Setting an impact goal is the first step towards measuring and managing the performance of impact investments (Mudaliar et al. 2016). An impact goal relates to the social and/or environmental impact that an investor tries to achieve through its investment.⁸ Like philanthropists, impact investors may aim for a wide range of social and/or environmental goals, which are subjective in nature (Brest and Born 2013). Impact investors may formulate objectives such as supporting clean cooking in developing countries, providing bed nets to prevent malaria, or the reduction of greenhouse gas emissions.

Simon and Barmeier (2010) state that organizations should initially focus on one or two more specific social or environmental goals which are in line with the organization’s mission, and measure the progress towards these specific goals. Concrete impact expectations and objectives should be formulated prior to the investment. A good understanding of the relevant goals is required for high-quality decision-making and helps to gain insight into the extent to which the objectives were achieved and how future investments may be improved (Maas et al. 2016).

There is a vast literature on management accounting and accountability that shows that performance measurement systems are used by companies in production and service industries (e.g., Ittner et al. 2003). Companies use financial metrics and forward looking, non-financial, measures to create economic value (Ittner and Larcker 1998; Ittner et al. 2003). Furthermore, Adams and Frost (2009) show the importance of key performance metrics for decision making, planning and performance measurement. Perego and Hartmann (2009) show that the quantification of environmental measures can improve the alignment with the environmental strategy.

Although the identification of successful investment strategies and opportunities is crucial for the success and growth of the impact investment industry (e.g., Jackson 2013b; IMWG 2014; Mudaliar et al. 2016), measuring the outcomes or impacts of investments is often a difficult task (IMWG 2014). In particular, it may be difficult to identify which outcomes can be directly attributed to the impact investments. Moreover, impact measurement is complex and constrained through the intangible nature of outcomes, and the required resources to quantify and describe these outcomes. Furthermore, the industry struggles with sensitive social and economic data, as well as limited data access (Jackson 2013a). Hence, these factors explain why impact investors are slow in adopting performance measurement systems despite the clear benefits.⁹

Many different social impact measurement models have emerged over the past few years (Maas and Liket 2011).¹⁰ These models help organizations to measure, manage and report the impact they generated and to take responsibility to those whom they aim to serve (IMWG 2014). The impact data should eventually provide insight in the extent to which value was created for the stakeholders. Standardization, analysis and reporting of such data can subsequently help impact investors to more efficiently raise and allocate capital in the future. This, in turn, should enable impact investors to generate more impact, while increasing transparency and accountability (IMWG 2014).

For investors to take impact into account, they first need to identify the impact itself. The role of the stakeholders is crucial in the impact measurement process, since the impact an investor creates is ultimately dependent on the investee (Brest and Born 2013). Furthermore, a potential investee should find a suitable way to create, measure and communicate impact (e.g., by filling out a survey that was sent out by the investor). Hence, investors should examine the degree to which an investee can meet the objectives of the organization, and it is important that the interests of the impact investor and investee are aligned (Epstein and Yuthas 2014).

While it is important to track key outcomes in order to help investors make more informed decisions based on relevant data (Golden et al. 2010; Brest and Born 2013), it is essential that data requests from the impact investor are in line with the daily business of the investee and the investees information needs (IMWG 2014). An overload of indicator reporting is an unnecessary burden for the investee, and may distract the investee from achieving their impact objectives and enhancing their organization (Simon and Barmeier 2010; Reeder and Colantonio 2013). Moreover, impact measurement requires financial resources, which can lead to higher transaction costs for institutional investors and investees, thereby making impact investments less attractive from a financial perspective. Hence, impact investors need to examine which data is worth collecting.

The impact investment industry is a relatively young market, hence limited data about impact investment performance is available (Ragin and Palandjian 2013). This implies that existing data often has to be evaluated in an isolated manner, due to the lack of benchmarks (Saltuk et al. 2015).

