A recent article in Harvard Business Review provides an illuminating discussion of a new impact investing metric called the “impact multiple of money” (IMM). Developed by TPG Growth’s Rise Fund and the Bridgespan Group, the IMM entails a multi-step process whereby investors quantify and then monetize the predicted social and environmental benefits of an investment. The method’s applicability to different sectors and incorporation of various nuances, such as an “impact realization index” that adjusts impact projections by quality of evidence, make it a valuable addition to the impact investor’s toolkit.
Yet those eager for closure on the enduring challenge of quantifying impact may feel a bit discouraged by the IMM. At first glance, the metric evokes the “multiple of money invested” (MoM), a ratio of returned capital to invested capital that is typically reported as a straightforward (even oversimplified) fund performance indicator. Unlike the MoM, however, the IMM calls for much more than scanning financial statements and doing some basic division; it requires secondary research, expert consultation, economic valuation, and hedging—lots of hedging.
It’s also worth emphasizing that the IMM does not measure impact retrospectively but rather predicts future performance based on existing evidence, which varies in precision and generalizability depending on the issue area. Of course, investors are already familiar with the vagaries and liberties of forecasting, but financial analysis is far more concrete when it shifts from forward-looking projections to backward-looking accounting. The IMM offers no such ex post conclusiveness. Rarely will investors have the data to verify their IMM projections after making their investments.
Let me be clear—it is to the credit of the developers that the IMM is more complex and tentative than conventional valuation multiples are. A clear-cut equation would necessarily neglect the unavoidable difficulty and subjectivity of impact forecasting. The authors of the Harvard Business Review article avoid pretensions of hard objectivity (an all too common conceit in the industry) and acknowledge that published research does not provide simple instructions for calculating impact. They recognize that interpreting research findings requires debate, judgment calls, and often substantial investments of time.
Most would agree that all of that trouble is worthwhile, because impact investors should anchor their predictions in as much rigor as feasibly possible. I want to add, though, that investors who are just beginning to wade into the seemingly foreboding waters of meta-analyses and systematic reviews should feel encouraged by more than just the prospect of better impact estimation. Reviewing evidence can also be critical for sound impact management.
The Global Impact Investing Network defines impact management as “the process by which impact investors can understand the effects of their investments on people and the planet, and set goals to adapt processes and improve outcomes.” Whereas impact estimation is a relatively passive process of accounting for what a company is expected to accomplish, impact management is a more active effort to steer and maximize a company’s positive impact. Strategies may include providing technical assistance for product development, underwriting third-party sustainability audits, and incorporating impact goals into legal agreements to preserve mission fidelity. Because impact management requires familiarity with complex social and environmental processes, building domain-specific content knowledge through secondary research (including but not limited to academic publications) is essential for maximizing positive outcomes and minimizing negative ones.