JTC has recently launched a range of practical ESG solutions to support family offices and family businesses in aspects such as training, policy writing, carbon reduction and efficient philanthropic structuring. But how can clients measure the effectiveness of their social impact?
We asked Howard W. Buffett, expert in impact measurement and management, how clients can assess their impact, how he developed a measurement formula and why it is important.
Why did you develop a formula to measure social impact?
I’ll start by providing some context. The practice of impact measurement has evolved considerably over the past few decades. Early efforts started with negative environmental impact assessments, followed by the social return on investment (SROI) framework (for calculating benefit-to-cost ratios) and corporate sustainability reporting. It wasn’t until 2006 that the field began using the term impact investing, and we began seeing increased coordination among a variety of impact-focused actors.
Today we have numerous standardized metrics and disclosures, but we remain far from commonly adopted measurement and reporting methods akin to GAAP for finance. As you would expect, many current frameworks have both strengths and drawbacks. Sets of metrics and rating systems are critically important, but they must be met with actionable analysis that meaningfully informs decision making. Impact investors or philanthropists, for example, are generally faced with a variety of challenges: they will have multiple, viable investment or project options, and it is difficult to compare those options—particularly for impacts of differing types. Further, because many of today’s standards are not yet universally adopted, and because impact has a different meaning to everybody, the market does not have a consistent or inclusive way to judge an activity’s societal value. Differing standards also mean there are myriad reporting options and formats, many focused on inputs and outputs, or narrative disclosures. I’m of course overgeneralizing, and a tremendous amount of work has been done by countless people before me. However, the practice of impact measurement still has a long way to go.
Many of these challenges became increasingly apparent to me over the past few decades. While conducting field visits in some 50 or 60 countries during that time, I observed project managers and social entrepreneurs struggling with what and how to measure their impact. They were often impeded by complex frameworks, implementation costs, limited staff, or varying and changing demands for data reporting from investors or donors. Similar challenges faced me and my colleagues in government as we contemplated how to design policies that would deliver highly impactful outcomes for communities in need.
As a result of these experiences, I focused my research at Columbia University on lessons and case studies that I hope will help others. Overall, I have learned that the practice of impact measurement could benefit from fundamental changes to how we think about impact analysis. In large part, that is why I developed the Impact Rate of Return® methodology, and I am optimistic about what the next several years will bring.
How was it developed?
The iRR® methodology has been evolving considerably over the past ten to fifteen years. I began working in this space while at the Bill & Melinda Gates Foundation in 2007-2008 on a special projects team focused on impact projections. From this experience, I developed some foundational design principles critical for creating effective impact measurement systems—principles that continue to inform my work today. I continued expanding my thinking on the subject for a few years, putting things into practice in a variety of environments. While working at the White House on the President’s cross-sector partnership strategy, I learned how important it was for organizations to find commonality in how they defined their objectives and measured progress. Regardless of what type or sector collaborating organizations came from, they benefitted from a consistent yet flexible approach to performance management.
Following this, I was responsible for designing and deploying economic development and stabilization programs in Afghanistan while working for the U.S. Defense Department. This provided me an opportunity to create measurement and evaluation tools that were truly inclusive of the preferences and priorities of the communities where I was working. More recently, through corporate board work, I have been engaging companies on their sustainability and ESG strategies, connecting management decisions with the efficient delivery of social and environmental impact objectives.
In all of these cases, there was a clear need to think about program evaluation beyond just metrics and measures. The organizations and communities I worked with wanted ways of understanding how their design and allocation decisions would affect the potential impact effectiveness of a given program or investment. Therefore, it seemed practical to me to devise a way to calculate an impact rate of return, in a similarly rigorous and applicable way as one would calculate a financial rate of return.
What does impact investing mean to you?
I appreciate you asking. I’ll start by saying it’s less about what it means to me as an individual and more about what benefit impact investing can create for society. There are, of course, many formal definitions in the marketplace. Perhaps the most widely accepted definition comes from the Global Impact Investing Network (GIIN), which defines impact investments as those “made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” The GIIN goes on to argue that the practice of impact investing must include the following four elements: impact investors must intend to create positive social or environmental impact, along with financial returns, using a range of financial products with various return profiles, while measuring and reporting on the impact performance of their allocations.
