Measurement 2.0: a new approach to understanding impact performance

To date, discussion of these questions has largely focused on finding better ways to measure impact. But in our work with Skopos, we came to realise something significant: impact measurement is most meaningful if you know what you want to achieve, and have a pretty good idea of what success looks like.

Traditional asset management provides a useful paradigm here. We can only judge the success of an investment portfolio relative to the investor's goals. What kind of return do they seek? How much risk can they tolerate? What level of liquidity do they require? Simple performance figures only tell half the story: a 5% return (for example) may be good or bad, depending on the investor's priorities.

We decided the same principle should apply to an impact portfolio, too. So we worked with Skopos to develop an impact management model – which we define as the management of assets in order to meet explicit impact goals (alongside financial goals).

Impact management starts by establishing an investor’s impact goals: aligning the type of impact they want to achieve with the goals of end-users (i.e. the people who experience impact).

who experiences change; what change do they experience; would the change occur anyway; and what else might change as a result?

Ultimately, we broke this down into four questions: who experiences change; what change do they experience; would the change occur anyway; and what else might change as a result? This way, investors start by describing societal challenges and the outcomes they want to see, while sectors and business models – the way that investors are used to framing their theses – become strategies to achieve those outcomes.

With the arrival of the SDGs – and increasing demand to understand how the private sector can play a major role – widespread framing of our impact goals in this way could help show where investment can address urgent societal issues. 

We then considered the level of impact performance Skopos is seeking (which we called the ‘impact return’) and the risk of failure it was willing to bear (the ‘impact risk’).

As with traditional investment, different investors will occupy different places on the impact risk/ return spectrum: some will be willing to accept a greater degree of impact risk if there’s a potential for a disproportionate impact return, while others may not. This explicit incorporation of impact risk into the goal-setting conversation felt surprisingly new (whereas in traditional finance it’s entirely commonplace).

Having established its impact goals, Skopos can then identify indicators that show when these goals are being achieved, and invest in strategies (i.e. sectors and business models) most likely to achieve them – with a clear framework to measure how well those strategies are performing.

We need impact goals to mobilise capital towards solutions to societal issues

Crucially, once an investor has established this impact management process, it becomes an iterative one – in which every stage can informs the other stages. For example: measurement might lead investors to adjust their strategies or even to adjust their goals.

We need impact goals to mobilise capital towards solutions to societal issues (rather than just hoping that some of it trickles through); but we also must be flexible about our goals, depending on what we learn from end users and other stakeholders. 

Of course, this is just one framework, tailored to one investor. But we believe that that this kind of impact management approach has exciting potential to resolve some of the big challenges currently facing impact investors.

First, it helps impact investors make better-informed investment decisions – because it gives them a better understanding of what success looks like, what the probability is of achieving this result, how an investment fits with the rest of their portfolio, and how that portfolio delivers against their overall impact goals.

Second, by framing impact goals very specifically in terms of the end-user experience, it means impact measurement must also focus on the end-user experience. Since any business focused on customer value should be doing this anyway, it makes it much more likely that impact measurement becomes part of core business practice, rather than being a costly add-on.

And finally, we believe it can help us get to a shared language and framework for impact investment. In traditional investment management, we have a common convention that helps us describe and manage against our financial goals, which makes it much easier to align expectations throughout the value chain (imagine how hard it would be to uphold fiduciary duty if we didn’t).

But within impact investing, different investors often talk about their impact goals in very different ways – which means that collaboration and aligning the expectations of asset-owners, intermediaries, entrepreneurs and end-users becomes incredibly difficult. Our hope is that by sharing Skopos’ experience, we can start a conversation about how to change that.

‘More than Measurement: A Practitioner’s Guide to Impact Management’ – a new report by Skopos and Bridges Impact+ – is out now and available for download here.

Photo credit: Abbey Studer