Advancing Social Impact Investments through Measurement - Volume 7, Issue 2
Assistant Director of Capital Formation, Living Cities
Prior to attending my first SoCap meeting in the Fall of 2009, I had heard a lot of buzz and excitement about this emerging “social impact investing” sector. At the conference, I experienced two distinct phases: overwhelming excitement and then sobriety. The excitement stemmed from the high level of energy at the event—social entrepreneurs pitching intriguing business plans, the young professionals who wanted to apply their skills toward making a positive social impact, and a sense that the world’s problems can be addressed while even making a profit. The sobriety came as I realized that much of this field and the related ideas were only at a conceptual stage, and that a significant amount of work around developing infrastructure and market-testing these ideas lay ahead.
Yet I remained optimistic. This sector had legitimate roots from the groundswell sentiment that pressing global and domestic social challenges could not be addressed by government and philanthropy alone, but needed to harness the private markets as well. David Erickson and I had been toiling for many years at the Federal Reserve on this same presumption of expanding community development finance capacity by tapping into the larger capital markets. At that SoCap conference we both concluded that whatever emerged on the capital side of impact investing, it had relevance and potential application for the community development finance field. At the same time, the community development field had been building up its marketplace for over 30 years and likely had insights and lessons to share with the impact investors. The problem was that at that point, these two sectors had little overlap or knowledge of one another.
As David and I discussed the potential nexus between the sectors, data and metrics stood out as an area of natural convergence. On the community development side, particularly in our work on expanding access to the secondary markets for capital, an ongoing hindrance was the lack of industry-wide financial performance metrics and standards. On the impact investment side, validating actual impact to address “green-washing”-type behavior (i.e., marketing oneself as a social impact creator, but not creating any actual impact), to develop benchmarks and standards, and to collect financial performance data to draw in private capital remained a formidable challenge. We saw an opportunity to create a venue where the two worlds of impact investing and community development could begin to engage one another on these issues while building important networks and relationships.
With this, we conceived the idea of a convening at the Federal Reserve Board of Governors to signal to the impact investment field our interest in this emerging sector and to introduce the key institutions and individuals of the community development finance sector to one another. Our aim was to keep the discussion grounded as much as possible and to work on the system-building that needed to happen. The result was a dynamic conversation focused on various dimensions of data and metrics, including the challenges of developing measurement standards for the wide range of activities taken on by impact investors, lessons learned in related sectors, and the needed steps among participants to move leading efforts forward.
Being new to the impact investment sector, we created an advisory committee to help us design this meeting. Our stellar group of advisors included: Sonal Shah, the Director of the Office of Social Innovation and Civic Participation at the White House; Antony Bugg-Levine and Margot Brandenburg of the Rockefeller Foundation; Sameera Fazili, U.S. Treasury; Lisa Hall, Calvert Foundation; and Georgette Wong of Take Action. The meeting was a success as participants from both worlds began to make meaningful contact and relevant lessons were shared. A new perspective and opportunity emerged as well around the growing role that Government can play in complementing the advancement of the social impact investment sector. We would like to thank our advisory group and the participants for a rich and productive meeting.
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.
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Table of Contents
Both the community development and impact investing fields are working diligently to find ways to bridge their divides and in many ways they are closer together now than ever. But if we are to make real progress in combining forces, focusing in particular on how we measure social and environmental outcomes holds promise in resolving overarching questions around wise use and targeting of limited resources.
Measuring social impact appears daunting. Many CRA-obligated institutions are trying to comply with regulations that they provide banking services (beyond deposit) to low-and middle-income communities.
It is possible to do systematic, methodologically sound impact measurement that more fully demonstrates what investors want to know: How are people’s lives improving? How are communities changing?
Enormous progress is being made in the design of metrics to assess the consequences of social interventions. But four considerations could still usefully be given greater salience in the design of social impact measurement systems.
The loud buzz of excitement about Impact Investing is cause for concern, but not only because the enthusiasm is ahead of the practice.
Measuring nonfinancial returns is a cost of doing business for community development financial institutions (CDFIs). Like any other expense, the tracking and reporting of impact must be justified by the contribution it makes to CDFI operational and strategic priorities.
The quality of an “impact investment” should be evaluated by data that both frames the need and tells us what happened in response to an investment. Impact data only tells us whether we’ve been successful. Opportunity data is required to inform whether, where, why and how to best target investment in the first place.
The banking crisis has laid bare something that is often hard to quantify: the social value from homeownership that accrues to people and their communities.