IMPACT MEASUREMENT METHODOLOGY

Transcription

1 IMPACT MEASUREMENT METHODOLOGY 1

2 TABLE OF CONTENTS 1. Introduction 3 2. Impact investing idea 3 3. Simpact s theory of change 5 4. Purpose of impact measurement 8 5. Simpact s approach for measuring impact Initial assessment Impact metrics assignment Impact strategy Data collection and reporting Impact metrics 15 2

3 1. Introduction Simpact is impact investing venture capital fund which invests in technology-driven projects that incorporate high business potential with positive social or environmental impact. We empower founders to build tech companies that combine profit with purpose. We believe that impact which project creates for the society and planet is the best indicator of its future financial performance because it represents the degree to which it solves actual problems. Being focused on making positive transformation in the world, Simpact s mission is to scale new tech innovations that successfully tackle the most pressing social and environmental problems in a financially sustainable and impactful way. Our investment philosophy states that technology is the strongest driver for development and for-profit solutions are the most important ones which enable lasting change. Simpact relays strongly on its mission and key goals, therefore apart from traditional financial targets, it also pursues explicit impact targets. Based on a fundamental principle: what is measured is being achieved because measured factors bring the most attention, we recognize the high importance of effective impact measurement system. This document presents Simpact s methodology of measuring impact and reflects its deep commitment to track created impact across its entire portfolio. Motivated by the desire to test the viability of innovative technologies and new business models Simpact introduces impact assessment elements into each stage of its investment process. All implemented practices are designed with the intention to understand what is being achieved with the capital that we invest, support culture of improvement and accountability, and foster impact. Impact metrics are aligned with Simpact s goals and track the progress toward desired social and environmental results. They measure the degree of the change since the onset of the investment and pose as a guideline in the investment management process. Data tracked over time, strengthen the process of building evidence for social returns and support data-driven decision making. Simultaneously, we recognize that there is much more that needs to be done to fully understand and accelerate social and environmental performance of our investments. Accordingly, Simpact places a strong emphasis on a constant evolution of its impact measurement practices. 2. Impact Investing Global Impact Investing Network defines Impact Investing as investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return. The idea builds on the concepts of ethical investing and corporate social responsibility and moves way beyond. Impact Investing is an act of providing capital to projects with special business models that deliver financial and social benefits. 3

4 Traditionally, social and environmental sectors have been dominated by governments, public founders, philanthropies and NGOs. Currently, however, new market-based players are gaining significant share of the market. Impact investors leverage the potential of private capital and use economic principles to produce positive change to social and environmental problems. Figure 1 illustrates a spectrum of investment intentions ranging from impact only investments to profit only investments. Impact Investing is situated in between philanthropy and private equity, donation and for profit investment. Its distinctive characteristic is its purposeful intention to generate both financial and social returns. Accordingly, Simpact defines its identity through deliberate objective of achieving financial value and social value. Figure 1 Simpact Spectrum Recently market approaches are gaining a big popularity as an effective mechanisms that provide impact at scale. Increasing support of private sector to public sector in creating innovative solutions to the world s biggest problems drives the high growth of impact investing market. Public agencies which traditionally have been related to impact, are not able to provide enough capital to satisfy all social and environmental needs. According to UN, private capital needs to address the shortfall of 2,5 trillion USD required to solve challenges of modern society 1. Impact investors invest in social enterprises providing capital to unproven business models at early stage across many different sectors. They are more flexible than mainstream investors and allow investees to grow and scale up at a steady pace. Apart from capital they also provide business guidance and mentorship. Impact 1 World Investment Report 2017, UNCTAD 4

