Imagine you are an impact investor, deciding how to maximise the impact of your investment choices. How do you judge whether to invest in a homeless shelter in London or a conservation programme in Tanzania?
If you were a conventional investor you would figure out how much return you get on each and act accordingly. There are whole industries set up to help you do this but when the question is how to maximise impact, things are less clear.
Despite many attempts, no one has yet worked out how to compare the impact of different social interventions or businesses. But what if there was a way to work out which organisation is likely to create more impact?
This is the basis of our Impact Risk Classification (IRC), which we created to help us assess the diverse impact investment portfolio of the KL Felicitas Foundation. The IRC assesses organisations based on a series of criteria, to generate an ‘impact practice’ rating. Does the organisation have a good theory of change and a clear impact mission? Do they collect meaningful data about their customers or outcomes? Can they explain, or do they try to measure, what would have happened if they didn’t exist?
The assumption behind this approach is simple: a social organisation that takes understanding, explaining and assessing its impact seriously is more likely to create positive impact. It’s not an irrefutable assertion, but it’s a proxy that can help when comparing the likely impact of different organisations.
The IRC creates an ‘at a glance’ rating to help an impact investor assess options across the impact spectrum—so a fund restoring land in the US can be compared to a social business providing affordable healthcare in Kenya.
This comparing of ‘apples and oranges’ is where impact investing assessment has fallen down before. The IRC is an approach that compares impact practice, rather than impact itself—helping us overcome the issue of how to contrast very different interventions.
But even with our workaround it still presents problems. For a start, some things are easier to measure than others, and some things are so hard that people don’t even try—which can skew our understanding of their impact practice. Environmental interventions are often easier to measure than complex social interventions (consider CO2 reduction vs. increases in vulnerable people’s self-efficacy)—as a result, environmental organisations often have more advanced impact reporting, and therefore score more highly on the IRC.
There are also considerations about appropriateness and context. A start-up with a clear mission and impact thesis, plus a few, carefully picked data collection points, is demonstrating a strong commitment to impact, even if their impact practice, and therefore their IRC stage, isn’t yet advanced. And what is ‘inadequate’ impact practice for a mature, socially aligned not-for-profit might be ‘good’ for a tiny start-up. We wouldn’t expect an ESG fund to measure impact in the same way as a charity issuing community shares, so an IRC rating needs to be considered in context.
One solution to these problems is to consider the ‘principles’ and ‘purpose’ scores (two of the five IRC criteria, the others being ‘outputs’, ‘outcomes’ and ‘impact’) as standalone indicators of an organisation’s impact focus, even if their impact measurement practice isn’t yet developed.
This flexibility is built into the system. Depending on your tolerance for certain kinds of risk, you can seek a higher IRC score in different areas. Some of the IRC criteria are very measurement focused, while others are less tangible, and focus on an organisation’s values and potential.
The IRC should be used alongside other tools for measuring and assessing impact. It doesn’t aim to replace other shared outcome reporting tools, and it doesn’t compete with case studies that bring impact to life. But it does offer a new perspective on the impact investor’s enduring question—how can I maximise my impact?
For applications of the IRC in practice, you can read our report Assessing the impact practices of impact investments. To see how it can be used in practice alongside other impact measurement tools, you can read our report In pursuit of deep impact and market-rate returns