Assessing Impact Investing - Rockefeller Foundation

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TheRockefeller Foundationevaluation officeAssessing impact investingFive doorways for evaluatorsEDWARD T. JACKSON AND KARIM HARJIDemand for evaluation services is growing in the impact investing industry. Yet, much of theevaluation community remains unaware of the industry and its performance assessmentrequirements. This paper proposes five channels, or doorways, through which professionalevaluators can learn about and engage with the field of impact investing.Impact investing involves the unlocking and placementof capital to achieve social or environmental impacts aswell as financial returns. For example, outcome-basedfinancing approaches are receiving increased attentionand experimentation as a means of mobilizing privatecapital to finance public services.1 More broadly, thefield of impact investing is part of a larger international effort to develop and scale-up innovative financialproducts and services aimed at addressing the complexglobal problems of poverty, unemployment, climatechange and disease.2tions – commission evaluations that not only examinethe technical design and appropriateness of the instruments used, but that also especially examine the downstream social, economic and environmental resultsachieved for individuals, households, communities andenterprises. Beyond evaluating impact investment instruments and results, there is also a need to examinehow the field as a whole is evolving. Such evaluationsmust be well-informed, professionally designed and independently conducted. They also should emphasizeaccountability and learning at the same time.3The imperative of evaluationFor professional evaluators, this can open up a world ofopportunities – but also of challenges. One challengerelates to the unique culture and practices of the field offinance and investment. An array of specialized technicalterms, complex regulatory environments, complicateddeal structuring, and agile and aggressive marketingare only a few of the characteristics of this industry thatAs new instruments for impact investing are tested andthen, if merited, replicated and scaled-up, it is essentialthat the stakeholders involved – banks, investmentfunds, foundations, development finance institutions,governments, corporations and civil society organiza-Financial support provided byThis paper was produced as part of the Strategic Assessmentof the Rockefeller Foundation’s Impact Investing Initiative.July 2014

evaluators need to understand. Moreover, there arefew traditions in mainstream investment and financethat are concerned with and accomplished in achievingsocial and environmental objectives. This means evaluators must systematically “tool-up” in many ways in orderto participate in the impact investing industry.Engaging with impact investing:five doorwaysImpact investing is a dynamic, generative new field.4For more than half a decade, this nascent industryhas had real “boots on the ground”, not only experimenting with, but also scaling up, innovative financialproducts and services in local settings in both theGlobal North and the Global South. At the same time,impact investing leaders have built the beginning of anidentifiable, connected ecosystem of asset owners, assetmanagers, demand-side actors (enterprises, projects)and service providers. Moreover, it is an industry thatvalues metrics and measurement, utilizing both qualitative information, such as stories and cases, and quantitative data. Indeed, at both the industry-wide and institutional levels, its discourse and practice on resultsmeasurement are purposeful and sophisticated – andincreasingly data driven.So, where should evaluators start? Here we brieflydiscuss the five “doorways” which evaluators can enterin order to learn more about impact investing andabout participating in the conduct of evaluations in thisindustry. These doorways are: industry-wide systems,theory of change, policy influence, sector interventionsand outcomes-based financing instruments’.1Industry-wide systemsMuch of the energy and creativity in performance assessment in the impact investing industry has beenanimated by two industry-wide initiatives. The firstis the Impact Reporting and Investment Standards(IRIS) system, a project of the non-profit Global ImpactInvesting Network (GIIN). IRIS provides industry participants with a common lexicon and set of detailedindicator definitions which can be tailored to the needsof individual investment funds and institutions.5 Thesecond, the Global Impact Investing Rating System2(GIIRS) developed by the non-profit B Lab, assessesthe social and environmental performance of impactinvesting funds and of companies seeking impact capital.As of mid-2013, GIIRS, an analogue to the Morningstarratings agency in mainstream finance, was rating some50 funds worth more than 2 billion, operating in over30 countries.6The development and refinement of these systems willtake more time. In addition, many institutions in thefield maintain their own customized and decentralizedmeasurement systems. Nonetheless, together, IRIS andGIIRS along with the GIIN itself, have already providedthe impact investing industry with technical coherenceand common practices framed by a broad, sharedvision. Any evaluation work undertaken in the field ofimpact investing should be informed by and linked tothese industry-wide systems. Evaluators should studyIRIS and GIIRS in detail.2Theory of changeTheory of change offers another doorway into impactinvesting for evaluators. A concept and tool originatingin the field of program evaluation, theory of change, alsoknown as program theory, refers to the constructionof an explanatory model that depicts, usually in visualform, the inter-relationships among the logic, resources,assumptions, activities and expected results of an intervention. Evaluators then interrogate the actual performance of the intervention against the theory of changeset out in the model, asking questions such as: To whatextent is the validity of the theory of change confirmedby experience? And to what extent is the model shownto be relevant, appropriate, efficient and effective?7Theory of change has been applied to assess the designand performance of impact investing at multiple levels,including: the industry as a whole; industry platformssuch as networks and social stock exchanges; investment funds; companies; individual investments;investee enterprises; employees in those enterprises;and their households and communities. Both qualitative and quantitative data have been collected in theseassessments.8 Evaluators seeking to work in impactinvesting should prioritize learning how to use theoryof change.A s s e s s i n g I m p a c t I n v e s t i n g : F i v e D o o r w ay s f o r E va l u a t o r s