5 Investing brings extra value to the economy. By providing patient capital and supporting entrepreneurs it catalyzes growth of social opportunities which are often underestimated by other financial institutions. 3. Simpact s theory of change Simpact s mission is to foster development and increase quality of life by scaling up tech innovation which solve the most pressing social and environmental problems in a financially sustainable way. We believe that technology is the key driver for development and only for-profit solutions enable effective and lasting change. Figure 2 demonstrates three fundamental statements which constitutes the core of our investment philosophy. Figure 2. Simpact s investment philosophy Science and technology is at the core of all major development advances and have significant economic impact. We recognize increasing role of technology in societal change and therefore we strive to promote sustainable innovation. By providing patient capital, sharing financial risk and supporting new technology-based solutions we want to foster enabling environment for future innovation which ultimately creates economic growth. Technology add substantial value to each development area, generates progress for humanity, society and environment. Simpact s goal is to make this added value reality and maximize it. At the same time we believe that only financially self-sustaining business models are able to generate effective and lasting change. Self-interested behavior, not philanthropy, can create prosperity in a sustainable way. Forprofit solutions satisfy human needs, improve efficiency, create jobs and generate economic value. Innovating through usage of new technologies, unconventional operating methods and modern management approaches enables business to increase productivity, cut costs and expand markets. For-profit models are the only 5

6 mechanisms that are able to leverage opportunities to growth and profitability and build long-term, stable improvement. Moreover, we recognize the enormous potential of business to contribute to social progress. A whole generation of social entrepreneurs is pioneering new product concepts and viable business models to address social needs and challenges and create shared value for business and society. We believe that commercial purpose can be consistent with social benefit while social mission opens up new needs, new markets, new value chain structures and totally new ways of thinking about business. This increases opportunities for strategic positioning and extra competitive advantages. Our investment philosophy is based on a conviction that financial returns and social contribution are interconnected and together with the power of innovation they can generate economically sustainable profound positive impact in the world. Simpact relies heavily on its mission and investment philosophy. Simpact focus all the efforts on implementation of new business model which integrate social and environmental dimensions. We invest in technology driven projects which have a potential to solve challenges of modern world in a financially sustainable way. We make early-stage investments and help to prove the concept in order to catalyze further growth and scale up impact. Therefore Simpact defines its investment target as a function of three key criteria which are featured on Figure 3. Figure 3. Simpact s investment target Looking for potential investees, it is crucial for us to understand if the project develops innovative technical solution, if it has potential to be scalable and financially sustainable and if it has deliberate goal to create positive impact on society and environment. 6

7 In order to stay fully focused on our mission and give clear direction to our activities we have characterized three main impact areas which prioritize our engagement. They reflect the impact that we want to achieve through our investments. They organize industry sectors and investment themes that we are the most interested in. Figure 4 presents the key elements of our investment strategy. Figure 4. Simpact s impact areas Simpact identifies three impact areas which formalize its impact strategy. Demographics represent demographic problems which include fast population growth, ageing population, migration, urbanization, unemployment, demographic pressure on environment. Demographic shift is by far the most significant challenge facing the whole world in 21 century. Relatively slow pace of demographic change requires extensive and long-term solutions. To address population issues and enhance the quality of lives, Simpact is looking for interesting project in healthcare, education, community development and human rights sectors. Second impact area which defines Simpact s focus is the issue of social exclusion. The challenge of exclusion cover the wide range of social and economic problems. It includes all situations when for some reasons people are being prevented from being involved in some activity or from entering a place. Main problems include poor skills, poverty, poor housing, high crime, bad health, disabilities, alcohol abuse, digital exclusion, ethnic problems. Simpact invests in project, which strive to empower underserved populations, reduce inequalities and enhance social cohesion. Furthermore Simpact concentrates its effort on all environmental challenges our planet is facing. Environment impact area addresses problems of global warming, pollution, waste disposal, natural resources depletion, deforestation and many others. Simpact supports eco-friendly project which limit degradation of environment, protect nature and species and contribute to preservation of the natural landscape of our planet 7

8 4. Purpose of impact measurement Impact measurement represent processes and activities which track progress achieved by the project towards desired social or environmental objectives. These activities include determining what to measure, collecting and analyzing the related information, and using the results in decision-making and reporting. As shown in Figure 5, impact measurement efforts serve a number of different objectives throughout the investment cycle. Figure 5. Continuous cycle of impact measurement, source: Harvard Business School, Measuring the impact in impact investing, 2015 As a part of due diligence process Simpact estimates impact that a potential project can generate. This helps us to understand what we can achieve with our capital and prioritize where to invest our resources in order to achieve intended impact. During deal negotiation we use available impact metrics and our own methodology to develop detailed plan on impact data collection and reporting in order to assess and maximize the impact during the lifetime of investment. Simpact monitors and analyzes impact together with financial data to know if project s performance is on track. At the end Simpact evaluates the impact created during the lifetime of investment and compares it with its in initial assumptions and targets. Simpact introduces well-define impact measurement system in order to place even more emphasis on impact creation and to better understand impact that is generate through our investments. Gathering and analyzing social and environmental performance data helps us to identify end beneficiaries and understand the value our 8

