As concerns about scarcity and inequality become increasingly urgent, many investors are eager to generate both business and social returns — to “do well by doing good.” One avenue is impact investing: Directing capital to ventures that are expected to yield social and environmental benefits as well as profits. Although the business world has several universally accepted tools for estimating a potential investment’s financial yields, no analog exists for evaluating hoped-for social and environmental rewards in dollar terms.
Over the past two years the organizations we work for — the Rise Fund, a $2 billion impact-investing fund managed by TPG Growth, and the Bridgespan Group, a global social-impact advisory firm — have attempted to bring the rigor of financial performance measurement to the assessment of social and environmental impact. The partnership between Rise and Bridgespan has produced a methodology to estimate the financial value of the social and environmental good that is likely to result from each dollar invested. We call our new metric the impact multiple of money.
The method of how to calculate an IMM during an investment-selection process consists of six steps.
1. ASSESS THE RELEVANCE AND SCALE
Investors should begin by considering the relevance and scale of a product, a service or a project for evaluation.
With regard to scale, ask: How many people will the product or service reach and how deep will its impact be? Rise’s experience with calculating the product reach of the educational technology company EverFi provides a good example. Rise identified three EverFi programs that already had significant reach: AlcoholEdu, an online course designed to deter alcohol abuse among college students, which was given at more than 400 universities; Haven, which educates college students about dating violence and sexual harassment and is used at some 650 universities; and a financial literacy program that introduces students to credit cards, interest rates, taxes and insurance, and is offered at more than 6,100 high schools. On the basis of projected annual student enrollments in these programs, Rise estimated that an investment in EverFi could affect 6.1 million students over a five-year period beginning in 2017.
Of course, a program’s impact is not just about the number of people touched; it’s about the improvement achieved.
2. IDENTIFY TARGET SOCIAL OR ENVIRONMENTAL OUTCOMES
The second step in calculating an IMM is identifying the desired social or environmental outcomes and determining whether existing research verifies that they are achievable and measurable. Fortunately, investors can draw on a huge array of social science reports to estimate a company’s impact potential. Over the past decade foundations, nonprofits and some policymakers have relied heavily on research results to guide funding for social programs.
For AlcoholEdu we drew on a 2010 randomized controlled trial demonstrating that students who had been exposed to the program experienced an 11% reduction in “alcohol-related incidents.” That would amount to some 239,350 fewer incidents. According to the National Institutes of Health, alcohol-related deaths account for about 0.015% of all deaths among college students in the United States. Rise estimated that AlcoholEdu would save 36 lives among the approximately 2.2 million students who were projected to engage with the program over a five-year period.
3. ESTIMATE THE ECONOMIC VALUE OF THOSE OUTCOMES TO SOCIETY
Once they have identified the target outcomes, social-impact investors need to find an “anchor study” that robustly translates those outcomes into economic terms.
To choose an anchor study we look at several key features. First, its rigor: Does the study systematically evaluate previous research results to derive conclusions about that body of research? Alternatively, does it present findings from a randomized controlled trial — which compares groups with and without a designated intervention? Both types of research are preferable to observational or case studies. Just as important is relevance: Does the study include people living in similar contexts and in the same income bracket?
When uncertainty or a lack of reliable research stalls your work, seek guidance from an expert in the field.
4. ADJUST FOR RISKS
We adjust the social values derived from applying the anchor study to reflect the quality and relevance of the research by calculating an “impact realization” index. We assign values to six risk categories and total them to arrive at an impact-probability score on a 100-point scale.
Two of the index components relate to the quality of the anchor study and how directly it is linked to the product or service. Together these account for 60 of the possible 100 points. Anchor studies based on a meta-analysis or a randomized controlled trial merit top scores, whereas observational studies rate lower.
The four remaining index components, each of which gets a maximum score of 10, are context, country income group, product or service similarity and projected usage.
Constructing the index proved challenging. We refined the risk categories and the values assigned to each many times on the basis of feedback from experts in evaluation and measurement.
5. ESTIMATE TERMINAL VALUE
In finance, terminal value estimates a business’s worth in dollars beyond an explicit forecast period and typically accounts for a large percentage of the total projected value of a business. It is, however, a new concept in social investment, where attention usually focuses on quantifying present or historical impact. To be sure, for many projects the social impact does not long outlive the program. But others can have a longer-term impact. In some cases, therefore, it makes sense to estimate a terminal value.
6. CALCULATE SOCIAL RETURN ON EVERY DOLLAR SPENT
The final step in calculating an IMM differs for businesses and investors. Businesses can simply take the estimated value of a social or environmental benefit and divide it by the total investment.
Investors must take an extra step to account for their partial ownership of companies they are invested in. Suppose Rise invests $25 million to buy a 30% ownership stake in a company projected to generate $500 million in social value. It can take credit only for the proportion of that value reflected by its stake: $150 million. Rise divides $150 million by its $25 million investment and arrives at $6 in social value for every $1 it invested — an IMM of 6X.
BUSINESSES AND INVESTORS must develop better ways to assess social and environmental impact. We’ve embarked on this experiment to demonstrate the value of putting impact underwriting on the same footing as financial underwriting. In a world where more and more CEOs talk about profit and purpose, the IMM offers a rigorous methodology to advance the art of allocating capital to achieve social benefit.
Chris Addy is a partner at the Bridgespan Group, a global social-impact advisory firm. Maya Chorengel is a senior partner at the Rise Fund, an impact fund that is part of the private equity firm TPG Growth. Mariah Collins is a manager at the Bridgespan Group. Michael Etzel is a partner at the Bridgespan Group.