3Policy assessmentIn recent years, the pace of work on developing policiesthat enable impact investing has picked up momentum.At the center of this effort has been the Impact InvestingPolicy Collaborative (IIPC), an international network ofscholars, practitioners and policymakers from a dozencountries. IIPC carries out research and organizes conferences to examine policies that: expand the supply ofimpact investments through clear rules and co-financing by governments; use taxes, subsidies and requiredreporting to direct capital to social and environmentalprojects; and institute enabling corporate structuresand fund capacity building to promote the success ofinvestee firms.9Measuring policy influence and effectiveness is a specialized area of evaluation.10 Assessing the performanceof policy initiatives aimed at enabling a larger volume ofmore effective impact investments requires a thoughtfulmix and utilization of evaluation frames and methods.For example, policies designed to increase the quantumand effectiveness of impact investing on the part of institutional investors deserve special attention. A recentIIPC study found that nearly half of all American statesmandate or encourage state pension systems to investin geographically targeted economic development andenergy-efficient real estate.11 In this instance, a full evaluation would be required to examine the “upstream”components of this experience, including the relevantlaws, regulations, investment practices and deals.At the same time, such an assessment would need tostudy the “downstream” effects of these impact investments, particularly for local enterprises and projects,employees and their households, as well as the communities in which they live. Evaluators should familiarize themselves with the design and implementation of“upstream” and “downstream” components in evaluations of institutional impact investments.systems, solar lighting and affordable private education.Investee enterprises in such sectors not only generateemployment and increase income for local workers,they also can provide products and services that areaffordable by the poor and low-income groups. TheOmidyar Network, informed by its efforts to scale-up microfinance in Asia and elsewhere, distinguishes amongthree types of actors within sectors: “market scalers”that rapidly scale-up proven business models; “marketinnovators” that create and test new technologies andbusinesses; and enterprises and organizations thatprovide sector infrastructure, such as credit ratings andresearch. Their contributions and effectiveness shouldbe evaluated differentially. Moreover, the social impactof these actors should be measured not only at the firmlevel, but also as part of the aggregate social impactof the sector as a whole – which, in successful cases,should be greater than the simple sum of its parts.12This is useful guidance for evaluators. Sector-based approaches are likely to be adopted by more key actors inimpact investing, and evaluators must be well-preparedto carry out assessments of these interventions.5Outcome-based financing instrumentsSector-based interventionsIn North America and Europe, outcome-based approaches - such as social impact bonds (SIBs) or “payfor success” (PFS) bonds - have emerged as a focus ofconsiderable government interest and experimentation.In the context of rising social inequality and declininggovernment spending capacity, this mechanism isviewed by governments across the political spectrum asa means of levering private capital for public purposes.They are actually contractual obligations, usually heldby governments. SIBs are contractual obligationsbetween government and private investors - such as afoundation, fund, or intermediary - to finance a socialprogram. If the non-profit delivery agent achieves theagreed upon social outcome targets of the program, thegovernment agrees to pay the investor not only for thecost of the program but also a return on the investor’scapital.13The impact-investing strategy of interventions inentire business sectors within a country or region hasseen increasing visibility. Such sectors may include,for example, medical technologies, mobile paymentUsing the example of SIBs, evaluators must assess boththe “upstream” and “downstream” components of SIBperformance. In the current context, there is a risk that4A s s e s s i n g I m p a c t I n v e s t i n g : F i v e D o o r w ay s f o r E va l u a t o r s3

