Measuring – and managing – impact investments
By Elizabeth Littlefield
OPIC President and CEO
A version of this blog appeared recently in Institutional Investor
You can’t manage what you don’t measure. It’s such a fundamental rule of business that it hardly bears repeating in the day-to-day work of running a small firm, a major corporation or an investment fund.
But there are times when a business moves into lesser known territory where all the usual measurement tools come up short. I see this happening more and more as businesses embrace things like sustainability and corporate social responsibility — or even happiness and quality of life. Terms liketriple bottom line or third metric attempt to quantify some of the important benefits of their work but do not fit neatly onto a balance sheet.
Here’s another one of those terms: Impact Investing. Now, Impact Investing is a term very dear to me and very core to OPIC’s work supporting development around the world. But it’s also a term that without the backing of some solid measurement tools runs the risk of being misunderstood as one of those non-serious, touchy-feely activities that businesses engage in solely to improve public perception.
In a nutshell, impact investing channels capital into solutions for common challenges such as access to education, financial inclusion, housing, healthcare and climate change while at the same time generating sufficient returns to constitute viable investments.
An even shorter definition is that, pardon the cliché, impact investments seek to do well by doing good.
But how do you quantify that?
At OPIC, we found there was no simple way to determine which of our investments were, in fact, impact investments. So we took the following approach:
- Does it aim to have a positive development impact? Because OPIC’s mission is to support development, we carefully consider every project’s potential development impact at the outset and all the projects we support meet this standard. All of the $3.9 billion we committed last year went toward projects expected to have a positive development impact.
- Is it in a high-impact sectors? From there, we looked at how we might define a smaller subset of our portfolio, so we counted only those projects that were committed in “impact sectors” such as access to finance, housing for the poor and renewable energy, that face the most difficult challenges raising capital. Last year, the majority of OPIC’s investment commitments – a total of $2.7 billion — were in those sectors.
- Was the investment made with “impact intent?” Finally, we sought to isolate a much smaller group of investments that were distinguished by the fact that they had “impact intent,” meaning that the implicit aim of the project was to address a social or environmental challenge while also generating financial returns. In 2013, $222 million of OPIC’s commitments fell into this most narrow definition.
This final definition separates all those projects that might happen to have a positive social impact from those that were designed from the outset to “do good” as a core part of their value proposition and business model. It’s a very tough standard to meet and one that I think all impact investors should be able to agree on.
Some of OPIC’s most successful investments to date fall into this narrow “impact intent destination.” We supported multiple funds managed by Global Partnerships, a Seattle fund manager that invests in poor communities in Latin America, and the first of these funds has already been repaid in full.
My hope is that if we can track the performance over time of that small group of projects that are indisputable impact investments, we can help show that impact investing works – not only by generating positive social benefits, but also by generating financial returns.