Impact investments: the challenge of measuring outcomes

4th January 2016 Adam Pitt

Even before it began, 2016 had been deemed a difficult year for the global economy, with low oil prices continuing to breed uncertainty, and the dipping fortunes of Brazil and China, two of the BRICS nations’ leading lights, still under the spotlight. Despite the pessimism over this year’s financial forecasts, Adam Pitt looks at the growing optimism surrounding development impact bonds and their ability to unite the strengths of the public and private sector

The gloomy outlook for this year came shortly after the world had celebrated an agreement among nations at the COP 21 Paris Climate Conference in December. While the debate continues over whether the non-binding deal is really a breakthrough, of all the deals struck in Paris, one of the most interesting in terms of financing development was the Breakthrough Energy Coalition launched by two-dozen high-tech company chief’s that includes Microsoft’s Bill Gates, Facebook’s Mark Zuckerberg and Amazon’s Jeff Bezos.

Their objective is to inject private finance and expertise into revolutionising the generation of renewable energy and is evidence of a compelling movement towards financial mechanisms that put social and environmental results alongside financial returns, and where accountability and transparency are essential elements of the investment. In a world that is forecast to be short on cash in 2016, such mechanisms offer hope for the development of new instruments and for more private financing of development.

Impact investing, where the achievement of social outcomes are key to the investment decision, is not new but it is gaining ground. The 82 respondents to a 2015 report published by JP Morgan Chase & Co. and the Global Impact Investing Network, reported US$60 billion in impact investments and a 13 percent growth in deals.

Impact investments in development projects have led to the issuance of special bonds. Like their social impact counterparts, development impact bonds are entered into by a donor and a service provider, who is then responsible for seeking socially motivated investors to fund its work. The investment capital is repaid by the donor along with a rate of interest that is remunerated on condition of the project achieving pre-determined development objectives.

With pressure from its own media regarding the management of overseas aid and having made accountability and ’payment by results’ a key part of its aid policy, the UK government was one of the first to issue a development impact bond when a US$2.3 million issue to improve healthcare in Africa, was announced by Justine Greening, UK Secretary of State for International Development, in mid-2014.

The UK’s bond is being used to fund research into sleeping sickness in Uganda, where 9 million people remain at risk from contracting the disease despite numerous interventions.

On face value this kind of deal seems like a win-win solution for all involved, and one that could open doors to new revenue streams from institutional investors for those previously resigned to grants or microfinance, such as non-governmental organisations. There is also a feeling that if results are tied to financial as well as social outcomes, development partners will do more to ensure that the desired outcomes are achieved to avoid making a loss.

“One of the big benefits of impact investing is that it is creating a balance between ideology and pragmatism,” explains Ali El Idrissi, Vice-President of Impact Investing and Social Finance at JP Morgan Chase & Co. “Governments are increasingly able to leverage the skills and resources of the private sector while the private sector is engaging governments in innovative ways, in support of public services that go beyond responding to needs to create opportunities for developing businesses interests.”

Such an approach can avoid misspent funds and maximise the value of every dollar spent on development. However, questions remain over how far such instruments can improve accountability, as well as overcoming a long-held criticism that projects are still bogged down by activities characterised by a trial and error mentality.

“The challenge with development impact bonds, and impact investing in general, is that a lot of investors are investing in emerging markets and places where they may not have invested before and, as a result, setting targets is a challenging exercise,” adds El Idrissi.

Ali El Idrissi, Vice-President of Impact Investing and Social Finance at JP Morgan Chase & Co
Ali El Idrissi, Vice-President of Impact Investing and Social Finance at JP Morgan Chase & Co

Another challenge for development impact bonds is the potential for organisations to set lower benchmarks for outcomes in order to access private funding, thereby increasing the probability of success, and reducing the risks faced by private investors. This may not be intentional on the part of the service providers but it is something that El Idrissi feels should not be overlooked in performing due diligence.

“In our day-to-day work there is no pressure to misrepresent anything, the real pressure is to show we are learning,” says El Idrissi. “We can’t afford to spend 4 or 5 years investing if we do not learn very quickly what does and does not work since we are obliged to show credible grounds on which to present this market as one that can expand.”

El Idrissi is responsible for an impact investment portfolio comprising nine funds worth a total of US$60 million. Investments cover agriculture, health, education, financial capability, housing, water and sanitation, transportation, and technology. El Idrissi says his portfolio has benefitted 27 million people in low-income and underserved communities in 37 countries.

Because of its collaborative nature and the need for all parties to demonstrate value, El Idrissi believes the model is geared for long-term success. In addition, he points to a hidden transformation that is taking place within big companies themselves, as employee satisfaction drives social investment.

“In big organisations you now have teams that are completely dedicated to social finance and development every day. These employees are becoming champions and ambassadors for their projects, which can change the whole DNA of a company and how it operates, and we have seen very positive ramifications occurring internally.”

