"Impact Investing's New Metric: Unpacking Impact Multiple of Money (IMM)"

Introduction:

Impact investing, the practice of combining financial returns with positive social and environmental outcomes, is gaining substantial momentum. Investors, including private equity funds, insurers, pension funds, and foundations, have channeled over $228 billion into socially conscious enterprises globally, with projections indicating that this figure could surpass $2 trillion by 2025. However, the true value of impact investing lies not only in its financial returns but also in its ability to create meaningful change. The challenge, however, is in quantifying and measuring the impact itself—a critical need in a field where qualitative assessments and proprietary metrics have often fallen short, leading to concerns of "impact washing." To address this issue, The Rise Fund and The Bridgespan Group have pioneered a groundbreaking methodology called the Impact Multiple of Money (IMM). This article delves into the concept of IMM, its development, and its potential to revolutionize the world of impact investing.

The Struggle to Measure Impact:

Currently, impact investors often rely on their own proprietary metrics and qualitative assessments to gauge the social and environmental impact of their investments. This fragmented approach creates a lack of standardization in impact measurement, making it challenging to discern true impact from well-marketed intentions. Matt Bannick, a managing partner of Omidyar Network, a prominent impact investor, has expressed concerns about the potential for impact investing to become a marketing ploy rather than a genuine force for social and environmental change. This concern is shared by many in the industry, with over 75 percent of respondents in a Global Impact Investing Network (GIIN) survey citing the "sophistication of impact measurement practice" as a significant challenge.

The Quest for a Common Language:

In contrast, traditional investors have long employed a shared vocabulary of risk, return, and liquidity to articulate and manage their financial objectives. To advance the field of impact investing, a similar set of standardized metrics is required—one that can benchmark and enhance social and environmental impact performance. Recognizing this need, key players within the industry have taken up the challenge.

A Collaborative Approach to Impact Measurement:

Several prominent organizations, including Root Capital , the MacArthur Foundation , the Omidyar Network , GIIN Navigating Impact, the World Economic Forum , and the Rockefeller Foundation, have published articles and reports addressing impact measurement. Additionally, the Impact Management Project, launched in 2016, involves foundations and major investment managers and aims to weave these efforts together into a shared language of impact management. Its goal is to develop practical tools that can help implement best practices in impact measurement.

The Birth of IMM: A Game-Changer for Impact Investing:

For two years, The Rise Fund , a $2 billion impact investment fund managed by TPG Growth , and The Bridgespan Group dedicated their efforts to developing a methodology that brings the same rigor applied to financial performance measurement to the assessment of social and environmental impact. The goal was to estimate, even before making an investment, the financial value of the social or environmental good likely to result from each dollar invested.

IMM Unveiled: Putting Impact Evaluation on Par with Financial Evaluation:

IMM stands at the heart of this methodology. It leverages a vast repository of global research and data on effective social and environmental interventions to project the social or environmental impact of an investment. This methodology is versatile, appealing to philanthropists, corporations, and financial institutions alike.

The Power of IMM in Impact Evaluation:

IMM places pre-deal impact evaluation on an equal footing with financial evaluation. The Rise Fund commits to invest in a company only if the IMM calculation suggests a minimum social return on investment of $2.50 for every $1 invested—an IMM expressed as 2.5X. This groundbreaking metric can be applied to quantify outcomes such as reduced greenhouse gas emissions, improved educational attainment, or enhanced health.

The Six Steps of IMM: A Roadmap to Impact Measurement:

• Assess Relevance and Scale: Evaluate the potential measurable impact of a company and the reach of its product or service.
• Identify Evidence-Based Outcomes: Determine specific social or environmental outcome targets supported by existing research and data.
• Estimate Economic Value: Assign a dollar value to the projected social or environmental change based on an anchor study and economic research.
• Adjust for Risks: Utilize an "impact realization" formula to account for the likelihood of achieving projected impact.
• Estimate Terminal Value: Assess the probability of sustained impact for five years after an investment concludes.
• Calculate the Return: Determine the return on every dollar invested, resulting in an IMM ratio (e.g., 8X).

IMM: A Directional Estimate, Not a Precise Calculation:

While IMM is rigorous and evidence-based, it acknowledges the inherent assumptions and choices involved. It does not provide a definitive ROI number but serves as a valuable directional estimate of potential social or environmental change.

Conclusion: The Promise of Evidence-Based Impact Investing:

IMM represents a significant stride toward evidence-based impact investing. Its potential to guide investors in quantifying the social or environmental benefits of their investments is promising. As time and rigorous evaluation unfold, we will witness whether IMM truly justifies our optimism and fosters a new era of impactful investing.

References:

https://www.bridgespan.org/insights/calculating-the-value-of-impact-investing#:~:text=We%20call%20this%20new%20metric,IMM%20expressed%20as%202.5X .

https://hbr.org/2019/01/calculating-the-value-of-impact-investing

Harvard Business Review Case Study: The Rise Fund: TPG Bets Big on Impact (9-318-041) dated Aug 27, 2019

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