help organize the market by making it possible to compare outcomes of investments. It would help protect the credibility and reputation of the field from conventional investments being promoted as impact investments,” the report said.
In its 2011 Progress Report, the Global Impact Investing Rating System (GIIRS) makes the apt statement, “After all, we can’t call ourselves impact investors unless we measure impact. And we can’t build an asset class without credible, comparable metrics.”
This is where GIIRS comes in.
The GIIRS System
GIIRS has developed a rating system that can be used worldwide—both in developed and emerging markets—to rate the social and environmental performance of private companies and funds.
GIIRS is based on B Lab’s B Impact Rating System that has been used by more than 3,000 businesses to assess their social and environmental performance. The next release of the rating system will feature a version that is appropriate for companies in the emerging markets, a fund-level assessment, and integration with the Impact Reporting and Investment Standards (IRIS).
The GIIRS system includes a self-assessment of 80-170 questions. While GIIRS collects data directly from companies and funds, GIIRS has partnered with Deloitte & Touche to develop a third-party verification and validation methodology.
In addition to creating separate assessments for the developed and emerging markets, the assessment is tailored depending on sector, the product or service delivered and the company size. For the developed markets, the sectors include manufacturing, wholesale and service or retail. The emerging market has those three plus agriculture. There are also industry addenda for companies in the building and financial services industries.
The Beta Tour
In order to test the validity and quality of the assessment, the GIIRS team set off earlier this year on a world tour to test the assessment with 200 companies. Last spring, 25 Pioneer Funds were chosen. The Pioneer Funds, which include Root Capital, E + Co, SEAF, Grassroots Business Fund and Acumen Fund, are leading venture capital and private equity funds making impact investments. The portfolio companies of these 25 funds are the first companies to go through the assessment. GIIRS started testing the assessment with the 65 companies that are based in the U.S. and Canada. Here, the assessment took its intended form as a self-assessment. But testing the assessment in the emerging market was better done in person.
“For the emerging market assessment, because we are launching a new version of the ratings assessment, we wanted as much as possible to engage with companies face to face and get feedback that way,” said Flory Wilson, the Director of International Standards at GIIRS.
It was out of this desire that the GIIRS beta tour was born. Over the course of a few weeks, GIIRS staff met with about 80 entrepreneurs and conducted phone assessments with another 55. The tour took GIIRS staff to Kenya, Tanzania, Uganda, India, Mexico, Georgia, Nicaragua, Costa Rica and Vietnam.
While meeting with companies, Wilson said, the staff took feedback on how to improve the assessment as well as other information about the companies that will help when finalizing the assessment.
“Whether in India, Kenya, or Mexico we found that companies were pushing boundaries in terms of creating products and practices that serve the underserved, develop supply chains that are inclusive of small producers and smallholder farmers, and improve the condition of the environment,” said Wilson.
The tour also helped some companies see themselves more clearly, especially those companies who are in the earlier stages of social impact development, Wilson said.
“It has given them ideas to do to both formalize activities that they been doing as well as given them ideas for things they can do that they haven’t previously been doing,” she said.
The team sought feedback related to the assessment itself as well as the process of taking the assessment.
One of the challenges faced by entrepreneurs while completing the assessment had to do with language. In the developed market, asking a question about green building standards doesn’t raise an eyebrow. This is a term companies and funds understand, Wilson said. In emerging markets, however, this terminology does not resonate as well. In the final assessment, Wilson said, the language will be altered slightly and concrete examples given. For example, the question might look something like this: “Have you implemented anything in your facilities to help make the building itself environmentally friendly?”
“That kind of thing we hadn’t anticipated. You only learn that from putting a really broad range of companies through the assessment,” said Wilson.
The Company Perspective
The GIIRS system aims to provide unified metrics for the impact investing sector, but it also gives companies a way to accurately measure and communicate the impact their work is having.
One such enterprise in Kenya is Juhudi Kilimo, a company providing asset financing and technical assistance to rural farmers with small and medium agriculture businesses in Kenya. Juhudi is excited about the prospect of one system to measure impact.
“Each investor has used a different tool to measure social impact during their due diligence process and afterwards,” said Rachel Brooks, a KIVA fellow at Juhudi Kilimo. “What GIIRS can offer us as a social enterprise is a comprehensive and uniform way to view and compare the results of our work, alongside our financials.”
There has been criticism of impact investors that they require their potential investees to submit more information and adhere to stricter standards. Brooks does not think the GIIRS assessment adds to this but rather serves a common goal.
“Regardless of our investors’ requirements, we’re actively trying to refine and truly gauge our impact, and that’s a real challenge,” she said. “Our mission is two-fold, and our closest partners share those goals. We need new tools that are targeted for organizations like ours, from GIIRS to mobile surveys like mSwali.org, to help us meet that challenge.”
Juhudi’s CEO Nat Robinson is a bit worried about the lack of service-related questions.
“The microfinance-specific questions are good but I wonder about all of the other types of service organizations out there that may not be able to answer most of the questions,” he said.
While the official GIIRS rating system won’t be released until July this year, the team will be working to incorporate the feedback they received, finalize the assessment and continue its outreach efforts.
In addition to the private beta that concludes at the end of March, there will also be a series of betas with additional GIIRS stakeholders to strengthen the assessment, including a verification beta in April, a fund manager beta in May and a public beta in May. The pioneer funds’ companies that participated in the private beta will be the first companies to receive an official GIIRS rating.
While still in early phases of development, the GIIRS system already has the support of a number of industry players including the Pioneer GIIRS Funds, partners such as IRIS, Investors’ Circle, SVX and Mission Markets, and investors such as Prudential Financial, the Rockefeller Foundation and USAID. If the larger ecosystem embraces the system, GIIRS has the potential to unify the impact investing sector and become the go-to for measuring impact and making investment decisions.
Photo credit: GIIRS