Impact Assessment In Practice - JPMorgan Chase
Global Social Finance04 May 2015Impact Assessment in PracticeExperience from leading impact investors Impact assessment is a key component of managing an impact investmentportfolio, and many investors today are building methodologies that bring valuebeyond simply reporting outcomes. For many investors, the impact goal is the common thread across a portfolio ofvarious sector, geography and instrument types and this diversification canmake choosing an impact assessment methodology challenging. As such, theprocess for developing a methodology is often an iterative one, refined withexperience and data over time.Social FinanceYasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comAli El Idrissi(44-20) 7134-6938ali.el.idrissi@jpmorgan.comJ.P. Morgan Securities plc To help inform that iterative process, this research presents sixty-eight casestudies from twenty-one leading impact investors that share best practice anddebated viewpoints on impact assessment along the investment process. Thereport builds off prior work in A Portfolio Approach to Impact Investment,which we recommend for broader coverage of impact portfolio management.www.jpmorganmarkets.com
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Table of ContentsExecutive Summary .3Introduction and methodology .7Why assess impact? .9For understanding, accountability and value creation .9Set organizational goals .11Build an impact thesis .11Consider how the intended impact will be assessed .12It’s an iterative, dynamic process .15Staffing the methodology design .15Screen and due diligence opportunities .17Evaluate the organization and management .17Evaluate impact risk along with the return potential.20Balance initial due diligence versus ongoing monitoring .21Use public information when available.22Staffing due diligence for impact .22Confirm terms and invest .23Set investment goals and develop the assessment process.23Select metrics .26Set targets to benchmark performance .28Document impact assessment terms .29Data-driven investment management .30Collect data from investees .30Use impact data to manage existing commitments .30Make future allocations based on impact data .31Staffing impact performance review.33Organization-level assessment .35Consider whether and how to assess attribution .35Consider whether and how to assess additionality .36Consider whether and how to aggregate across a portfolio.38Looking ahead .40Momentum beyond reporting towards value creation.40AppendicesAppendix I: Participants .41Appendix II: Impact assessment literature .43Appendix III: Published investor tools .452
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Executive SummaryImpact investment portfolios are generating a growing set of impact data andinvestors are increasingly looking to move from basic impact reporting frameworksto impact assessment that creates value for management. This report presents ourfindings from interviews with twenty-one leading impact investors and related deskresearch on current impact assessment practices. Critical to the report are sixty-eightcase studies featuring real examples of how investors address specific question intheir assessment methodologies. In the executive summary, we capture the high-levelprocess that emerged from those conversations, and present the general overview ofour findings. Readers can find case studies for each point below in the main report.Figure 1: Report structure follows investment processWhy assess impact?In order to best understand what led the investors we interviewedto choose their current assessment frameworks, we asked them toexplain why they make the assessment and how they plan to usethe results.To learn what works and inform investment managementMost impact investors assess the impact of their portfolios tounderstand the effect of the organization’s work against the socialand environmental goals they set, as a means of holdingthemselves accountable towards those goals. Further,interviewees increasingly want to utilize impact assessment datato drive value creation at the level of the investee, the investorand/or the broader market.An investor’s perspective across three levelsThe report follows the structure of the investment process, asshown in Figure 4, and we use this structure to highlightperspectives at each of the organization, portfolio and investmentlevels.Source: J.P. Morgan.Set organizational goalsDevelop the impact thesis as a tool for screening opportunitiesImpact investors allocate capital towards positive social and/or environmentalchange. Many investors articulate a specific “impact thesis” or “theory of change”they wish to support through their capital. Some investors utilize a single overarchingimpact thesis for their portfolio; while others operate across several impact theses,with different portfolios for each. For most, the impact thesis serves as the missiontowards which the portfolio is driving.Make the link from the theory of change to the relevant metrics upfrontA theory of change is most useful when it can be linked to the specific outputs of theintended investments. Several investors make this link upfront, either at the time ofarticulating their theory of change or when considering investment opportunities.3
