How investors should first look in the mirror if they want better data quality.
To prove a social return on investment, an impact investor needs data; good data. Many impact investors complain about the quality of their data on impact. They say the data is incomplete, inconsistent or incoherent. Then the conversation quickly shifts to the investees, the companies in which the investors invest in. Who else could be to blame for the poor quality impact data other than the investees who are supposed to deliver the information? Don’t you agree?
No, I don’t agree. I feel there are valid reasons why the investees are not to blame. In my work as an impact consultant, I’ve found that investees often are unable to meet the impact reporting requirements imposed on them by their investors. Let’s look at why investees have a hard time meeting the impact reporting requirements of investors.
First of all, these investees, especially the smaller ones, are business-driven people, not analysts. Setting up measurement procedures to track the impact that investors are looking for is contrary to their operational character. These investees fear that such procedures distract them from doing business. So they resist.
Second, not all companies with impact investments behind them are for-impact businesses. They may consider themselves good entrepreneurs with a smart idea that also happens to be a solution to an environmental or social problem. I know an entrepreneur who hadn’t heard of the term impact before an impact investor knocked on his door. Now, he has to prove the effect of his positive impact. The entrepreneur then asked me “Isn’t it good enough to know that we’re making a difference?”.
Third, entrepreneurs are interested in data, but only if it is related to business performance. In fact, impact data has great potential to serve as business intelligence. Impact data is complementary to more traditional information like financial data or operational data. However, business owners need help with understanding the impact data. Unfortunately, investors often collect the data from the companies and keep the analysis to themselves. Thus investees feel they’re submitting information to a black box that doesn’t feedback the analysis. Not very motivating if you’ve worked hard on completing the long impact data request sheet.
Of course investors recognize this problem and want a solution too. Fortunately, there are things investors can do on their end. Here are three suggestions:
- Purpose: think of what you want to know before you start defining what impact you can measure. What is the core impact you want to achieve? What are the areas where you really want to make a difference and can be held accountable for? Which areas of impact do you consider out of scope? With a clear purpose for impact in place, both investor and investee know why they’re measuring impact.
- Focus: based on what you want to achieve, you should define what you need to measure. What data determines whether you’re achieving your goals and proves your investments were successful? The litmus test to separate relevant from irrelevant KPIs is to check if a KPI tells you something about the core impact. If you don’t need the KPI to prove the impact case, it’s probably irrelevant. A focused set of KPIs helps to bring down the reporting work load for the investee to a feasible level.
- Context: feedback the investment data to the investees so they benefit too.There are obviously valuable insights coming out of the investor’s analysis of impact data in portfolio. That’s why it’s so disappointing that some investors keep this information to themselves. To begin, it’s simply rude not to tell them what you did with the information they provided. But more importantly, the information is valuable to them too. If you link the impact data to their core business, entrepreneurs will be highly interested in this information. Think of client profiles, market demographics, operational efficiency; that’s all standard impact information that is closely linked to business performance. On top of that, investment portfolios offer investors the unique position to place a company’s business performance into context. This is information that few entrepreneurs have and many are interested in – provided that the information is relevant to business. Sharing impact analysis results will help entrepreneurs understand the value of impact measurement and gain commitment for data collection.
In my opinion, investors are right to be ambitious about the quality of impact data and they should set the bar high for their investees. However, there are concrete measures investors can take to help their investees meet these requirements. These steps are already a helpful start to smoothing out the measurement process and in the end, getting better impact results.