There are several actors in the field of impact measurement which offer a direct, measurement-related service to impact investors. These are actors that are specialized in impact measurement advice, benchmarking and reporting specialists. Examples of well-known organizations are Sustainalytics, Trucost, B Analytics and MSCI. These intermediaries can facilitate the selection of investments which have a high likelihood to achieve a considerable impact. Although such initiatives are a good start, the practices of these organizations are currently not universal (Ragin and Palandjian 2013).

An impact investor needs to analyze data to assess the progress toward the goals of the investment. Where relevant and feasible, this analysis needs to incorporate the achieved contribution or attribution. To monitor goals, key indicators and targets are essential. A good impact analysis typically compares the key performance indicator against a historical baseline, a forecast, or industry peers (Behn 2003).

When the impact data is analyzed, it is important to look at the indicators which did not contribute to decision-making and reporting (IMWG 2014), since requesting unnecessary KPIs creates a burden for the investee (Simon and Barmeier 2010). It is however unclear if impact investors have obtained sufficient expertise to evaluate the outcomes (Duiker et al. 2016).

There is an increasing interest in non-financial information (Cecil 2010; Eccles and Krzus 2010; Eccles and Saltzman 2011). Reasons for organizations to report nonfinancial performance are to manage the perception of stakeholders (Skouloudis et al. 2010; Ragin and Palandjian 2013), to show the organization’s value to the world, and to prove that the activities of the organization are in line with social norms (Simnett et al. 2009; Cecil 2010). In addition, communicating and reporting of the achieved impact keeps organizations accountable to their stakeholders (Skouloudis et al. 2010; Ragin and Palandjian 2013). Simon and Barmeier (2010) and Ragin and Palandjian (2013) state that impact investors should be transparent about the social impact which the investments have generated.

Maas et al. (2016) state that sustainable performance measurement, reporting and management can be used to create transparency and facilitate decision support to improve performance. Similarly, Jackson (2013b) states that information about the performance of investments can lead to improved selection of new investments. Furthermore, good outcome performances can enable organizations to attract new investment capital (Ragin and Palandjian 2013). The ability of companies to attract capital and to direct it to quality impact investments will determine the growth of the impact investment industry. In fact, Hummels and Fracassi (2016) find that there are ample investment opportunities, but that most do not comply with the size and risk-return impact profiles of institutional investors, making it harder to use previous impact data for new investment decisions. According to Jackson (2013b), the impact investment industry could become more robust, resilient and self-sustaining through impact evaluation.

From the discussion of prior research and the seven guidelines on impact measurement it has become apparent that performance measurement is a crucial aid to evaluate prior investments and to identify and select good future investment opportunities. However, it is unclear to which degree impact investors have adopted performance measurement systems since social and environmental impact is typically difficult to quantify and because collection of impact data is time consuming and puts a burden on the investees. In the next section we discuss the research methodology which is used to examine to which degree impact investors measure social and/or environmental impact and to which extent they currently incorporate and expect to incorporate this information for future investments and related reporting.

When asked to define impact investing, the interviewees mentioned that numerous different definitions of impact investing are used both in the Netherlands and internationally, suggesting that no definition of impact investing is used consistently among investors. This is in line with studies that indicate regional differences, as well as differences between institutions, and individuals (Jackson 2013b; Calderini et al. 2018). Despite the fact that the participants mentioned different definitions and characteristics of impact investments, five out of thirteen of the investors referred to the impact investing definition of the Global Impact Investing Network (GIIN).

