Are you a social enterprise looking for impact investors? Better start measuring your impact. Good impact metrics not only help attract impact investors, they can also boost your performance and your long term viability.
Those are the conclusions of The Business Value of Impact Measurement, a study published recently by the Global Impact Investing Network (GIIN), which interviewed impact investors from 30 organizations, including Acumen, Ecotrust, Goldman Sachs, Omidyar, Root Capital and others.
“We wanted to understand the different ways impact investors use impact measurement data as a strategic and operational tool to drive business value for themselves and their investees,” says Abhilash Mudaliar, GIIN’s research director.
Impact investors use impact measurements to inform everything from investment decisions to increasing operational efficiency in portfolio companies. Indeed, the importance of impact measurement for business results is an issue that’s top of mind for many investors. A full 97% of the impact investors noted that measuring social and environmental performance is “very important” or “somewhat important,” because doing so can improve the financial performance of investments and inform investment decisions. Further, 80% of respondents reported they use data on social and environmental performance to inform business decisions.
The report zeroes in on five significant drivers of value that investors and companies get from impact measurement and management:
Investment decisions. Investors find impact measurements help them improve everything from deal sourcing to selection. “For some investors, data related to impact criteria—such as customer savings, job creation, and ecosystem quality—support decision-making about where to allocate capital by providing additional insights into market gaps that represent attractive opportunities,” says the report. Investors may also analyze their deals post-investment to determine whether it was cost-effective in achieving the desired impact.
“What we look for is: ‘Is this going to be a great business because it is highly impactful as opposed to despite being impactful?’”
— Arjan Schutte, Core Innovation Capital
Revenue growth. Impact data helps companies understand their customers and, as a result, develop products and services better tailored to their needs. That‘s especially important when it comes to gathering data on the impact products and services have on customers’ and the broader community’s lives and well being. Crucial data like customer income levels and access to healthcare or other services can be gathered before investments are made and used to measure later impact. Investors and companies can also turn to the information to fine-tune business strategy by, say, further segmenting customers.
Case in point: When the Gates Foundation recently invested in an East African social enterprise providing solar lighting to areas without electricity, an assessment revealed the product wasn’t reaching the poorest segment of the target population, according to Mudaliar. So they created a product at a lower price point. That not only made it affordable for more customers, but also increased revenues.
Improving operational effectiveness and efficiency. Investors can use impact data to improve operational areas ranging from HR to accounting. Example: LeapFrog, which makes equity investments in high-growth, purpose-driven financial services businesses in emerging markets, uses a proprietary measurement framework. It aggregates financial and operational metrics, like scale and reach, on a quarterly basis. By analyzing the data, the organization has been able to figure out ways to help companies pay more promptly, a vitally important issue when serving low-income people who lack the cash savings to pay for emergencies.
Marketing and reputation building. That better understanding of customers can help create more effective marketing campaigns. In addition, says the report, “The value of this information for impact investors and their investees extends beyond simply telling a positive story about the impact they have had. It also helps investors and companies earn trust with key stakeholders, which provides them with loyalty, license to operate and goodwill that can speed and smooth operations.”
Strategic alignment and risk mitigation. Impact data can ensure that investor and company activities are aligned with the mission, as well as help identify risks early. One microfinance asset manager, for example, requires the companies it invests in conform to various social performance management practices, such as monitoring how much their customers have borrowed from other microfinance institutions. “It helps them identify the potential for over-borrowing before it becomes a problem, “ says Mudaliar.
Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.