While this helps define the practice of impact investing, it does not answer a more central question: what does it mean to have an impact? Here is where things become more challenging, because impact can mean anything to anybody. Simply put, impact is change. I generally expand on this by describing impact as “any positive or negative social, environmental, economic, or governance-related change that is caused by one’s actions.” Although that description remains broad, it connects causality with the type of change that is occurring. Keep in mind that the significance of change and its magnitude and importance are inherently relative concepts. Therefore, describing change will be dependent upon both the baseline against which it is measured and the perspective of the individuals or organizations experiencing that change. As a result, a comprehensive and effective impact measurement system must consider context, along with unique perspectives and priorities.
What type of clients do you currently work with?
My firm has the privilege of working with all sorts of organizations, ranging from small non-profits to large foundations to federal government agencies. Of the hundred or so groups currently using the Impact Rate of Return® methodology in some form or another, a majority of them are community developers, economic developers, and impact investors.
While our clients differ considerably in their missions and priorities, there are commonalities in what they seek from an impact measurement system. First, clients generally want a system that is consistent in its approach, but customizable to reflect their needs and that of their stakeholders. Second, they want a system that is capable of rigorous analytics, so that their results will meet with investor expectations and, in some cases, comply with regulatory reporting requirements. For example, Opportunity Zone investors may soon see additional tracking and disclosure expectations regarding their community-based investments. Many ESG investors in the EU are now subject to the Sustainable Finance Disclosure Regulation (SFDR), and the SEC is signaling that US investors may soon have to follow suit.
A third and related commonality is that clients are looking for a measurement system that builds upon the great work of other frameworks in the ecosystem—one that is compatible with industry leading reporting standards. For example, Impact Rate of Return® can integrate metrics from IRIS, GRI, and SASB, among others, expands on the dimensions of impact recommended by the IMP, and can build on the many ESG rating services currently in the marketplace. Finally, our clients want a system that is comprehensive it its evaluation by bringing together each of the elements most critical for impact analysis. Anything short of this fails to provide them a thorough picture of their impact effectiveness.
How can you help clients?
In general, the Impact Rate of Return® system helps clients do three important things: first, define the impact they seek to create and measure. Next, describe how they will measure and score their impact. And finally, provide the analysis they need to make more informed decisions.
How this process creates value for clients varies based on the type of organization and how that organization delivers its programs or carries out its activities. Investment funds, for example, can use the system to streamline their impact data analytics to ultimately improve investment performance and inform their downside risk protection. Foundations can gain deeper insights into their grant making programs by better understanding the impact delivered by their grantees. NGOs, on the other hand, can use Impact Rate of Return® to help clarify and simplify their communications, thereby elevating visibility and awareness of their mission, programs, and impact on society. And finally, municipalities and other government agencies can strengthen their policy and program reporting by increasing their impact accountability and transparency to their citizens.
What are your plans for the future?
Ultimately, our goal is that the Impact Rate of Return® system can be used by anybody to help deliver greater impact for society. Whether someone is a student graduating and launching a social enterprise, or the head of small NGO, or an investment professional at a pension fund, we want our system to be accessible and easy to use. Importantly, we want users of our approach to be able to engage in rigorous evaluation and to provide the kind of impact reporting that investors, grant makers, and even shareholders, are coming to expect—all without the process ever becoming too onerous. Our methodology can also help increase community engagement and participation in the practice of defining, measuring, and analyzing impact, which is both fundamentally important, but also increases the likelihood of project success.
Howard W. Buffett is a professor at Columbia University, and an expert in sustainability and impact measurement and management. He is the creator of Impact Rate of Return®—an innovative methodology to measure and analyze social and environmental impact.
The material in this interview is copyright Howard W. Buffett. Impact Rate of Return® and iRR® are federally registered trademarks of Global Impact LLC and all rights are reserved. The iRR® System is patent pending. This material is used with the express permission of Global Impact LLC/Howard W. Buffett.