Core characteristics of impact investing that were referred to are intentionality, impact measurement, investments with a social return as well as a financial return, and positive change. However, none of the impact investors referred to the attribution characteristic of impact measurement when asked to define impact investing. While it is feasible for investors to identify whether an investment contributed to the realization of results (i.e., the contribution approach), it is undoubtedly more complicated to accurately identify an investment’s impact while accounting for simultaneous investments by other investors and other factors (such as changing social and economic conditions) that may have contributed the achievement of results (i.e., the attribution approach). When asked further, three interviewees indeed indicated that measuring attribution is really difficult, and sometimes impossible. Participant 4 describes the issue as follows: “Attribution is very difficult to measure. There are certain assumptions that arise from research. On the basis of such assumptions we can report data at an outcome level”. One of the interviewees mentioned that the measurement of attribution is not so important for the organization, as they find it sufficient when the invested money leads to solutions for social problems within the specified themes of the organization. This interviewee claimed that attribution is very difficult to measure, especially in the case of liquid markets, because the organization then only plays a small role in the total investments in the investee. Only in the private market, infrastructure, and private equity, attribution can sometimes be expressed (Participant 1). Therefore, it may not be surprising that only one participant tries to measure attribution. Another interviewee stated to look at contribution instead: “We let go of attribution. We look at contribution instead” (Participant 10).

The investment developments in the social field contribute to new business models. With respect to the business models the following was indicated: “First we had finance driven business models, then finance and risk business models and currently finance, risk and sustainable driven business models” (Participant 7). Several interviewees indicated the need for a growing impact investment market, and one of the interviewees stated that “Conventional financing is not unlimited” (Participant 1). In addition, impact investors search for beneficial solutions to address problems in the economy (Participants 1, 2 and 5). However, currently the impact investment industry is not yet seen as successful. Only one third of the interviewees stated that the impact investment industry is a success already, while the majority was more skeptical. One of the interviewees argued that impact investing is successful when using existing vehicles, like green bonds, but that it is not successful when you talk about the best-in-class approach (Participant 7).¹² This interviewee argued that this is not the way impact investments are supposed to be carried out, because: “In that case you claim to make impact, although your contribution as an organization is limited” (Participant 7). In contrast, another interviewee stated: “Often impact investing comes in combination with a best-in-class approach. This is in particular an appropriate solution for institutional investors” (Participant 5). Another interviewee stated that the impact investment industry is not successful since it is not common practice. Moreover, some interviewed institutional investors indicated that too little scalable impact investment opportunities exist. This is in line with Hummels and Fracassi (2016), who indicate that the largest problem for investors is finding suitable investment opportunities.

To gain more insight into the expected developments, the interviewees were asked about their view on future developments. Eight institutional investors indicated that impact investments will be a success in the future, while five institutional investors were more skeptical. An increasing demand for impact investment opportunities combined with growing prosperity could lead to a bright future for impact investments. One of the interviewees argued: “Forecasts and trends indicate that more money will be invested in the future, due to growing prosperity. From this perspective, you also can expect that there will be more attention to Triodos-like organizations” (Participant 11).¹³ Moreover, most interviewees emphasized the importance of retirement funds for impact investing in the future.

In contrast, one of the more skeptical interviewees argued: “There is a reputation risk. If one thing goes wrong it will be all over the news, and then impact investing will fall apart” (Participant 15). Another interviewee also indicated the possibility of reputation risk, and illustrated this with an example of an investment made in a company that contributes to food security through genetic modification. Such an investment might result in negative publicity as the growth hormones could potentially be carcinogenic (Participant 1).

When asked for challenges in the impact investment industry, a couple of points were indicated. Some argued that they fear that the definition of impact investing will diminish (Participants 1, 4, 5 and 8). The lack of clearness of the impact investing definition is also recognized by Olsen and Galimidi (2008) and Calderini et al. (2018). Other impact investors indicated challenges in classifying impact investments into different asset classes (Participant 5). However, it was stressed that impact investing itself does not belong to a separate asset class, as claimed by O’Donohoe et al. (2010). Other interviewees indicated challenges with regard to impact measurement (i.e. Participant 3), which will be extensively discussed in the next section.

Most of the interviewed impact investors have a general impact goal, but indicate that they are also exploring new impact areas. Only three of the thirteen institutional investors formulated specific impact goals. Nine investors linked their impact goals, which are either general or specific, to the Sustainable Development Goals (SDGs), and eleven indicated willingness to (continue to) do this in the future. Several advantages of the SDGs which were mentioned are: it is a universal tool, it makes communicating easier, it provides a broad overview of the development area, and it gives a framework to structure investments. Some disadvantages that were mentioned are: there are too many goals which makes it daunting, the goals are too high-level, and that the system could end up being used as a marketing tool.