9 invested capital is delivering to the beneficiaries and the society as a whole. Delivering on our mission is central to our existence. Measuring impact encourage us to stay true who we are and why we exist. On the other hand it also provides great consumer insight for the projects themselves. Understanding how end users benefit from a product or service and their attitudes toward it poses valuable insight on customer characteristics and demand. Our projects use these information to improve their offering and create new marketing strategy. Measuring impact requires stronger relationships with our projects which benefits both sides. It generates more opportunities collaboration. Common analysis of impact data and follow-up discussions and brainstorming session result in many new ideas. Joint work on impact performance is a great learning experience for us and for our projects. As a first impact investing fund in Poland, Simpact is very determined to promote best practices of transparency and accountability in order to increase engagement of external stakeholders and motivate them to contribute to the impact investing ecosystem. Systematic ongoing collection of empirical data generate evidence of impact and is useful to build narrative of the whole impact investing ecosystem. By being transparent on how our inputs relate to achieved impact outcomes, Simpact wants to make a strong case for future players that will decide to enter impact investing sector. 5. Simpact s approach to impact measurement Simpact has designed its entire investment process around impact criteria in order to maximize social and environmental returns of its portfolio. At each stage of the process we aim to assess the potential of the project to realize impact. Figure 6 illustrates our impact-based actions across all stages of our investment process. 9

10 Figure 6 Simpact s investment process During very first screening we assess whether potential project targets fit our investment strategy checking if they fulfil all three key criteria: R&D, Profit and Impact. Afterwards projects which were qualified for initial assessment are verified on their potential impact and management commitment to impact. Simpact uses unified scorecards to rate projects capabilities and rank them accordingly. Projects with the highest opportunity score are shortlisted for due diligence and further analyzed. We map Input-Output-Outcome indicators that constitute projects impact value chains and assign impact metrics against which the progress will be measured. I-O-O analysis verify expected result and it guides our final decision about whether we decide to sign term sheet and start working on investment contract. During negotiations, together with project management team, we develop Impact Plan for the project, set pre-investment values for impact metrics and decide on monitoring and reporting content and frequency. While concluding on investment agreement, project management team signs Value Declaration which promotes the highest ethical, social and environmental standards. Over a lifetime of investment every project is committed to gather data on impact metrics and provide it to Simpact annually, in the form of Impact Report. Simpact analyzes results from all of its projects and aggregate them into Simpact Impact Report. 10

11 5.1. Initial assessment During initial assessment Simpact uses unified scorecards in order to assess the impact potential of its investment targets. The main objective of the analysis is to evaluate project s performance along all three Simpact s investment criteria and investigate project management competences and alignment with Simpact s mission and values. We gather required information through desktop research, in-house and external analysis, expert consultation and meeting with management team of the project. Simpact has built a model which simplifies the complexity of the impact potential assessment. Figure 7 depicts Simpact s framework for initial assessment. Figure 7. Simpact s initial assessment framework On a project level, Simpact ranks potential targets against its three key criteria: Technology, Profit and Impact. R&D aspect concerns technology which the project is based on. Simpact invests solely in projects which develop technology-driven innovation. Therefore it is crucial to investigate if proposed solution is innovative and what kind of benefits it delivers in comparison to already existing methods. Profit criteria corresponds with business opportunity of the project. It evaluates attractiveness of business model and scalability possibilities. Impact score confirms project s fit with Simpact s mission. It includes three components which represent Simpact s impact areas: Demographics, Exclusion and Environment. Project gets adequate points if it improves quality of lives, increases opportunities for underserved populations or protects species and nature. 11

