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Jul 24, 2014

Measuring Social Impact-Emerging Standards

One of the most difficult concepts in social enterprise is the notion that an investor must accept a “below market” financial return in recognition that creation of a “social impact” often places bounds on the profit potential of the enterprise.  Compounding this difficulty is the similar use of “social impact” in determining grant and charitable gift decisions.

For example, if one decides the social impact merits a grant, does that same impact merit an investment?  The presumption is that an investment requires a larger social impact to warrant the “risk” of the investment becoming a loss.  That puzzles me because a grant seems no different from a total loss on an investment.  Nonetheless, I often find in discussions with philanthropically-minded individuals that they will reject an investment while they will accept making a charitable donation to a social enterprise.

Nonetheless, the impact investment community has already become comfortable with investing in social enterprises and they are developing their own criteria for measuring and evaluating social impact.  The Global Impact Investing Network (GIIN) has established a catalog of emerging impact measurement standards call IRIS.  IRIS lists criteria by area of relevance.  Examples of categories:  community banking metrics, health metrics, land conservation metrics, microenterprise metrics.  The list goes on.

Of particular interest to me are the metrics for investments in early stage enterprises.  These metrics have been developed by Toniic, a social enterprise investment global coalition. The value of these lists of metrics is not that they are sophisticated; they are not.  Rather, they are accepted, which means you are not going out on a limb of naiveté if you use them.  Here are a few accepted metrics per Toniic:

  • Number of unique individuals who were clients of the organization during the reporting period
  • Number of full-time equivalent employees working for enterprises financed or supported by the organization
  • Value of wages (including bonuses, excluding benefits) paid to all full-time employees of the organization
  • Value of funds invested in the organization (both loans and investments) during the reporting period

Yes, not sophisticated.  But definitely relevant.

In forming a new social enterprise, or in considering whether to invest in one, the choice of metrics to assess the merit (and success) of its social objective need as careful attention as the financials and business plans.

If you still feel that social enterprise is a bit vague and you are not clear on how it applies to your nonprofit, your social goals, or your philanthropic planning, you should learn some basics.  If you are in or near Central Ohio, I strongly urge you to take advantage of the workshops offered by the Center for Social Enterprise Development.  The next one is August 14 at Otterbein University in Westerville, Ohio.  See the programs and registration information here.

If you are more confused how profitability and “nonprofit” can coexist, you need to read Linking Mission to Money, Second Edition.  Available at your bookstore or here.