A growing number of investors attempt to monetise the impact of their investees, assigning monetary values to the social value they create. This allows them to speak the same language as key strategic stakeholders, such as funders, co-investors and the public sector. But should the discussion around impact be set on monetary terms?
Let’s first define our terms. A crucial element for measuring and managing impact, Step 4 of the EVPA five-step process, is valuing impact. Impact valuation refers to weighting the benefits versus the costs/sacrifices for the stakeholders; it is essential to understanding the importance that stakeholders give to each outcome. Valuation can be monetary but also non-monetary – and here is where we should place this debate.
Non-monetary valuation techniques include client satisfaction surveys or participatory impact assessment groups. On the monetary side, there are several techniques used by investors for impact, such as the Impact Multiple of Money (IMM), the Impact Rate of Return (IRR) and some types of Cost-Benefit Analysis (CBA). These techniques allow to compare future monetary benefits and costs of an intervention. But monetary valuation can go a step further and assign a quantitative value to the different outcomes experienced by different groups of beneficiaries. For example, according to EVPA’s latest industry survey, 24% of investors for impact use Social Return on Investment (SROI)1, which is a broader IMM framework that allows for accounting social value through monetary valuation.
But, should investors monetise impact or not? We think this is the wrong question.
Monetisation techniques are very useful for demonstrating cost savings or increased incomes. This can help impact stakeholders communicate more effectively with the public sector, as it reflects how an administration can benefit from an intervention. This can be useful when constructing hybrid financing mechanisms, such as social impact bonds (SIBs).
Consider an activity that tackles long-term unemployment: it can save public expenses in terms of unemployment subsidies and, at the same time, increase the income of newly employed people (through the salary earned) and the state (through taxes). A practitioner conducting an SROI analysis valuates the impact by assigning financial proxies to determine the monetary value of each outcome2. These proxies also help calculate the cost the public sector saves thanks to the social solution (if it is of sufficient scale).
Monetary valuation is also well-suited for mobilising capital from more traditional impact investors, ESG investors or other mainstream players into the impact ecosystem. For example, some impact funds that invest as minority shareholders, and tend to co-invest with traditional investors, can use monetisation techniques to help co-investors grasp how to embed impact considerations when investing.
In short, one of the main advantages of monetisation is that it allows to speak the same language as mainstream financial actors and the public sector. But monetisation also comes with risks.
The end value given by a monetisation technique, by itself, does not provide all the information decision-makers need. Monetisation techniques require certain assumptions to link an activity with the impact targeted – the more data available, the less ambiguous the assumptions. Without a detailed explanation behind each assumption, the final monetary value is not very informative for decision-making purposes. It is also important to be clear about what is being quantified and what is not in these situations.
Monetary techniques provide a simple end value. In some cases, it might be too simple. Certain players might accept oversimplified proxies that fail to capture the actual impact of the activity. Furthermore, oversimplification may cut off opportunities to learn. When investors for impact face inquiries related to monetisation, for instance from co-investors that only want to report a monetary value, they often end up dealing with an overburdening process that does not bring learnings nor improvements for maximising impact.
“We should emphasise that it’s not the end value that matters but the process behind it.” – Gergely Iváncsics, Impact Ventures
The results of monetisation methodologies should be presented in a way in which the complexity of the impact and the learnings acquired during the process are duly acknowledged and captured. For example, achieving positive net impact might not justify the negative impact created. Monetisation should not replace the process of building collective knowledge, embracing the subjectivity component of impact and being aware of the risks of comparability.
Acknowledging the benefits and the risks of monetary valuation, investors should avoid oversimplified questions such as whether to monetise before assessing why, when and how it can be a useful practice.
Going a step further, the impact ecosystem still faces unresolved questions:
Should we strive to speak the same language as mainstream finance players – by monetising impact, for example?
Or should we try to change their mindset by stressing the complexity of impact management, thus really changing the paradigm?
Investors for impact are best positioned in the ecosystem to influence this debate.
Pieter Oostlander – Using monetisation to understand value
Pieter Oostlander is the Founding Partner of the Shaping Impact Group, the fund manager of SI2 Fund, INZET and SI3 Fund. His professional background is in accounting and finance. He held various top-level finance functions in international companies before he switched to the social investment and venture philanthropy sector in 2004. For ten years he has been a member of the Board of Directors of EVPA, three of which as chairman. Pieter is also a member of the board of directors of Social Value International.
The use of monetisation in impact measurement is in assessing what is material, in order to include only that in an account of value. During an analysis one will identify many impacts: the unraveling of stakeholder-groups into subgroups, each having multiple outputs, each output in turn leading to various outcomes, can cause an explosion of different impacts. As always, the 80/20 rule applies; 80% of the overall impact of an intervention is caused by only 20% of the constituting elements. But, how to identify those 20% that make the difference? Which knobs to turn when you want to substantially increase positive impacts or decrease negative ones? That is where valuation of outcomes comes in. It helps the distinction between what is material in the end, and what isn’t.
An often-heard opinion is that one shouldn’t want to express intangible benefits in euros or dollars. But that is not what valuation means to do. We are trying to find a common denominator for different outcomes. And we should take the stakeholder-lens as the way to look at it. What is meaningful or valuable to the stakeholder, and what isn’t? The common denominator could be ‘time’ or even ‘banana peels’ if you like, as long as it helps the assessment. In general currency comes in handy.
For us as an investor, valuation of the impacts of different portfolio companies in the same way allows us to aggregate impacts on a portfolio level. That is a nice side-effect that we uncovered in our journey of impact measurement for impact investment portfolios.