This exposure to development finance within a corporation was precisely what led Maharshi Vaishnav to make the move from a high-flying career as a Director at McCann Worldgroup to the non-governmental organisation Educate Girls, which would pip the UK to the post by launching the first-ever development impact bond in 2014.

“My transition to development was a gradual process that started when I took a senior corporate branding position at the Piramal Group, and it just happened that corporate social responsibility fell under the umbrella of corporate branding,” explains Vaishnav.

The Piramal Group is one of the largest conglomerates in India, and supported the biggest midday meal programme in Maharashtra State. Through this, Vaishnav was involved in supporting an organisation that was feeding 2.5 million children a day for 200 days of the academic year. He was instrumental in the construction of a kitchen and facilities, distribution networks, and the entire supply chain.

In a twist of fate Vaishnav says that despite his own intentions, it was a spate of ill health after taking a Masters in Public Policy and PhD in the US, in which he contracted dengue fever and broke his foot, that saw him take on a project for Educate Girls that became a full-time job.

Established in 2006 by Harvard Business School graduate Safeena Husain, Educate Girls is driven by a simple mandate to ensure girls are registered and attend school. Fuelled by the belief that regular attendance will lead to retention, Vaishnav says the programme has been a great success and has brought more than 100,000 girls back to school.

“As I speak we have 4,619 community volunteers that work for us and the way we are growing right now, in the next 3 years we’ll have 16,000 community volunteers on our books,” says Vaishnav. “We are adding 3 districts every year now and each expansion comes with about 3-4,000 villages, and about 5,500 schools. Currently we are present in about 8,500 government schools, by 2018 we’ll be present in 30,000 schools.”

Measuring outcomes

Much of this progress has been achieved through grants and Vaishnav says the decision to test a development impact bond was first mooted by the UK Department for International Development, which approached Educate Girls. That project did not get off the ground but a subsequent plan led to the world’s first development impact bond with a four-year US$290,000 issue which was bought by investors brought to the table by UBS Optimus Foundation, the philanthropic arm of Swiss bank UBS. The Children’s Investment Fund Foundation, an independent philanthropic organisation, is the outcome payer on the bond, with payment dependent on the achievement of measurable educational outcomes.

The objective of the bond, which has a 20 percent focus on enrollment and 80 percent on grade gains, is to enhance the work of getting girls back to school in rural India, a task that is aided by an annual survey carried out by armies of paid staff and volunteers known as ‘Team Balika’. These teams go door to door to identify every girl in their village and data is compared with India’s census and child tracking records to form a baseline for outreach programmes, explains Vaishnav.

“We do our own surveys because child registration is not so common in rural India and because tribal populations can move around a lot so they can be hard to track.”

Opposition among local communities is not uncommon, with one father saying ‘my goat is my asset, my girl is my liability, I’m waiting for her to be old enough to marry and then I’ll give her away’. It’s not just communities that have had to be won over either. When Educate Girls introduced geotagging and an app to tracks outputs some of its own staff and volunteers said they felt like there was a lack of trust.

“We had to explain that while the structure of the bond means that we are financially covered, there is a reputational risk and we are accountable to our funders and our beneficiaries,” says Vaishnav. “We are paid for each girl we get back to school and grade gains and even then we are only paid for grades that rise from C to B and B to A, so it is important that we have full visibility over where time is being spent.”

Vaishnav admits that staff and volunteers could still sit under a tree all day and fill in a false report, but says that the organisation’s recruitment process and partners’ due diligence checks mean that this risk is unlikely, with IDinsight, a specialist data monitoring agency for social impacts, acting as independent evaluator.

Not all impact investments appear to be as clear-cut or easy to measure, as the Government of Utah found out when it published the results of a social impact bond in which Goldman Sachs invested in a preschool programme to help ‘at-risk’ pupils avoid special education. An article in the New York Times questioned the metrics used to measure success and whether or not that might affect the actual achievements that could be credited to the programme.

Jon Cox, Communications Director for Governor Gary Herbert, of the US State of Utah
Jon Cox, Communications Director for Governor Gary Herbert, of the US State of Utah

“The lesson with impact investing is to encourage innovation, but to be prepared to ask whether we are measuring the right thing,” says Jon Cox, Communications Director for Governor Gary Herbert, of the US State of Utah. “We have been encouraged by the initial results but we still want to make sure they accurately reflect what we set out to do, and if we have to make adjustments then that’s what we’ll do.”

Time will tell whether satisfaction with investment performance and outcomes among donors and partners with be enough on its own to bring about change and meet the expectations of those who are most vulnerable, whether to environmental or education threats.

Referring to their 2015 report, Abhilash Mudaliar, Research Manager at the Global Impact Investing Network, says: “Investors are satisfied with the social or environmental impact their investments are generating, and for the third consecutive year, 98 percent of investors believe their portfolios are performing in line with their original expectations.”

The air of optimism surrounding development impact bonds is noticeably palpable, and uniting the strengths of the public and private sector will be a key part of financing development towards the Sustainable Development Goals.

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