In 2022, the Global Impact Investment Network (GIIN) estimated that the size of the impact investing market exceed $1 trillion for the first time. While $1 trillion is a milestone to be celebrated, perhaps more interesting are the emerging ways for impact investing to be measured.

Core Revenue Driver

For an investment to be considered for an impact allocation, the company must generate meaningful revenue from the portion of the business generating impact. If the company experiences a significant pivot or disruption, this section of the company may experience a decrease in relevance to the overall company’s performance. For ongoing evaluation, investors must monitor the significance of the impact driver in the company’s ongoing financial performance.

Holistic Measurement

Regardless of the size of the impact portion in a company’s overall balance sheet, the company’s impact must be measured on a net basis. Metrics should be designed to monitor the impact portion of the company against the positive or negative impacts of other portions of the company’s business.

Impact Measurement Must Address Additionality

Would the positive benefits be realized without the explicit contributions from the underlying portfolio company? Would a better impact have been achieved had the investment been allocated elsewhere?

Impact Measurement Must Include External Scale

Has the company contributed to exponential progress? Does the core investment drive change at scale? Does its presence contribute to a waterfall of decarbonization? Are there secondary or tertiary benefits to its business practices?

Impact investments are a story, not a spreadsheet. Some of its KPIs will be complex and evaluations will need continuous context. The most successful portfolio managers dedicate considerable energy into the primary and ongoing evaluation of financial and impact performance.

Originally posted on ScopeFour Capital LinkedIn.

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