Impact Investment market grew by an amazing 42.4% in the last year – from $502 billion to $715 billion in assets under management.
The impact investment myth
Impact Investing’s “Unique Selling Proposition” lies in its claim to produce both social and financial returns. It has long been thought that social ventures cannot yield the same financial returns, but this is largely untrue; research from McKinsey, looking at 48 investor exits between 2010 and 2015 found that they produced a median internal rate of return (IRR) of about 10 percent. The top one-third of deals yielded a median IRR of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprises. We can measure financial returns through a number of metrics, but how does one measure the social impact of investments?
The meteoric rise of Impact Investing has largely been driven by the increase in socially conscious investors, who are turning away from ‘sin stocks’ and looking to more sustainable ways to grow their capital. Amongst the various Impact Investing funds, one certainly stands out. Texas Pacific Group Capital (TPG) launched the $2bn Rise Fund, back in 2017, which at the time was the largest impact fund in ever created, until a year later when TPG raised another $3.7 bn for its second fund; TPG Growth.
TPG’s impact arms are known for two main reasons: their celebrity backers; the likes of Bono and Jeff Skoll, and their highly praised method of measuring the social impact of their investments. The metric they are most famous for is the Impact Multiple of Money, which is part of the proprietary assessment methodology that allows TPG to estimate a company’s potential for positive impact. The IMM with is deployed with rigor consistent with TPG’s commitment to a data-driven approach, and thus enables the fund to manage, measure and drive impact results throughout the course of their Investment.
End-to-end Assessment (Rise Fund)
Measurement: will be integrated throughout the investment cycle.
Sourcing: We will seek companies that deliver products, services, and interventions shown by research to lead to specific, quantifiable social or environmental benefits.
Diligence: We will estimate in quantitative terms the impact we anticipate can be achieved with the investment and clearly define how it aligns with our impact goals.
Investment: We will manage investments to enhance both impact and financial returns. We will monitor progress towards achieving impact goals throughout the investment.
Exit: Post-exit, we will assess and report on the total impact achieved through the investment.
IMM puts pre-deal impact evaluation on a par with financial evaluation. Rise will 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. The methodology can be used to monetize outcomes ranging from lower greenhouse gas emissions, to higher educational attainment, to better health. Here are the six steps involved:
Assess Relevance and Scale: Does the company have potentially measurable social or environmental impact, and how many people will its product or service reach?
Identify evidence-based outcomes: Identify social or environmental outcome targets and determine whether existing research and data verify that the outcomes are achievable and measurable.
Estimate the economic value of those outcomes to society: Pick an anchor study that provides an evidence base for the investment’s claims of impact. Then use economic research to put a dollar value on the projected social or environmental change.
Adjust for risks: IMM uses an “impact realization” formula that discounts the likelihood of achieving the projected social or environmental value.
Estimate Terminal Value: A concept used in the business world, terminal value in this case estimates the probability that the people reached and the social or environmental value created will continue for five years after an investment terminates.
Calculate the return on every dollar invested: Start with the total projected social value created by the investment and right-size it to reflect the investor’s share proportional to ownership stake. Rise then divides the projected social benefit of the investment and arrives at an IMM. For instance, an IMM of 8X means $8 social or environmental return for every $1 invested.
Rise Fund and Y Analytics
Y analytics an independent organization established to drive increased and more effective investment in creating social and environmental good by equipping capital allocators with the research basis to effectively understand the impact of their decisions. The organization, headquartered in Washington, D.C. and led by Maryanne Hancock, will help bridge the divide between the research community and capital allocators. Ultimately, this will ensure that capital directed at addressing the United Nations Sustainable Development Goals is used most efficiently, and more broadly, that we advance our abilities to direct capitalism towards solutions that have the potential to create real, tangible impact.
The organization is an outgrowth of The Rise Fund and is informed in part by active investment experience, totaling nearly $2 billion across 25 investments in a variety of industry sectors and spanning markets around the world. Building on the work of The Rise Fund – in partnership with Bridgespan and KPMG – and staffed by a team of economists and researchers, Y Analytics will seek to translate research to help decision-makers evaluate impact at the front-end of the capital allocation process and manage impact rigorously thereafter. It will also collaborate with other organizations working creatively in this space and share its learnings to help advance knowledge in the field. It will focus on two primary streams of work:
Creation, Advancement, and Stewardship of Research-based Disciplines– Building mechanisms and methodologies that bridge the divide between research communities, capital allocators, and other key decision-makers. Y Analytics will actively share the approaches and learnings with the public to help advance the field.
Impact Assessment and Analytics Services– Helping investors make more effective, evidence-based decisions using a rigorous approach that curates and translates research to inform estimations of net impact in economic terms that an investment creates across several impact pathways.