the high expectations held by governments for SIBs willnot be achieved. There is also the question of how thesocial outcomes will be sustained over time, particularlyin cases where the shorter-term contracted targets havebeen realized. Furthermore, comparing SIB performance with a counterfactual case would strengthen theanalysis.14 While outcome-based financing approachesof this kind are still at an early stage of design and implementation, the need for their careful and professionalevaluation is already clear. In particular, “upstream” and“downstream” components, sustainability of outcomesand counterfactual evidence will all be important in theevaluation of outcome-based financing approaches.ConclusionThese five doorways are apertures through which theevaluation community can not only access and learnmore about impact investing; it can also add significantnew value to this young industry. As the field of impactinvesting proceeds on its path to greater maturation andscale, it will require more evaluation capacity at everylevel. Evaluators will be important not only to assessthe intended and actual outcomes from individual transactions, but also to critically analyze how the field as awhole is contributing to efforts to tackle global socialissues. It is the responsibility – and the opportunity –of professional evaluators to prepare themselves thoroughly, in order to make this contribution with optimumskill and effectiveness. If they succeed, both the impactinvesting industry and the broader field of evaluationwill be enriched. More importantly, there will be clearerand more substantial evidence of how individuals,households and communities struggling with povertyand injustice can benefit from business models thatintegrate, and achieve, social outcomes.3456789101112.1314Endnotes124On social impact bonds, see Godeke, S. (2013). Community reinvestment act banks as pioneer investors in pay for success financing. Community Development Investment Review, 9(1), 69-74; and Godeke,S. & Resner, L. (2012). The investor landscape: Building a healthy andsustainable social impact bond market. New York: The RockefellerFoundation.Gates, B. (2011). Innovation with impact: Financing 21st centurydevelopment. Presented to the G-20 Summit, Cannes, 2011. In thispresentation, he argued that annual development-finance flows couldbe increased to 165 billion worldwide by adding the following newA s s e s s i n g I m p a c t I n v e s t i n g : F i v e D o o r w ay s f o r E va l u a t o r sinstruments to basic aid commitments (of 80 billion): an infrastructure fund for sovereign wealth funds ( 8 billion), a financial transaction (Tobin) tax by some European countries ( 9 billion), savings inremittance transfers ( 16 billion), diaspora bonds ( 4 billion), and theglobal component of a fuel tax ( 37 billion).Rodin, J. & MacPherson, N. (2012). Shared outcomes: How the Rockefeller Foundation is approaching evaluation with developing countrypartners. Stanford Social Innovation Review, Summer 2012, SponsoredSupplement, 10(3), 12-15.For overviews of the development of the impact investing industryover the past five years, as well as its earlier antecedents, see BuggLevine, A. & Emerson, J. (2011). Impact investing: Transforming howwe make money while making a difference. Hoboken: Jossey-Bass;and Harji, K. & Jackson, E.T. (2012). Accelerating impact: Achievements, challenges and what’s next in building the impact investing industry. New York: The Rockefeller Foundation. Another good overviewof the industry is found in the special edition on impact investing ofthe Journal of Sustainable Finance and Investment, 3(2), 2013, http://www.tandfonline.com/toc/tsfi20/2/3-4IRIS website: http://iris.thegiin.org/. For the main GIIN website, seewww.thegiin.orgGIIRS website: http://giirs.org/For an overview on the nature and application of theory of change,see Funnell, S.C & Rogers, P.J. (2011). Purposeful Program Theory.San Francisco: Jossey-Bass; and Rogers, P. (2008). Using programmetheory to evaluate complicated and complex aspects of interventions.Evaluation, 14(1), 29-48.Jackson, E.T. (2013). Interrogating the theory of change: Evaluating impact investing where it matters most. Journal of SustainableFinance& Investment, 3(2), 95-110. The journal article can be accessedat 95.2013.776257#.UbCEA9gpldgSee Thornley, B., Wood, D., Grace, K. & Sullivant, S. (2011). Impactinvesting: A framework for policy design and analysis. San Franciscoand Cambridge: Pacific Community Ventures and the Initiative forResponsible Investment at Harvard University.A useful overview of the evaluation of policy influence, and a helpfulset of tools, are found in Jones, H. (2011). A guide to monitoring andevaluating policy influence: Background note. London: OverseasDevelopment Institute.Wood, D, Thornley, B. & Grace, K. (2013). Institutional impact investing: Practice and policy. Journal of Sustainable Finance and Investment, (3)2, 75-94.Bannick, M. & Goldman. P. (2012). Priming the pump: The case for asector-based approach to impact investing. Redwood City: OmidyarNetwork.Godeke, S. & Resner, L. (2012). The investor landscape: Building ahealthy and sustainable social impact bond market. New York: TheRockefeller Foundation.Godeke, S. (2013). Community reinvestment act banks as pioneerinvestors in pay for success financing. Community DevelopmentInvestment Review, 9(1), 69-74.

