Boosting early-stage impact investments: the role of a decentralized ecosystem
We aim to build an impact-oriented and decentralized ecosystem for sourcing, funding and accelerating projects that will solve important real-world issues.
In this paper, we’ll discuss the state of the art of impact investing and propose ways to leverage the best of the existing assessment models, in our move towards decentralization.
Impact investing: an emerging field
Here we examine the tentative standardization of impact assessment methods in this nascent ecosystem, a process led by the Global Impact Investing Network (GIIN). We’ll see that, despite real progress over the last 10 years, there is room for improvement in standardizing impact assessment methods.
Impact investing is certainly entering the vocabulary of investment professionals, but where are we in concrete terms?
At the end of 2020, the impact investing market is estimated to have been worth $715 billion, representing…0.7% ($103T) of the total value of all assets under management.
GIIN: the first mover and standard-setter
The impact investment industry is a relatively young ecosystem. The first standards of measurement appeared in 2009, with the GIIN. This organization defines itself as the “champion of impact investing, dedicated to increasing its scale and effectiveness around the world”, and states that: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
This definition highlights three key characteristics:
- Intentionality of impact — Intended impacts are specified prior to investment. This distinguishes impact investing from other forms of investment with impact considerations (e.g., funds with ESG policy)
- Impact measurement — An impact roadmap needs to be created, with concrete objectives and a timeframe with which to measure performance
- Return expectations — Impact investing aims to reconcile impact with profitability
In the absence of official regulation, the GIIN has acted as a key point of reference in the impact investment ecosystem. Indeed, almost half of the existing funds use its catalog of metrics for assessing potential impact or measuring actual one, which is second only to the Sustainable Development Goals (73%). GIIN takes its role very seriously, to the extent that its scientific committee has taken responsibility for setting out guidelines for the ecosystem construction, notably with the Roadmap for the Future of Impact Investing.
The work done by the GIIN has accelerated the process of standardization in the impact investing industry. Ten years ago, 85% of fund managers used their own Impact Measurement and Management (IMM) systems. Today, 89% rely on external tools, especially the SDGs, the GIIN’s catalog of metrics and the Impact Management Project’s dimensions of impact.
A beginning of standardization by the authorities
To prevent impact washing, institutions and authorities are working on standardized impact assessment and measurement criteria for each type of fund.
Given the market penetration of private players, like the GIIN, it is very likely they will have to use privately-generated tools as a starting point.
In the European Union, regulations are being drafted in the form of a Sustainable Finance Disclosure Regulation, which aims to prevent impact washing. The EU is working on standardized criteria to define the following three types of fund:
- Non-ESG funds (Article 6)
- ESG funds (Article 8)
- Funds targeting sustainable investments (Article 9)
It is clear that, although regulations didn’t begin until March 2021, they will closely resemble the existing impact assessment and measurement frameworks established by actors like the GIIN. This is why we consider this organization to be a key point of reference in the ecosystem.
Notwithstanding the huge progress in developing standardized IMM frameworks in the past decade, initiated by GIIN and now carried forward by public authorities, there is still much work to be done…
Existing methodologies are not fit for our purpose
“There are a lot of methods and analysis grids. The measurement of the impact of funds is not yet standardized, explained Aglaé Touchard-Le Drian (RAISE partner). There is this tension between the need, on the one hand, to standardize key indicators and, on the other, to be very specific to the investment in question.”
The lack of standardized frameworks increases the risk of impact washing.
For example, funds — whether impact-oriented or not — often claim to be aligned with SDGs; yet, without any standard for measuring the attainment of SDGs, it is impossible to verify these funds’ contribution in any precise way.
On the other hand, impact-oriented projects struggle to demonstrate the impact they have generated or to compare their performance with their peers, due to a lack of common measurement criteria.
Some methodologies have been invented to solve this problem, such as the Social Return on Investment (SROI). However, they are far from being unanimously accepted.
While the SROI insists on the prior specification of intended impacts (including the impact objectives of each stakeholder, the timeline of impact, and potential unexpected outcomes), one of the problems associated with this impact measurement method is the impossibility of isolating a project’s exact inputs and outcomes. How can we be sure that the perceived impact is due to the project’s contribution only?
