As impact investment grows in size and importance, how do we know it’s working?

By Nina Fenton and Claudio Cali

Impact investment is big and getting bigger. But what does impact mean?

For some people, impact means screening out harmful companies. For others, it means making real changes in the lives of people and communities. As the impact industry grows in size, scope and importance, it becomes more important to carry out impact measurement for the underlying investments.

We visited Nairobi and Addis Ababa recently to work with four prospective fellows of the European Investment Bank’s partnership training program with the Global Development Network, also known as GDN. These up-and-coming researchers are working with innovative businesses supported under the EIB’s Impact Financing Envelope for Africa, the Caribbean and Pacific to take a closer look at the companies’ results and impacts. While these researchers are tackling the “how” of impact measurement, we wanted to take a step back and think about the “why.” What can impact measurement do for us?

Four reasons to measure impact

1. Impact measurement strengthens value. Social enterprises and impact investors typically put consumers at the core of their business models as well as their impact theses. Because of this, who the customers are and how they benefit happens to be the very information that companies need for commercial success. Customers buy products and services because they expect these purchases to have a positive impact on their lives. They keep buying if that impact is sustained.

All the entrepreneurs and businesspeople we met are passionate about their social and environmental impacts, as well as about the commercial side of their ventures. As innovators, they also know that we need to constantly test and improve our impact theses, just as we would for our business models. Like any business thesis, impact theses can be difficult to put into practice, with failures and mission drift along the way. Measuring what the impacts really are can help keep things under control and help steer business models toward an “impactful” value proposition. A recent blog story on the impact programme of the UK Department for International Development helps explain how insights into impact can add to the commercial value of a company.

© poa!

Andy Halsall, chief executive of poa!

As one example, the internet service provider poa! is an innovative enterprise providing affordable internet access to low-income and rural communities in Kenya, starting out in the informal neighbourhood of Kibera, Nairobi. Poa! received funding from the Novastar Ventures East Africa Fund, which the EIB has supported under its Impact Financing Envelope. For poa!, creating community goodwill is not just about corporate social responsibility, but it also makes business sense: the company’s good reputation in the community encourages residents to purchase their services and makes them willing to host Wi-Fi infrastructure.

One of the EIB-supported researchers will be working with poa! to better understand how internet access is impacting low-income communities. The findings should help poa! figure out how to bring the maximum benefit to communities as it starts to roll out services to other low-income areas of Kenya. Andy Halsall, the chief executive of  poa!, put it simply: “This is about getting better at what we do.”

© poa!

A worker with the internet service provider poa! explaining the company’s services in the Kibera neighborhood of Nairobi.

2. Experiment or Die. For “impact purists,” demonstrating a change in the lives of impact investment beneficiaries is not enough to prove that you have had an impact. The purists want to understand what part of that change was caused by that particular investment, rather than by any other changes going on in the world. Far from being a niche academic concern, the conundrum of causality can often carry major commercial weight. For example, before a company rolls out a new product on a large scale, it needs to know how customers will respond. Selling a small batch and talking to customers will allow them to observe a response, but they would only be getting feedback from the “early adopters,” who are usually particularly curious and open-minded people. Such a company might be surprised, when they do the rollout, to find that the consumers who hung back respond very differently.

Because they understand this, large companies often experiment almost constantly, carrying out numerous market research trials with random components to guard against self-selection of consumers, as explored by David McKenzie in an interesting World Bank blog story. Carefully designed experiments can be applicable to the smaller firms involved in impact investment, too: Experimenting is, after all, at the heart of an entrepreneurial mind-set.

Several of the companies working with the EIB-GDN research fellows have expressed interest in using experimental methods to test a commercial idea before rolling it out. The researchers are receiving support on the technical aspects from experts such as Arianna Legovini, who leads the Development Impact Evaluation group at the World Bank. As a helpful side effect, these firms should get a proof of impact that would satisfy even the purists.

© poa!

A school in the Kibera neighbourhood of Nairobi that receives internet access from poa!

3. My impact measures to the moon and back. The self-identified members of the impact investing community – including the authors of this article – are passionate about the impact goals we would like to achieve. Sometimes so much so that we end up defining our impact with words such as “immense” or “ground-breaking,” only because we cannot find a meaningful way to measure it. Sometimes this belief in the immensity of our impact can lead to investors and entrepreneurs getting carried away with indirect and incidental effects over which they have little control. Like my maths teacher used to say – and the US Navy before him — “Keep it simple, stupid.” When done appropriately, the discipline of measuring impacts requires investors and entrepreneurs alike to strike a balance between rigor and feasibility. Focus on what your investment/business can actually change. This will help you define a small set of metrics that you will be able to collect and report on across time. In turn, that will help you connect the dots with your inspirational goals.

4. Strengthen your “Impact roadshow.” The core thesis of impact investing is that financial returns can go alongside social and environmental benefits. However, being an impact investor often involves taking on a higher level of risk, or accepting a lower level of risk-adjusted returns.

Impact investors undergo beauty contests and road shows to raise funds, just as they would for initial public offerings. Here, potential stakeholders are always eager to know what they are achieving “in exchange” for this enhanced level of risk.

Having a clear results framework that backs your impact thesis might prove to be the best tool to show your accountability and transparency towards them, while also stopping you from committing to results you cannot deliver. The further you can delve into those impacts, with surveys and rigorous methodologies, the more credible and transparent you are going to look.

And now, a bad reason to measure impact

‘Mirror, mirror, on the wall, who's the fairest of them all?’

As results measurement specialists, we often hear questions such as, “How do you prioritize impact projects?” or “Can your results framework tell us whether a certain investment is more or less impactful than another?” This is a misguided quest. Even the best impact measurement will only give you limited insight on how to prioritize among investment opportunities in different sectors, which contribute to very different types of impacts, or on how to trade off between depth and scale of impacts.

Someone trying to decide whether a healthcare improvement that will see 100 people treated has more impact than providing 100 households with better access to information faces the classic problem of comparing apples with oranges.

As another example, would you rather support a health clinic providing affordable services to 1000 patients a month or a social enterprise that will provide 100 individuals with a completely transformational livelihood opportunity?

This is why measuring impact should contribute towards the overall assessment of a business opportunity, in combination with techniques such as a cost-benefit analysis where relevant.

Impact measurement should be an opportunity to take stock of investments in relation to your own impact goals, and to maximize the impact of each individual project along the way, including controlling for potential unintended negative impacts you might have overlooked


Nina Fenton and Claudio Cali are economists at the EIB. They are specialists in impact finance.

Disclaimer: These are the views of the authors and not the views of the EIB.