Ah, impact measurement …

Perhaps no single topic in this book has this particular quality of being both essential and anathema at the same time. Hold onto your hats, because that combination of opposites means this is a potentially transcendent topic!

At the outset, many investors may doubt one can ever really know one's impact, let alone account for it to someone else. I often hear those who are not yet engaged in impact investing say something along these lines: “If it were measurable, wouldn't it already be integrated into conventional investment decision-making?” But as ample and growing evidence presented elsewhere (including in this book) demonstrates, seeking out and including information about the environmental, social and governance (ESG)-related qualities of investments results in a more complete view of not only investments’ impact on the world but also of their potential financial performance. In other words, it is increasingly clear that investors’ fiduciary duty includes understanding the material ESG qualities of investments.

Although one may intuitively gauge the social or environmental value of one's own investments, intuition is both impossible to transmit to other decision makers up the capital supply chain without supplementary means of communication, and intuition can be wrong. For example, early equity investors in microfinance believed it to have almost miraculous povertyalleviating benefits– so much so that some I know have felt that asking microfinance operators to stop and measure their social performance would require an unethical diversion of resources away from direct beneficiaries who might otherwise be saved from dire poverty. Yet studies show mixed poverty alleviation results of microfinance across the board, and solid evidence that certain practices in microfinance are what drive more consistently positive impact. These measurement insights combined with volatility in microfinance driven by scandalous negative impact where insufficient attention was paid to social and governance issues are all proof that, despite the surface appearance of obvious and sometimes even miraculous social benefits from impact investments, in order to have positive impact, systematically measuring impact is important.

What is impact, metrics and reporting in impact investing? How do you do it especially given the fact that privately held companies do not have to disclose their environmental and social performance, and currently there are no publicly available databases of information on the environmental and social impact of alternative investments?