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Screen and due diligence opportunitiesAssess management’s commitment to impact and the business model linkJust as impact investors balance the dual purpose of social or environmental changewith financial return, it is critical to align this balanced view with the management ofthe investee. This alignment becomes particularly important over time whendecisions arise that put the financial and impact goals in contrast to one another.Use scorecards to rank opportunitiesSeveral investors use scorecards to quantify the evaluation of an opportunity basedon the above factors. The scorecards can be impact-specific or cover a range ofimpact and financial considerations. As part of our own deal assessment, we use ascorecard to evaluate both the fund manager and the types of underlying companiesthat the manager intends to invest in. Figure 2 illustrates the thematic areas that weassess on a weighted basis. This assessment results in a spider graph like the oneshown, which can then be compared between the pre-investment state and the currentstate over the life of the investment. Other examples are included in the main report.Figure 2: J.P. Morgan Social Finance impact assessmentThe categories of assessment used in the scorecard for pre-investment and ongoing assessment for the J.P.Morgan Social Finance Principal Investment portfolio, which is a portfolio of impact investment funds.Source: J.P. MorganEvaluate impact risk along with the return potentialInvestors also assess opportunities for the risk that the impact intended may not bedelivered to the degree expected or that the investment will result in a negativeimpact. Some investors use the due diligence report to identify risks to impactdelivery and rank opportunities against different impact risk considerations todetermine an impact risk score.4
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Confirm terms and investEnsure relevance to the business: Plan to learn from impact data and use itMost investors we interviewed agreed that the most successful impact assessmentrevolves around impact goals that relate back to the business success. Not only doesthe output information become more useful to the running of the business, but alsomanagement at the investee is more aligned to collecting the data because of thevalue beyond simply reporting back to their investors. Investors can also use welldesigned impact data as a management tool and feed insight gained through theprocess back into the management of that company or others in the future.Consider what is in investee's control and what is notSeveral investors emphasized that assessment should focus on outputs or outcomes inthe investee’s control. In other words, investors can ask their investees to monitor theimmediate outputs of their work – like number of female borrowers – but should bemore wary of committing investees to delivering or measuring more remoteinformation – like whether those customers have increased levels of savings.Standardize core metrics, overlay individualized metrics for more detailSeveral investors referenced that at least some of the metrics they use are standardacross all of the investments they make. Metrics that can apply across regions orsectors, though, are usually by nature higher-level or more generic measures. Thisdoes not necessarily make them less valuable, but it highlights the reason that severalinvestors use some standard metrics across much of the portfolio, and add investmentor sector-specific metrics to complement with more detail on individual deal orsector performance (Figure 3).Figure 3: Metric selection is an iterative processThis can apply to both the investee metrics and the investor metricsSource: J.P. Morgan.Set targets to benchmark performanceOnce metrics are selected, some investors and investees will then set numericaltargets for what those metrics’ readout might be in the future. For example, investorsmight set the goal of one million low-income consumers reached or one thousandnative-species trees planted. These numerical targets could then be used at a futuretime to judge whether the outputs had been achieved as planned or not.Document impact assessment termsWhile some investors prefer to keep impact targets out of legal documentation toallow more flexibility for the investee, others do utilize legal documentation ofimpact goals. Some confirm target outcomes in a side letter with the investee, others5
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015draft covenants within the investment documents themselves that are linked directlyto impact goals. Investors might also ask investees to become signatories in the UN’sPrinciples for Investors in Inclusive Finance or obtain a GIIRS rating, leveragingthird-party tools to help cement investees’ commitment.Data-driven investment managementShare learnings with investees, make it more than data collectionMany investors engage investees in the process of choosing the metrics by whichtheir impact would be assessed. Further, giving investees access to the results of theassessment can align incentives along over the life of the investment and ensure thatthe investee sees value in thorough, efficient data collection.Responding to poor performanceIn the event of poor impact performance, investors initiate a conversation to explorethe cause and gain insight into the current state of operations at the investee. Impactdata can prompt this exploration, which can also reveal risks to the financialperformance. Ideally, an impact assessment results in information that informs futureallocations and other market engagement strategies. Investors hope to use the outputsof their analyses in this way, though many are yet to implement this transfer ofknowledge as