A majority of the interviewees indicated that they expect that navigating companies towards impact goals becomes extremely important in the future. Participant 3 stated: “It all starts with you. What do you want to achieve?”. In particular, it is suggested that companies need to think about the way in which they are distinctive, and that they need to be transparent about it. The impact goals should be integrated within the whole organization, and aligned with the mission according to several interviewed institutional investors (Participants 1, 3, and 15). This is also indicated by Simon and Barmeier (2010), who state that organizations should start focusing on one or two social or environmental goals that are in line with the organization’s mission.

The Impact First investor in the sample pointed out that they search for new investment opportunities to provide a proof-of-concept for other impact investors. This Impact First investor stated that the organization is able to do this from the viewpoint that achieving impact is priority. The interviewee gave an example of such an investment, which is an investment that supports clean cooking in rural areas in Africa. With regard to this investment, the interviewee stated: “The financial risk is very high, but the potential impact and added value are high as well” (Participant 10).

During the interviews it became apparent that the approach to impact measurement depends on the impact commitment of the organization and its role in society. Most impact measurement models used by the interviewed institutional investors have the objective of measuring the estimated impact, but the institutional investors in the sample still search for a suitable model. From the thirteen institutional investors in the sample, twelve indicated that they recently tried or are soon going to try a new impact measurement model, suggesting that they strive to improve the way of measurement. However, there is some variation in the quality of measurement as illustrated by the following quote: “We are not much further than telling what our outreach is” (Participant 10). Despite this, the interviewed institutional investors indicated that there is no need for new impact measurement models. Instead, they indicate a need to outline the best practices of impact measurement models for each sector. According to one of the interviewees, a lot has changed in the last six years in impact measurement. The interviewee claimed that while the research of Maas and Liket (2011) indicates 30 different quantitative impact measurement models, there is now a tendency towards a universal model (Participant 4). Many institutional investors currently use impact measurement models from existing initiatives, which are then adapted to their organizations. Within the sample the most widely used models are the models of Bridges Ventures and B Lab. One interviewee, who uses both models, stated the following “The method of Bridges Ventures, that we have aligned with our organization, is actually a kind of roadmap. It starts with a radar and eventually leads to a scorecard with KPIs” (Participant 10). When asked why this model was chosen, the interviewee responded: “Primarily because the model takes risks into account, and secondly because the model focuses on actual outcomes. Besides this, we are under the impression that, since they use the model for their own investment team, the model is quite advanced.” In addition to the models of Bridges Ventures and B lab, interviewees indicated the promising expectations for the new update of SPI4 from the Social Performance Task Force, which can be used for the inclusive finance sector.

All interviewees indicated the need for standardized impact metrics. One of the interviewees stated: “We firmly believe in the standardization of metrics” (Participant 1). It is indicated that standard impact metrics may lead to less burden for the investees, who then need to fill in one survey instead of multiple surveys. Currently, the investees get an excessive amount of surveys, therefore it is important that organizations only measure the necessary metrics (Participant 5, Participant 10).

In general, standardization in the impact investment industry is important because it enables the market to become more mature. Thereby impact investments will become more accessible for investors, leading to an additional inflow of money to the industry. However, there is also a risk associated with standardization. One of the interviewees referred to the risk of: “hitting the target, but completely missing the point” (Participant 13). This may happen when institutional investors make standardization an objective in itself. The interviewee argued: “We all know the history with the high credit ratings. If you want to assess risk, you need to look at the underlying investments!”. Furthermore, this interviewee stated: “Each sector that matures, will find a fixed terminology, methodology, and best practices. Then there is uniformity”. This indicates that patience is required, as one of the interviewees mentioned: “The financial world is built in 300 years and that is not the case with this industry” (Participant 4).