TheRockefeller Foundationevaluation officeField-building that lastsTen tactics for the impact investing industryEDWARD T. JACKSON AND KARIM HARJISuccessful fields of practice must be capable of transforming themselves over time inresponse to the forces of change, while at the same time maintaining the integrity oftheir core mission and enhancing their impacts on the ground. This capacity must now beembedded in the genetic code of the impact investing industry. If the leaders and funders ofthis dynamic new industry can make this happen, then the new field will flourish and sustainitself across the globe. More importantly, impact investing will be much better able to fulfillits promise of improving the lives of poor and vulnerable people by generating large-scale,durable solutions to some of the world’s most complex problems.So, how do you build an adaptive, enduring field? Thegood news is that much is known about how to do this.Foundations, non-profits, governments and companiesall have rich experience in this regard. One especiallyrelevant source of guidance is the field-building workof the Rockefeller Foundation in launching the impactinvesting industry itself in 2008–2012. This briefingnote draws extensively on lessons from this effort, andhighlights ten tactics that industry champions can useto create a field that will last. These tactics can be usedby leaders and funders in the Global North and GlobalSouth alike, at the levels of regions, countries, and localities.1Building an Enduring FieldIn order to build a field that will adapt and endure,impact investing leaders and funders should considerthe following.1Support network coordinators who arepluralistic and non-proprietaryThe hosts of impact investing networks at the regionalor country levels must be entrepreneurial and resultsdriven, and deploy viable business models. Plus,Financial support provided byThis paper was produced as part of the Strategic Assessmentof the Rockefeller Foundation’s Impact Investing Initiative.July 2014

above all, they should view the field in a pluralisticand non-proprietary way. They must be committed towelcoming impact investing actors with a variety ofstances and methods into the network, and to facilitating the learning, exchange and success of a wide rangeof asset owners, asset managers, demand-side actorsand service providers. Such an approach will help thesecoordinators achieve critical mass in network membership faster. It is also likely that coordinators with thisorientation will themselves be open to learning andadapting the network to changing conditions and needsas their efforts move forward.2Commit to the long term and stay thecourseField-building is a long-haul exercise. It takes 20–25years – about the length of one generation – to build apermanent, self-sustaining field of practice or industry.Understanding this is essential for industry leadersas well as for funders. For leaders, this means stayinghealthy and always building the skills of younger colleagues, because multiple generations are required inthis long-term work. To be sure, foundations and development agencies often feel pressure to take a short-termapproach to their grant-making. But funders shouldprovide support to networks, infrastructure and innovators for no less than five years and, ideally,

to participate in the impact investing industry. Engaging with impact investing: five doorways Impact investing is a dynamic, generative new field.4 For more than half a decade, this nascent industry has had real “boots on the ground”, not only experi-menting with, but also scaling up, innovative financial

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