their portfolios are still young and the information too little as yet.Organization-level assessmentWhat and how an investor reports depends often on why they report. Investors thatmanage proprietary capital will have more discretion over their reporting, whileinvestors that manage money on behalf of clients will need to consider the interestsof their investors as well. While some investors might collect impact data on amonthly or quarterly basis, most of the investors we spoke to report the impact oftheir investments on an annual basis. Many of the investors featured in this reporthave produced public impact reports and we refer readers for examples.AttributionIn representing impact at the level of the investor, some investors calculate theportion of their investees' impact that they feel is attributable to their portion of thefunding. There were divergent views on the benefit of making such a calculation:some focus on checking that they made a contribution rather calculating the size of it,while others scale the impact they report by the proportion of capital they provided.AdditionalityIn social science, the term “additionality” is used to indicate that an interventiondelivered an outcome that otherwise would not have occurred. Some of the mostrigorous impact assessments analyze whether an intervention brought an additionalresult that would not otherwise have occurred. However, we found differing views onthe value of assessing additionality at either the investment or the investor level.Several investors do not assess additionality, some due to cost while others areunconvinced of the value of such an assessment. Others do assess additionality toknow that their capital is being used effectively, either qualitatively or quantitatively.Consider whether and how to aggregate across a portfolioAcross the investors we interviewed, few had a system in place today for aggregatingthe impact of a portfolio beyond simply reporting the total number of lives touchedor total jobs created. Others did not see that aggregating impact data at the portfoliolevel would bring much value, and chose not to make the analysis.6
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Introduction and methodology“The more that impact measurementmakes it possible to link accuratelyprogress in achieving socialoutcomes to financial returns, themore compelling impact investmentwill become.”Social Impact Investment TaskforceImpact investment has gained much attention over the past few years on the promiseof achieving both financial return and social impact. This simple yet powerfulproposition has catalyzed a growing set of organizations and individuals across thepublic and private spheres. While the size of the impact investment market is stilllimited, both in terms of number of players and capital allocated, many encouragingtrends have consistently supported its growth and positioned it for a scale-up phaseover the coming few years.1“Measurement should only be doneif, and to the extent that it willactually influence decision-making,and the cost of measurement is notexcessive compared to thesignificance of that decision.”OECDAssessment for value creation: a selection of case studiesAs the industry matures, investment portfolios are generating a growing set of impactdata. With this growing data set, investors are increasingly looking to move frombasic impact reporting frameworks to impact assessment that creates value formanagement. This research is designed to help investors navigate the set of choicesthat define an impact assessment process by highlighting practical examples acrossthe investment life cycle. To conduct this research, we interviewed and share theexperience of twenty one practitioners of different types, from foundations to fundmanagers to institutional investors – bios for each organization are available in theAppendix. We also conducted a literature review and a review of investors’published frameworks. This work resulted in sixty-eight case-studies across thedifferent stages of the investment process, which we present here.Figure 4: Report structure follows investment processAn investor’s perspective across three levelsThroughout the report we will reference three levels of perspectiveat which impact assessment can be made and utilized by an investor:a whole organization, across a portfolio and individual investments.These can be mapped to the investment process, as shown in Figure4, and we use this structure to organize our report. Some investorsconsider impact at all three levels, while others will focus on one ortwo more specifically.While we present this structure as a general process that investorsuse, we also emphasize that investors today prioritize different partsof the process, as the case studies show. Further, this linear formatdoes not capture the fluidity that occurs in practice across theinvestment process, and the iterations that investors make to theirassessment frameworks based on their learning over time.Clearly impact assessment can be valuable to more stakeholdersthan just the investor – such as the investee or the broadermarketplace – and where relevant we will specify thosestakeholders. In general, though, this report considers impactassessment from the eyes of the investor.Source: J.P. Morgan.1For more on industry trends over recent years, see the annual J.P. Morgan/GIIN ImpactInvestor surveys since 2010, at www.jpmorganchase.com/socialfinance.7
