By Leela Vosko, Director of Impact
In a rapidly evolving impact investing landscape, the journey towards developing and refining an effective Impact Management System remains challenging, yet essential. This year marked a significant milestone for MicroVest as we initiated the design and development of MicroVest’s new Framework for Portfolio Management, the Pyramid of Intentionality. Having concluded this process, I wanted to share reflections and takeaways from the perspective of a fund manager that had just evolved its Impact Management System in a fast maturing environment.
Is It Time to Standardize Standards Around Impact Measurement & Management?
Standard setters and industry organizations have been instrumental in shaping the integrity and diligence of impact investing, with significant progress made over the past few years. In fact, if it were not for the research and guidance initiated by standard setters, MicroVest would likely have not developed the its new Impact Framework. Despite these advancements, we found that the landscape among standards and best practices remains fragmented, as was evident during our research.
Impact investors seeking to comprehend and apply varying guidelines must still independently navigate a variety of reports on best practices, which requires piecing together a mental map of how different components of these frameworks align or diverge. Standard setters could enhance comprehension by providing more visual, contextual guidance for practitioners, which could help in clarifying the intersection and divergence of standards and facilitate greater adoption and harmonization across the industry. (The Impact Management Project’s System Map for Investors and Financial Institutions has been one helpful (and visual) resource for investors and financial institutions to manage their sustainability impacts.) Standard setters might also think about agreeing on a unified starting point for describing their best practices to enhance mental mapping. For instance, Standards A, B, and C could all decide to start their Guides at a common reference point within an Impact Management (IM) system, such as Goals. This approach would give readers a consistent baseline against which they could easily understand guidelines and best practices.
The Dangers of Adding Variables to Measurement Without Subtracting
As the field of Impact Management evolves and grows in sophistication, there has been a tendency to add additional criteria or considerations for measuring the impact of an individual investment or fund. This inclination towards adding new variables and pushing for more measurement is understandable, but should be carefully balanced with the subtraction of less relevant or outdated ones. If not, practitioners will need to dedicate more time and resources to adhere to an expanding list of variables, some of
which may have limited value or be outdated. More importantly, this could divert focus from core activities, which is to mobilize capital toward impactful initiatives. We feel that simplification and prioritization should not be considered inferior to sophistication when it comes to measuring and managing impact. As such, to ensure that the primary mission of impact investment remains front and center, it is necessary to enable a more focused and efficient pathway for achieving meaningful social and environmental outcomes alongside financial returns.
Measuring What Matters – Differing Approaches May Still Lead to the Same Investment Decision
Many can agree that measuring impact is not straightforward; sometimes, impact resists measurement. Yet, there remains a broader push toward more and more impact measurement. Investors will typically seek to measure impact in an effort to 1) improve the quality of investment decisions; 2) better understand their own impact 3) report impact to stakeholders, and/or 4) manage and improve impact. However, the methods investors employ to evaluate these aspects can vary significantly, despite often leading to similar conclusions. We should always ask ourselves: Which method enables the acquisition of necessary information in a straightforward and efficient manner? Currently, there is no universally accepted standard for impact measurement, though many investors are creating and sharing their own methodologies. This question of what to measure and how to implement it continues to evolve and we will continue to share our approach as our thinking around this evolves as well.
Small Fund Managers
For small fund managers like MicroVest, it is crucial to clearly define the boundaries of an area of operation and establish firm agreements on what will and will not be included in our IM System. Creating an evidence system that fits well with the size of the practice and the resources available to allocate to measuring and monitoring impact requires careful consideration of both when to measure impact and when it is better not to. In this regard, there is much that can be learned from a small fund manager when it comes to demonstrating lean and efficient approaches to impact measurement and management.
At MicroVest, we hold ourselves accountable not only to our investors but also to our portfolio companies and their end beneficiaries. We are committed to the dual objectives of ensuring the financial and credit sustainability of our portfolio companies and while support and assessing the impact of our investments. We continue to refine our approach and adapt as the market changes.
Disclaimer
The information contained in this article has been provided by MicroVest Capital Management LLC (“MicroVest”) and no representation or warranty, expressed or implied is made by MicroVest as to the accuracy or completeness of the information contained herein. This article is for informational purposes only and is neither an offer to sell nor a solicitation of an offer to purchase an interest in any MicroVest product (the “Funds”), and nothing herein should be construed as such. Any such offer or solicitation will be made only by means of delivery of a definitive private offering memorandum which contains a description of the significant risks involved in such an investment. Prospective investors should request a copy of the relevant Memorandum and review all offering materials carefully prior to making an investment. Any investment in a MicroVest product is speculative, involves a high degree of risk and is illiquid. An investor could lose all, a significant portion or some amount of its investment. You should not construe the contents of the enclosed materials as legal, tax, investment or other advice. To invest with MicroVest, one must be a qualified purchaser and an accredited investor. The investments may be deemed to be highly speculative investments and are not intended as a complete investment program. They are designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment in the Funds and who have a limited need for liquidity in their investment. There can be no assurance that the Funds will achieve their investment or impact objectives.