The interviewees were skeptical about the possibility of reaching one general comprehensive model. One of the interviewed institutional investors argued: “Standardizing metrics is important to us. But the weighting of certain playing fields is something that cannot be standardized”. Later in the interview this interviewee referred back to this question and argued: “A procedure can be standardized, but assigning weights is full of judgments, which is something you cannot standardize” (Participant 1). Another interviewee argued about standardization: “I think it is an illusion, that through standardization, everything can be added up and becomes comparable” (Participant 8).

One interviewee argued that it would be ideal to have one model in which all indicators are available, so that each impact investor can select its own indicators within a specific sector (Participant 15). Another investor pointed out that some organizations, like banks, would be able to standardize certain methodologies, but are not able to do so since they depend on the needs and requirements of the investors (e.g., retirement funds). Therefore, this interviewee mentioned: “In the end, the large investors will set the standard” (Participant 12). Overall, according to most interviewees, impact models should be made specific for each different industry. One comprehensive model with all different sectors is not beneficial according to the interviewees. It is hard or even impossible to create systems that can accommodate all different intentions in the world. Eventually, the management of impact data should be developed in the same way as the management of financial data (Participant 1, Participant 15).

One of the participants argued “There is a need for a platform in which companies can share their methodologies” (Participant 7). This was supported by another interviewee who mentioned that they are working with another organization to collect and aggregate the data of investees, so they can increase knowledge about certain impact areas. This information can subsequently be shared with others to lower the cost of measurement (Participant 9).

The majority of the interviewees collect data through investee surveys. During the interviews several interviewees indicated that good cooperation with the investees is extremely important, and that in general this cooperation is improving. One of the interviewees stated: “We do not only invest in the investee, but we are working quite close with the entrepreneurs. It is not unusual for one of our employees to assist at the investee’s location at the beginning of a deal” (Participant 9). However, sometimes the collection of data is difficult: “Sometimes you expect a series of data, but you receive nothing because there was a flood. That is the reality with impact investing. With all these ifs and buts, you should be happy with whatever data you get. Why should you only interpret numbers? We never interpret these numbers without context” (Participant 13).

Some of the interviewees pointed out that the investors find metrics alone insufficient, and that they feel the need for more background information on their impact investments. This information could include but is not limited to the gender of the supported group, or characteristics of the geographical investment area (e.g., rural/urban area) (Participant 15).

Impact measurement requires a lot of resources, as substantiated during the interviews. One of the interviewees argued: “Impact measurement is time-consuming, specifically for your workforce, and is not easily done. Besides this, it is often costly to let other organizations do the research” (Participant 12).¹⁴

When asked about the manner in which they guarantee data accuracy, the answer of one of the interviewees was: “Our ambition is to be able to do impact audits, but we still have a long way to go. We have no solutions for data accuracy. You just trust what they are doing” (Participant 10). Another interviewee argued the following: “Internally, we have an annually assessment of the focus sectors and look at several projects that we adopted five years ago. We subsequently look back at the approval documentation and examine which effects were expected” (Participant 8).

According to Ragin and Palandjian (2013), data agencies can play an important role in evidence-based practice. However, data providers do not always have comparable data. “It becomes interesting when they have many comparable datasets which I can compare with the investment” (Participant 12). One of the interviewees stressed: “Not only do measurement methods need to be standardized, but data agencies need to strive to a certain quality label and specific standards. There are currently too many different data agencies” (Participant 5). Some interviewees indicated that data providers need to merge in order to provide a large accessible database. Sometimes the different data providers present totally different outcomes as well: “Two years ago we made an agreement between three parties that could deliver carbon data. All three parties had received the same benchmark from us. After which they all presented three completely different outcomes. And that was on carbon, which is one of the easiest things to measure” (Participant 7).

One of the interviewees stated that the data which are available for evidence-based measurement are not accurate at the moment. This is deemed very problematic, since “Garbage in equals garbage out” (Participant 6). In one of the interviews it was stressed that the international research agencies should be linked to universities in order to have an immediate feedback loop (Participant 7).