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015We reference assessment rather than measurementReaders will note that we use the term “assessment” rather than measurement inmuch of the report. We use this term to capture the whole process of assessment,from setting goals and benchmark targets, to determining the degree of depthrequired from the information collected, to measuring impact against theexpectations defined at investment, to sharing the results of that measurement withstakeholders and informing future allocations.Defining our terminology: Output vs. Outcomes vs. ImpactThroughout this report, we use the term "impact" to reference the environmental andsocial results of an investment. However, in social science, ‘impact’ has a specificdefinition: it describes outcomes that can be attributed to a particular intervention, asdepicted in Figure 5. An academic impact evaluation, for example, might entail amulti-year study with a control group to understand what would have happened if theintervention had not taken place. This type of rigorous evaluation, includingRandomized Control Trial, would provide the greatest possible certainty that thesocial ‘impact’ intended had been delivered, which is powerful but also onerous andexpensive in practice. Many impact investors therefore settle for measuring leadingindicators like ‘activities’ or ‘outputs’ rather than running control groups to measurethe ‘impact’. In this report, we do not prescribe that investors assess impact at anyparticular level of depth. Instead, our use of the term “impact” generally includes theleading indicators as well as the impact itself.Figure 5: The impact value chainSource: Rockefeller Foundation, J.P. Morgan.A Portfolio Approach toImpact Investment(Oct 2012)Building off previous workThis report builds off of work published in A Portfolio Approach to ImpactInvestment (Oct 2012), which follows the path shown in Figure 6 to illustrate thepractical steps impact investors take to build their portfolios. We refer readers to thiscomplementary report for a broader approach to impact investment management.Figure 6: A Portfolio Approach to Impact InvestmentSource: J.P. Morgan8
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Why assess impact?Impact investors allocate capital with the intention to deliver a set of positive socialor environmental outcomes alongside financial returns. Given the dual purpose,impact investors usually employ impact assessment as a part of their investmentprocess. In determining their impact assessment process, investors are faced with aseries of decisions including how much and what kind of data to collect, and howdeep the analysis should go. In order to best understand what led the investors weinterviewed to choose their current assessment frameworks, we asked them toexplain why they make the assessment and how they plan to use the results.For understanding, accountability and value creationDetermine outcomes and report to stakeholdersNaturally, most impact investors assess the impact of their portfolios to understandthe effect of the organization’s work against the social and environmental goals theyset, as a means of holding themselves accountable towards those goals. They maythen share their findings with internal and/or external stakeholders includingmanagement, shareholders and employees of the investee or the investor. Some havecommitments in place – contractual obligations or more informal agreements – toreport the social or environmental outcomes in certain ways (e.g. audited by thirdparty evaluations) or with certain frequency.Learn what works, and feed this back into portfolio managementSeveral interviewees referenced a further goal of utilizing impact assessment data todrive value creation at the level of the investee, the investor and/or the broadermarket. For longer-tenor investments, interim impact data can be used to refinebusiness practices or inform strategic decision-making at the investee level. Morebroadly, investors can use impact data to inform future capital allocations based onwhich interventions have been more effective. Some investors referenced that theyseek to contribute what they learned to public knowledge, and others that they utilizethe evidence to support advocacy work.“It’s our organizing principle.Sector focus and expertise arecritical to success so a thesisdriven investor needs tomeasure, monitor and learn inorder to be a better investor inthe future: find the best deals,add value to the portfoliocompanies, and exitresponsibly.”Frontier Investments GroupBridges Ventures: Impact assessment is part of our identityBridges Ventures views impact measurement as part of the essence of being animpact investor. In their view, an impact investor aims at contributing to solve asocial and/or environmental challenge, while also ensuring that the business modelsit backs operate sustainably. This entails prospectively defining target outcomes aswell as potential for positive and negative externalities, and then retrospectivelymeasuring total performance.Shell Foundation: Drive learning and resource allocationShell Foundation is accountable to their Board and develops yearly plans with 10indicators to judge performance and success. Shell Foundation has a strategicapproach to impact assessment and views it as a driver of resource allocation andlearning for subsequent projects. Hence, the Foundation prefers to track and measurechanges in performance against pre-defined milestones and impact targets – bothdevelopmental and financial – and believes that eventually, impact assessment willbe a source of value creation for impact businesses.9