For example, one of our portfolio companies thoroughly assessed the impact of the five different lines of service they offer. All the way from inputs to outcomes, monetised impacts and SROI ratio**, completely based on stakeholder feedback.
When they studied the results, it appeared that one of the product lines turned out to have a very small impact-ratio as well as a low overall value of its impact. In combination with operational issues in service delivery, this raised the question for the board of the company whether this service was to be continued or not, despite it being financially profitable. The option of re-allocating resources to equally profitable but more impactful services was on the table.
This option would not have been considered if impact measurement hadn’t taken the value of impacts into account.
**The SROI ratio is the result from dividing the value of benefits from, by the value of total inputs into an intervention. For more information, consult the SROI Guide.
Maha Keramane & María Ruiz-Melgarejo – How impact monetisation enables structuring Impact Bonds
As Head of the Positive Impact Business Accelerator (PIBA) at BNP Paribas, Maha Keramane and her team develop a dedicated framework and a wide range of products and services to support Impact Enterprises within BNP Paribas, from a specific impact measurement methodology to innovative financial tools such as Impact Bonds (IB). She and her team structured around 25 impacts bonds on various social, environmental or development issues, mostly in France. She is also in charge of coordinating and implementing the impact investing strategy for the Group. Within the PIBA, María Ruiz-Melgarejo, as Project Manager Impact Methodologies, implements impact measurement and reporting transversally throughout BNP Paribas. She combines these operational tasks with her PhD in Economics in Sorbonne-Pantheon University, focusing on impact measurement and evaluation.
We always think about how much it costs to carry out a programme, but what about the cost of not carrying it out?
It is generally admitted that major social issues such as children placement in foster care, long-lasting unemployment or criminal recidivism are structural problems that cause endless negative individual and collective consequences, very well described qualitatively.
Quite often, because of political temporality, a public expenditure is mainly apprehended through a cost/benefit analysis: what it costs today and what are the expected qualitative benefits. But qualitative assessments can be easy to criticise and whether they are worth the spending or not can be highly subjective.
Monetisation can make an income from something that otherwise would not generate revenue by translating qualitative factors into financial terms: for example, the annual cost of a prisoner ranges between €35.044 and €71,591*** and they also reoffend in 40% of the cases; a child put into foster care is emotionally damaged but also costs €60 000per year to society; an unemployed person costs €28 000…
Thus, instead of thinking on how difficult and expensive it is to cure the consequences of social problems, we should focus on how prevention is cheaper for both taxpayers and society. This is exactly what Impact Bonds aim to demonstrate by combining impact monetisation with an outcome-based financial mechanism.
What is an Impact Bond?
An Impact Bond (IB) is an innovative outcome-based financial contract between private investors, public authorities (final payors) and a service provider (NGO, impact entrepreneur…) to deliver positive social or environmental impacts. The private investors provide upfront capital to a service provider to implement the project, and are repaid, with a potential premium, by the outcome funder, only if successful results are achieved and the targeted impacts are met.
Impact Bonds use monetisation like a decision-aid tool because it helps compare the cost of every prevention programme, the future cost of cure if no prevention is made, but also the impact costs and revenues. It also allows to compare environmental and economic performance of different interventions, for example, by benchmarking them against the avoided cost that the society or the environment would have had otherwise.
The Impact Bond/monetisation mechanism disrupts the traditional risk-return models and allows the funding of projects that were not meant to be profitable according to a “classical” financial analysis. Indeed, Impact Bonds can offer a financially attractive impact return on investment both to private investors and to public bodies, that is measurable, substantiated, thus less subject to individual judgement or political ideology. This is the case of prevention programmes, in which positive social or environmental added-value, when measured in monetary terms and avoided expenses, fully justifies the investment, compared to its cost.
This economic rationale is embedded upfront in the design of any Impact Bond because it is a cornerstone:
- for the investors whose financial return depends exclusively how much the impacts of the projects are valuable for the people and the planet.
- for public authorities who must justify the social added value of this device compared to its cost and a more efficient resources allocation.
What are the challenges and opportunities?
The combination of Impact Bond and monetisation forces all stakeholders to make explicit both their assumptions and impact ambitions, through translating social and environmental positive outcomes into a common unit and providing a common language and metrics to very different types of actors to encourage better decision making.
On the challenging side of IBs, we find the complexity of establishing the connection between the actions carried out, the achievements and the avoided costs, with the potential danger of false precision and the difficulty of comparing impacts across sectors or geographies. To be as accurate as possible, we need holistic and scientific methodologies to measure social and environmental impact.
It is also essential to work with the state and social service providers to establish a reliable database of social phenomena such as unemployment, social exclusion, environmental degradation… and its financial costs for a country: to monetise the impact of that project we need studies on how re-entering the labour market could prevent recidivism as well as information on the financial costs of what could have happened without the project.
Impact monetisation is key to contribute to efficient public expenditure, but we should keep in mind that social and economic change are not always a success story. Finding the best policies is a trial-and-error work, and it is important to remember that programmes with less chance of success also need to be financed, in order to reach the most difficult cases. This includes the outcomes that are challenging or impossible to value or monetise, like well-being.
Even though it is not and should not be considered as a miracle method, impact monetisation is largely contributing to shifting the paradigm of the financing of public policies: from spending to investing, monetisation gives value to obtaining a return on investment that will be both financial and social.
*** La réinsertion des personnes détenues : l’affaire de tous et toutes, Avis du Conseil économique, social et environnemental, November 2019. Available here.
This post first appeared as a LinkedIn article.