Impact investing professionals regard the absence of standardized and commonly accepted methods for measuring impact to be a limiting factor that needs addressing.
When it comes to unique, privately-used measurement tools, it is similarly difficult to find something satisfactory.
Most of the methodologies are either too simple (lacking any scientific basis), or too complex for widespread, decentralized use.
For example, several VC funds highlight the integration of impact criteria in their project selection process. However, close examination reveals that they have no specific tools or analysts for this topic. These investors do not seek projects on the basis of their own pre-determined impact goals, but rather choose to fund viable projects that already have their own impact objectives. This still allows the investors to claim that they are impact-oriented.
On the other hand, some funds have adopted complex impact assessment and measurement methods. For example, INCO Ventures has adopted a scientifically-robust approach. They have built their own IMM systems (INCO ratings & MESIS), backed by Kimso, a cabinet of experts.
As a result, they have over 800 indicators in their database…
To move towards decentralized governance, we need to provide simple and understandable tools for assessing potential impact, that suit all members of the investment community. Overly complex assessment methodologies will not work.
Finally, despite the growing movement towards standardization, we were not able to find any universal methodology to assess impact. The personalized tools of specific funds are usually not clear and simple enough to be widely adopted by a decentralized community.
So, how can we design an impact screening tool — for finding projects whose intended impacts align with our predetermined impact goals — that works for a whole investment community? In other words, how can we move towards a fully decentralized system for evaluating impact intentions? In doing so, how do we make sure that we don’t simplify the screening and assessment process at the expense of scientific robustness?
Here are our provisional answers to these difficult questions…
Three development areas to be explored
1. Focusing on measuring the impact intention and its robustness at scale
In early-stage projects, what counts is the purpose and vision of the founders. Most evaluation grids are overly complex, trying to visualize and precisely quantify impacts before they are generated. For current fund leaders, this is the area of IMM that most needs development resources.
Clearly separating the screening of impact intentions on the one hand, from the impact assessment on the other, will simplify the project selection process. This opens the way for more standardization and decentralization.
⚠️ Warning: certain business models may find their initial intentions compromised when they scale up. Indeed, when the growth of a company is linked to the production of tangible products, the need for scalability and the impact intention can quickly become misaligned.⚠️
2. Maximizing impact generation by co-designing the roadmap
Creating simpler analysis tools for impact screening allows investors to, firstly, select projects based on their intentions, and then build the roadmap with project leaders afterwards. This saves them expending too much effort in the (often futile) process of trying to accurately complete standardized impact assessment grids. One of the common mistakes in the impact world is trying to exhaustively assess and report on potential impacts.
Building a roadmap with project leaders should be part of our mission. Defining the objectives, milestones and timeframe with them, alongside scientific experts, will maximize the chances of achieving concrete impact goals.
3. Harnessing strong scientific expertise and pushing for a decentralized approach
Our observation of the impact investing system is that funds are waiting for good ideas from project owners. This approach is too opportunistic, and tends to lead to only sporadic real-world impacts.
Is there an alternative way to address key environmental or social issues more precisely? What if we start from the problem rather than the solution?
We are working on a unique approach to identifying the most pressing problems:
- Creating task forces (scientific experts, professionals, consultants) dedicated to identifying the most urgent problems in a particular sector and suggesting potential solutions
- Recruiting an A-team of entrepreneurs with whom to co-construct an impact roadmap on one of the identified problems
This model, inspired by some well-known venture builders, is still in the design stage, but it could fit perfectly within a blockchain ecosystem. Task forces could be launched anywhere in the world in any sector, and propose projects on the launchpad.
Imagine if we could have teams around the world reinventing packaging for a plastic-free world, or working on pharmaceutical industry blind spots, like non-patentable molecules!
These are the 3 paths we are working on right now to enhance impact investing with blockchain technology.
More updates to follow…
Written by Yannis Baala & Anaïs Bouchet— Impact Projects Managers
