Why is measuring Social Impact not easy?

Why is measuring Social Impact not easy?

Most of us know that the definition of Impact Investing contains ‘environmental’ and ‘social’ sectors. 

During a discussion with a banker friend a few days back, this topic came into discussion. How come the impact investments, in contrast with classic philanthropy, and especially from institutional investors seem to be going mostly to environmental (like Climate Action) rather than social?

Well, to start with, the impact on the environment is relatively easier to measure using technology. But in my opinion, the social sector has three notable issues:

Firstly, access to real-time data. Sometimes the privacy laws or lack of standardization makes it difficult to obtain accurate information about health, economic means, social impact, social innovation, etc. For example, one social project was to invest in making the workplace healthy, so that the financial loss caused to the company because of having sick employees would be reduced and a part of that profit would be given to the investor as ROI. Unfortunately, it turned out that sick leave data in that country was private information, that neither the employer nor the insurance company could provide. Similarly, other sorts of data necessary to measure impacts can be difficult to ascertain, thus making accurate impact measurement which is a critical requirement for impact investors and wealth managers not possible.

Secondly is giving the proper weightage to social data. In different regions, different cultures, etc, the value of social data can have different weightage. For example, while having a temperature of 25C at a working place can be considered uncomfortable in European countries, it might be considered quite comfortable in some Asian and African countries. Hence the weightage given to this might differ. Thus, here the difficulty lies in taking measurements that consider more tangible and intangible variables to be able to derive accurate results.

Thirdly, the monetary value. Of course, all investments whether impact or not, are measured on financial value and performance. Social projects have more known and unknown impacts, which are often very difficult to give monetary value to. For example, making bio-degradable sanitary napkins available to poor regions has the social impact of increasing school participation of female students and increasing their chance of completing school considerably. But what monetary value would you give to this impact? Will it be the future productivity of that person when she gets a good job after finishing school? 

In conclusion, enforcing standard regulations of Impact Investment reporting on financial institutions will only make them choose for easy and secure way. 

One way regulators can support social investments, is by either looking at each sector individually or not setting too strict reporting guidelines which due to above-mentioned reasons will make it difficult for financial institutions to comply with. They should sit together with the market players and stakeholders, and work at creating a more robust and realistic methodology for the valuation and measurement of such investments. Otherwise, Social Projects will remain a hard sell to Institutional Impact Investors.

Ben Banerjee                                    20.10.2022