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015J.P. Morgan: Build experience towards creating a client platformThe impact investment portfolio at J.P. Morgan, like our research, was established toexplore the market and provide the firm with the experience to build the appropriateclient engagement strategy. Allocating capital has built our experience of theinvestable set of opportunities in the market, and managing the portfolio hascontributed invaluable lessons in balancing financial and impact goals side by side,and translating impact assessment into a management tool for value creation.TIAA-CREF: Assess for transparency and learningTIAA-CREF assesses the impact of their investments for several reasons: (i) Toevaluate the program against the intentions with which the investment was made;(ii) To encourage transparency with their investees and pass this through to their ownstakeholders; (iii) To evaluate efficacy and identify trends that could be used indetermining future capital allocations; and (iv) To provide reporting to stakeholders.IGNIA: Using impact assessment to confirm the vision to self and to investorsIGNIA's mission and vision is to build a more equitable life for families at the baseof the socio-economic pyramid by providing financial and strategic support to highgrowth enterprises with a social impact. IGNIA considers impact assessment as anecessary exercise to confirm this vision to itself and also to its investors andstakeholders.Turning to the investment process and case studiesWith the background of why investors make these assessments, we now turn to howthey make the analysis. In the next section, we begin to present the case studiescollected across different investors, at different points across the investment process.Throughout the document, we use symbols to highlight: General case studies, Case studies on staffing various aspects of the work, and Debated viewpoints.These case studies color the analysis throughout the report. We now begin to presentthe impact assessment process along the path of the investment process.10
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Set organizational goalsOnce the rationale for assessment is clear, the process of developing a frameworkbegins. We will remind the reader where we are in that process throughout thedocument by referencing the structural diagram at left. We start at the organizationallevel with setting organizational goals.Build an impact thesisImpact investors allocate capital towards positive social and/or environmentalchange. Many investors articulate a specific “impact thesis” or “theory of change”they wish to support through their capital. Sample impact theses include: “Toempower underserved individuals at the Base of the Economic Pyramid, by sellinginnovative products that enable access to basic goods or services;” “To providefinancial services to the urban and rural poor, building financial literacy and prideamong women;” or “To address growing energy needs through scalable, sustainableenergy solutions.” These statements help to unite the portfolio around a goal againstwhich the portfolio outcomes can then be assessed and towards which theinvestments can be managed.Develop the impact thesis as a tool for screening opportunitiesSome investors utilize a single overarching impact thesis for their portfolio; whileothers operate across several impact theses, with different portfolios for each. Formost, the impact thesis serves as the mission towards which the portfolio is driving.Beyond being used as a first screen for opportunities, a theory of change can alsohelp an investor decide between two models of impact within a given sector.“A well-founded institution with anarticulated mission that adoptsbest practices will lead to a betterrun, sustainably profitable, betterinvestment.”MicroVestOmidyar Network: Unlocking new business modelsOmidyar Network has an organization-level theory of change focused on unlockinginnovative business models that can scale positive impact. As explained in an articlepublished jointly with Accion Venture Lab, Omidyar believes this scale can bedelivered through both direct and indirect means, illustrated in Figure 7. As thefigure shows, Omidyar assesses the systemic change that their investees inspirethrough such things as consequent funding rounds led by new investors or increasedcompetitive behavior inspired by the investee’s work. Their assessment thus includesthe broader systemic change that occurs beyond the individual investment.Figure 7: Omidyar Network and Accion reference five pathways to impact at scaleSource: On Innovators and Pinballs, M Kubzansky and P Breloff, Standford Social Innovation Review, Sep 2014.11
Yasemin Saltuk(44-20) 7742-6426yasemin.x.saltuk@jpmorgan.comGlobal Social FinanceImpact Assessment in Practice04 May 2015Root Capital: Assess the impact of our lending, and the impact of our clientsRoot Capital’s lending is directed towards “the missing middle” of developing-worldfinance, targeting businesses that are too big for microfinance and generally unableto secure credit from conventional commerc
Impact Assessment in Practice Experience from leading impact investors. Impact assessment is a key component of managing an impact investment portfolio, and many investors today are building methodologies that bring value beyond simply reporting outcomes. For many investors, the impact goal is the common thread across a portfolio of
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