Building Scale in Community Impact Investing through Nonfinancial Performance Measurement - Volume 6, Issue 1
Federal Reserve Bank of San Francisco
In the community development finance and impact investing worlds, there is both universal agreement for the need for better social outcome measurements and no consensus on how to do it. This issue of the Review is an attempt to gather in one place what we know, what we think the state of the art is, and how we might contribute to an ongoing process to establish a tool—or many tools—that help us measure the social benefit of impact and community investing.
Ben Thornley and Colby Dailey provide us with a comprehensive look at this issue in the lead article of this volume. They review the existing literature, highlight and explain leading tools and approaches, and provide a provocative new intellectual framework with which to analyze the issue. Thornley and Dailey caution us not to waste time on elusive “silver bullets.” Instead, they suggest we create an environment—through new practices and policies—that encourage impact and community investors to collect and report social outcomes data. Even if existing data were more effectively reported, they argue, it would likely motivate clusters of investors to coalesce around certain social outcome reporting strategies. Alongside this incremental approach, however, Thornley and Dailey also propose more sweeping change from government. In particular, they suggest that changes to how the CDFI Fund requires community development financial institutions to collect and report social impact data, and how depository institutions covered by the Community Reinvestment Act (CRA) do the same, could create new standards overnight and drive catalytic improvements in social outcomes measurements.
The essays that follow Thornley and Dailey’s article provide viewpoints on social outcomes measurements from a variety of perspectives—from government, philanthropy, investors, and fund managers.
Margot Brandenburg, a leader in the field of social outcomes measurements, makes the case for the chilling effects that may strangle an inchoate impact investing industry if we fail to solve the social outcomes measurement problem.
John Moon compares and contrasts the current stage of development for the impact investing field with early community development investing and questions whether changes to the CRA might help foster impact investing in a way that is similar to how it helped create the community development investing field. He argues that combining efforts from impact investing (e.g., the work of the Rockefeller Foundation with new measurement tools, taxonomy, and ratings) with developments in the community development investing sector (e.g,. Opportunity Finance Network’s CARS rating system) would reinforce both sectors; he goes as far as to suggest that elements of one tool, such as the CRA, should be incorporated into the methodology of tools on the impact investing side and vice versa.
Arjan Schutte urges us to be practical as we pursue social outcomes measurements by focusing on: 1) measures within sectors – health care, alternative energy, financial eduction – instead of too-broad measures for all sectors; 2) outputs instead of a fuzzy understanding of impact; and 3) aligning a few measures or metrics that reinforce both operational objectives and financial incentives for investors and fund managers.
Penelope Douglas focuses her essay on a simple question: Who cares about social impact? The answer, according to her, are the millions of small depositors at banks, policy holders from insurance companies, and workers who contribute to pension funds. In each case, the community that provides the capital—depositors, policy holders, pensioners—give direction to their investor intermediaries on what values they want to promote with their money.
Allison Duncan and Georgette Wong emphasize the need for “leadership from all parts of the investment ecosystem, but most specifically asset owners, intermediaries, and businesses.” They argue that if we can tell a better story about impact and demonstrate how it can reinforce (rather than detract from) financial return, then we have the opportunity to create radical change by attracting tens of trillions of dollars from global corporations, pension funds, and high net-worth individuals and families.
David Colby and Sarah Pickell provide the community development field with an example of how the Robert Wood Johnson Foundation measures its social impact—an activity that is not for the faint of heart since it makes failures, as well as successes, public. The commitment is worth it, they claim, since it brings to light the types of programs that make a real difference in people’s lives.
Finally, Sameera Fazili weighs in on the question of how the government can help promote the field of social outcomes measurements. Although she concludes that too many competing policy, regulatory, and statutory issues make it unlikely that the federal government can lead the way to one standard, she does highlight the many ways the government can encourage this effort, including: 1) setting standards; 2) collecting and sharing data, and 3) providing a “Good Housekeeping Seal of Approval” for certain activities or institutions.
In the end, an effective way of measuring our social impact from institutional, retail, and government investments could change the way we look at both government and the market. A growing consciousness among consumers and investors about social and environmental issues is already changing the types of products and services that are available in the marketplace. Government, too, is seeking to change the ways it does business by providing more resources to programs that are proven to work and by directing funds away from programs that don’t. Xavier De Souza Briggs, Deputy Director of the Office of Management and Budget, captured this idea at a recent Federal Reserve conference where he explained that leaders in the federal government are trying to change “the DNA of the federal government” so that it can take more risks and reward investments that yield better social outcomes. That change – both in the market and for government – requires better data on social impact.
The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System. Material herein may be reprinted or abstracted as long as the Community Development Investment Review is credited.
Read the full issue (pdf, 2.05 mb)
Table of Contents
The measurement of nonfinancial performance is becoming increasingly important in the community impact investing industry, where individuals and institutions actively deploy capital in low-income domestic markets for both financial and social returns.
Impact investing encompasses a broad range of sectors and geographies, but U.S. community development finance is widely recognized as one of its most mature and vibrant areas of activity.
To what degree has CRA-motivated lending and investing successfully improved communities?
After around 40 years of institutional “impact investing” it is distressing that “impact measuring” is hardly de rigueur. While impact investment managers understand clearly how to measure financial returns, the best practices, systems and compliance in measuring the social benefits are anemic, at best.
In a dozen years at Pacific Community Ventures raising capital for our own venture capital funds, and advising clients regarding how they might measure and communicate social impact, I keep returning to the question of who really cares about social impact?
In order to truly unlock the potential of the impact investing industry, social/environmental metrics must be directly connected to financial outperformance.
The community development field does well, but could be strengthened by demonstrating how much good it does.
The impact investing field has made notable strides in recent years in developing metrics for measuring and evaluating the social impact of its investments.