Understanding Impact Investing Performance
Unlike conventional investment management, impact investors can benchmark their performance in social or environmental returns in addition to traditional financial returns. Investors in ESGthemed indices, ETFs, or equity can track financial returns using the same conventional benchmarking tools as other traditional investors. A discussion of financial benchmarking tools will not be included here as there is already a variety of literature on investment portfolio management.
Tracking social or environmental returns, however, is more difficult. Tools such as B Analytics (profiled in more detail in the Appendix) allow investors to manage their companies based on ratings derived from IRIS or GIIRS. Most of this information is only collected ex post facto and cannot be exhibited in real-time. Furthermore, most of the ratings are based on “scores” given to broader themes within environmental, social, and governance categories. This information is qualitative and therefore difficult to assimilate into economic returns, which are tracked in quantitative financial terms. Quantifying social and environmental returns remains a challenge for investors seeking more specific information on whether their “impact investments” are truly making a difference. One possible solution to this problem is the social return on investment (SROI) concept.
Social Return on Investment Social return on investment (SROI) as a benchmarking tool is unique to impact investing. It can be compared to the price/earnings ratio in terms of its potential for evaluating performance. These metrics are used to measure value creation, and the SROI specifically measures the amount of social impact generated on a specific amount of investment in a particular subject.
SROI is not a new phenomenon in the world of impact investing–there have been discussions on SROI in the 1990s–however, measuring SROI remains tricky. Emerson, Wachowicz, and Chun of the Roberts Economics Development Fund (REDF) concluded that social enterprises create value in a continuum that ranges from economic, to socioeconomic, to social value.45 Economic value is the traditional motive for most enterprises; common measurements include return on investment, price/ earnings ratio, and profit margin. Social value is created when processes and inputs are combined to create improvements in the lives of individuals or society as a whole. Emerson, Wachowicz, and Chun state that this is where most non-profits operate, and it is difficult to measure value in this space since most “products” are qualitative and not reducible to analytical terms.