12 On the management level, Simpact verifies if management team of the project has all the necessary attributes to realize all postulates. Founders are the key driver of project s success. We truly believe that team of people who is going to run the project makes a difference and is the most unique characteristic across entire portfolio. Setting some framework on people assessment is not easy task. However, in order to ensure some order and comparability we have defined three areas which we quantify: capabilities of management team of the project, their commitment to impact and alignment with Simpact s values. Aggregate value of project score and management score represents opportunity score of the project and is the basis for the ranking of potential targets. Projects with the highest opportunity score are shortlisted for due diligence where they are further analyzed in order to establish scope and outreach of their impacts Impact metrics assignment In order to develop impact metrics that will be used to evaluate the impact performance of the project, Simpact defines impact value chain. In the first step it describes the problems which the project tries to solve and its main aim in addressing them. Well-defined objectives are helpful in identification of all stakeholders that are expected to be the most impacted by project s activities. This analysis of the impact potential enables Simpact to map the relationship between project s inputs, outputs and outcomes. Inputs are all resources that are involved in the project which enable its functioning. Outputs are tangible, immediate practices, products, and services that result from the fundamental project activity, whereas outcomes are changes, or effects, on people or environment that are the result of those outputs. Traditionally impact value chain starts with inputlevel data and progresses to, output, and outcome-level data. Evidence of the extent to which the project has made a meaningful difference increases moving to the right of the chain. 12

13 Figure 8. Impact value chain After careful analysis of project s impact value chain we establish impact metrics which are indicators measuring identified inputs, outputs and outcomes with the strongest focus on outcomes. Metrics selection is based on IRIS Catalog and Simpact s own design. We engage management team of the project in the process of choosing metrics in order to ensure their full commitment. Some metrics are standardized which means that they are the same across the entire portfolio and others are individualized meaning that they are specific for each project or sector. However, they all need to be relevant to the business and in control of the management team of the project. Pre- investment numerical values of the impact metrics are set to benchmark project s future performance. Main indicator of impact result is impact multiple which is the relations between realized value and pre-investment value of the metric. Impact value chain model is a great illustration of how input and outputs relate to outcomes and therefore it is a very efficient evaluation tool to determine which project we should fund. It provides a discipline to Simpact s decision-making and forces us to make a clear argumentation on our investment Impact strategy During negotiation of the investment contract Simpact aspires to build with the management team of the project the shared notion of the future success. We strive to achieve a common understanding of what impact results we are aiming for, what metrics we can track in order to know if we are on a right path and how we will know that we have succeed. Moreover we also analyze if there are any potential negative impacts of the project and 13

14 come up with a clear policy on their mitigation. Impact Plan is a document which summarizes all of those agreements. It is a conclusion between Simpact and the management team of the project upon the impact that the project aims to achieve and the mechanisms it will use to measure progress towards those objectives. We believe that more purposeful approach to impact measurement make the process of data collection and reporting more useful for the project itself. Well-defined strategy that establish a specific focus and ambitious measurable goals gives the project clear direction for its main engagement. It reinforces all the efforts and contributes to meaningful change. Impact Plan includes social or environmental challenges that are addressed by the project, impact goals that the project strives to achieve, impact metrics selection which enable assessment of impact performance, data gathering methods, form of it presentation and frequency of reporting. Moreover it identifies stakeholder and resources which will contribute to successful accomplishment of the plan. Simpact attempts to strike a balance between clearly defining desired results and giving freedom to management team of the project to decide for themselves how they want to achieve them. Therefore all of the actions and processes outline in the Impact Plan are structured within the idea of constant improvement. Intermediate milestones and regular analysis of selected impact metrics and measurement practices leave a room for continuous evolution. Adjustments and lessons learned enable us to bring successful initiatives to scale while terminating those that underperform. 5.4 Data collection and reporting Simpact uses impact performance monitoring to track progress of its investment projects towards impact goals which involves collection, share, analysis, validation and reporting of impact data. The essence of the performance monitoring is to analyze progress and get to know whether the project is performing as intended. The tasks of collecting data on impact metrics is carried out by our investment projects and is reported to Simpact on a regular basis. In most cases impact performance report is provided quarterly together with financial and operating data. Collection and store of data in a timely and organized manner ensures that the information technology, tools, resources, human capital, and methods used to obtain and track these information function properly. While it sound like an accountability process, performance monitoring provides actually data that are very useful in managing operations and strategic decisions. Continous monitoring of impact performance of each project is keeping us updated and is allowing us to make a well-informed decisions about management of our portfolio. We strive to deep dive into all data that we collect, analyze it to better understand the results of our projects and drive conclusions. Simpact is focused on constant improvement therefore we have very flexible approach to assigned metrics. We change impact metrics or add new ones whenever we decide it is necessary in order to have a better understanding of impact performance. 14

