Investors Look for the Impact Rather than the Revenue Stream
In an era witnessing a shift in values and priorities, the investment landscape is undergoing a remarkable transformation, particularly in the metrics defining investment success. Historically, the singular pursuit for investors was revenue growth. However, a notable change is unfolding today, introducing a distinct criterion: impact.
Previously, the spotlight shone solely on financial growth and return on investment. Yet, the current trend underscores a new emphasis – evaluating how a startup or company contributes to society and the environment. In this evolving scenario, the significance attributed to the impact a company makes holds equal, and at times even greater, importance than traditional revenue streams.
Why are investors looking for impact?
There are a number of reasons why investors are shifting towards impact investing.
- Financial performance: Evidence suggests that companies, which are committed to social and environmental responsibility, are more financially successful in the long run.
- Stakeholder pressure: Investors are facing increasing pressure from their own stakeholders, such as pension funds and endowments, to invest in companies that are making a positive impact.
- Consumer demand: Since consumers are increasingly demanding and expecting companies to operate in a responsible manner, companies that are having a positive impact are more likely to attract and retain customers.
In a report by Global Impact Investing Network – GIINSIGHT about Impact Measurement and & Management Practice, the following key insights where shown:
- Impact investors rely on an assessment of the scale of the problem and global development agendas to define impact priorities, while investee objectives and impact data play a greater role when investors set specific impact targets.
- Investors most commonly use the United Nations Sustainable Development Goals (SDGs) to guide their impact strategy.
- Investors are starting to use impact data to inform decisions but still face headwinds.
- Half of impact investors do not engage directly with their end stakeholders, but investors commonly discuss impact performance with their investees.
- Impact investors use a variety of impact accountability mechanisms, with half of investors undergoing audits on impact practice or performance.
How are investors evaluating impact?
In an independent research project at the Harvard Business School, an interview was conducted for more than 20 leading impact investors, and it was learned that investors use impact measurements for different objectives in different parts of the investment cycle, and the methods for measuring impact vary based on the objective.
The phases are the following:
- Estimating impact
- Conducting due diligence to assess the potential social return
- Planning impact
After the investment happens, the investors and investees focus on monitoring impact, measuring, and analyzing impact throughout the life of the investment to track the investment’s effects. After the program is done, an assessment happens which could lead in some cases into a re-investment.
The methods were grouped into four main categories:
- Expected return methods: exemplified by the Robin Hood Foundation’s benefit-cost ratio (BCR), assess the poverty-fighting benefits of programs against foundation costs, guiding decisions on impactful grants and ongoing reinvestment.
- Theory of change methods: employed by organizations like Acumen and LGT Venture Philanthropy, use logic models to map input-output linkages, identify assumptions, and assess impact risks, aiding in the development of risk mitigation strategies for effective intervention.
- Mission alignment methods: such as Bridges Ventures’ Impact Scorecard, gauge project execution against mission and end goals, employing scorecards to monitor key performance metrics, operational performance, organizational effectiveness, finances, and social value.
- Experimental and quasi-experimental methods: utilized by Bridges Ventures and social impact bonds, involve after-the-fact evaluations employing randomized control trials and counterfactual approaches to determine an intervention’s impact compared to a scenario without the intervention, ultimately informing financial return on investment.
As investors increasingly recognize the financial success of socially responsible companies, the demand for positive contributions to society becomes a driving force. The methods outlined, ranging from expected return and theory of change to mission alignment and experimental approaches, underscore the diverse strategies employed by investors to evaluate and maximize the societal value of their investments. This transformative trend reflects a broader commitment to aligning financial success with positive societal outcomes, marking a pivotal moment in the trajectory of responsible investing.