Given that most of the interviewed investors lack specific impact goals, they did not set specific desired results either. Only two institutional investors have set impact targets, one is currently working on setting impact targets, and the other ten did not set any targets at all. One of the interviewees, active in the inclusive finance sector, mentioned that they did not have a target yet, but do analyze if the investment achieved the goal. When asked how they are able to do that, the interviewee argued: “Even though you don’t set a fixed number, you can try to see to how many people you are reaching, and if this number increases over the years”. Hereafter the interviewee stressed: “We don’t have the targets, but we still look at which developments we want to see and if we are making progress in that direction” (Participant 15). In general, the interviewees indicate that they analyze impact data more frequently than in the past.

When impact data is analyzed, it is important to look at the indicators which do not contribute to decision-making and reporting. Such data is irrelevant, which should be taken into account when adjusting collection methods (IMWG 2014). It was striking that one of the institutional investors pointed out the following: “We have measured a lot of indicators over the years, but we never reported any of them” (Participant 15), which may have led to an unnecessary burden for the investee.

One of the interviewees stressed “Currently, impact investors are not much further than saying that they are committed to, or have caused a difference to some topic. That is ultimately what you are looking for with impact investing. Making a difference. We need to verify this with an impact evaluation. But in the end, you are not able to do that for everything” (Participant 8). Only one of the interviewed investors performed an impact evaluation and mentioned: “I think I did a good job, but I have also seen that the administrative costs for micro finance institutions (MFIs) are enormous when information is requested. And most MFIs don’t do anything with this data” (Participant 2). Other interviewees argued that it is not yet feasible for them, and that they don’t see it happening any time soon due to the required resources (Participant 1, Participant 3). Some institutional investors pointed out that they have attracted more employees for impact measurement and analysis over the last two years (Participant 7, Participant 10, Participant 17). When asked if evaluation on impact will gain more importance in the future, one of the interviewees answered: “Yes, for sure. If we are only able to say that we received the money back properly, but we do not know who truly benefited from the investment, we are not doing a good job! We cannot afford this” (Participant 8).

Until recently, social impact was mostly shown through non-financial and qualitative information, like a statement about pollution prevention and corporate social responsibility, or a sustainable report (e.g., Medley 1997; O’Dwyer and Owen 2005). Some interviewees indicated that they are searching for other ways to report their social impact. One of the interviewees is working towards integrated reporting (Participant 4), while another indicated that there may come reporting requirements from the government: “Organizations can expect reporting requirements from the government in the near future. They will not demand that you engage in impact investing, but that you report about it. Even if you make no impact” (Participant 1). In fact, institutional investors perceive that they are required to be increasingly transparent about their impact investments, and for the future they expect more reporting requirements. As one of the interviewees stated: “We do not only report our impact data to show what we did and to fulfill the reporting needs, gradually our whole business model asks for it” (Participant 8).

One of the interviewees argued that impact measurement is just a component of impact investing. Ultimately it comes down to how the data may be informative for your decisions and strategies. The interviewee argued that in recent years the sector was focused on the kind of impact they wanted to measure, how they were going to measure it, and how the data would emerge from the market. However, little thought went into what to do with the impact data. The interviewee argued: “We need to go from impact measurement to impact management” (Participant 10).

It was remarkable that none of the interviewed institutional investors uses the impact data for new investment decisions. However, they recognized the importance of it. A variety of reasons were given. One interviewee pointed out a rapidly changing world makes it difficult to use past impact data as new input (Participant 15). This is particularly an issue because of the typically long horizon of impact investments, which makes it difficult to base decisions on past impact data. Furthermore, it was stated that basing investment decisions on impact data is only possible when the measurement practices become more mature. Another reason is that there is a lack of evidence that financial returns can be combined with social returns. Nonetheless, of the total sample, six investors think that they will use impact data for new investments, five have doubts, and two are convinced that impact data will not be used for new investment decisions.