15 Simpact uses the same form of the report to aggregate data from all investments and monitor the impact of its entire portfolio. In order to deliver meaningful insight and ensure big picture, report outlines current metrics with a historical baseline. We also recognize that more needs to be done to understand how metric use changes over time, to further socialize and address the challenges and limitations involved in measurement, and to improve the intrinsic business value of collecting impact data. Therefore we stay open for further improvements and share insights from our impact measurement practices and experiences we had with strategic decisions that result from these insights in order to contribute to a common knowledge of the entire impact investment sector. 6. Impact metrics Simpact recognizes dynamic changes in global economy and acts accordingly as the leader in impact investing field. While defining impact metrics for each of our investment projects, we use the collection of IRIS metrics and Simpact s own designed metrics. Figure 9. Simpact s impact metrics assignment process Cross-portfolio IRIS metrics represent six indicators that were chosen by Simpact from IRIS catalogue and are implemented across its entire portfolio because of their universal application. They can be implemented to every project while they measure the extent of the impact created regardless of its kind. Second group of metrics adopted from IRIS catalogue. Goal-specific IRIS metrics include indicators which are related to a particular impact area. They are closely related to the kind of the impact that the project is aiming to achieve. Moreover, on a case-by-case basis, Simpact develops its own metrics whenever it decides it is necessary. Majority of IRIS metrics tend to measure outputs not outcome whereas we put a great emphasis on 15

16 understanding the outcome of our projects. Cross-portfolio IRIS metrics are commonly-used in all of our projects whereas goal-specific and project-specific metrics are used selectively on per transaction basis depending on their relevancy to the particular project. This construction of metric selection provides optimal level of flexibility and comparability. Figure 10. Cross-portfolio IRIS metrics Cross-portfolio IRIS metrics measure the extend of the impact created by the project. Number of Clients/Users/End-beneficiaries and Number of Products/Services Sold metrics are proxy for the access to the output of the project. Job Creation metrics shows the size of input. Whereas Shareholder s Equity, Cashflow and Profit generation metrics are related to the business model and scalability and pose as a good predictor of future reach of project s output. 16

17 Figure 11. Goal-specific IRIS metrics Figure 10 gives a sense of metrics that are commonly implemented by Simpact into projects within specific impact areas. This set of metrics is not universally applied. We use specific metrics depending on a variety of different factors such as: sector, business model, type of product or service and target customer group. Figure 12. Project-specific Simpact metrics Moreover Simpact also constructs its own metrics which are designated to measure outcomes that result from our projects. We use very broad understanding of outcomes as very extensive array of consequences appearing 17

18 with the influence of the project. Usually they are not embodied by single number directly related to the project itself but rather based on many assumptions about customers or product/service. Figure 12 shows simple framework that directs our reason while we are designing metrics for each project. Whenever it is desired and feasible we want to track the growth of the market of a particular market that results from introduction or expanded use of the new technology or business model that the project we invest in has developed. We observe if there are any real changes at a sector level that are consequence of the project s influence. In even more broad perspective, Simpact strives to determine cost efficiencies and amount of extra income in order to assess what opportunity increment occurs as a outcome of the project. By using IRIS metrics and its own-designed metrics, Simpact wants to understand what are the outputs of the project, how those outputs result into outcomes and what is the extent of the outcomes. Taking into account how different is each and every project case that we are dealing with, there is no one simple solution on how to measure those effects. Therefore we have developed our own method of metrics selection and assignment for each project that we want to invest in. We believe that this individual approach to each project ensures the most efficient and valuable impact measurement. 18