Accelerating Measurement Within Impact Investing: Five Critical Lessons
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This case study was originally published by The William Davidson Institute at the University of Michigan (WDI).
Background and Challenge
Since its founding in 1959, the mission of the Inter-American Development Bank (IDB) has been to improve lives in Latin America and the Caribbean by addressing some of the world’s most critical challenges, such as reducing poverty and social inequalities. Additional IDB goals include fostering development through the private sector and promoting regional cooperation and integration. As part of these goals, IDB launched the Multilateral Investment Fund (MIF) in 1993. The MIF has effectively established itself as “the largest provider of technical assistance for private-sector development,” partnering with 39 member countries to fund more than 2,000 private sector development projects with total financial investments amounting to more than $2 billion USD. The IDB and MIF continue to look for new and improved ways to measure and track the impacts of their financial contributions. MIF investees—the enterprises who receive funding—also want to measure their impact in effective and resource-efficient ways. As one example, on which this case focuses, the MIF looked to improve and standardize the indicators they use to assess their inclusive distribution networks, which seek to generate business opportunities for micro-entrepreneurs in low- and middle-income economies. The MIF’s lack of standardized indicators made it difficult to aggregate data, encourage learning across similar enterprises, or demonstrate the collective benefit of financing these organizations to outside funders. However, these concerns are not unique to MIF or its investees; other impact investors and their investees also face many of the same issues. This case provides key insights and solutions to address these challenges.
Proposed Solution
To address the challenge of standardizing indicators, MIF, in partnership with the Citi Foundation and Canada's International Development Research Centre, created the SCALA Inclusive Distribution Network (SCALA) in 2013 to promote economic growth in Base of the Pyramid communities in the region. In addition to providing financing, SCALA promotes collaborative work through “laboratories” aimed at overcoming the common challenges that its inclusive distribution member organizations face while piloting and scaling. In 2015, SCALA formed the Metrics Lab—currently led by the William Davidson Institute (WDI) at the University of Michigan—to address the lack of existing mechanisms for measuring and comparing socio-economic and business impacts. As part of this work, WDI reviewed and adapted six existing metrics frameworks and tools to develop the Inclusive Distribution Network Measurement Framework, a new indicator framework for boosting the impact of small inclusive businesses and their distribution networks. WDI designed the framework to combine the strengths of these existing frameworks while simultaneously leveraging the many indicators that enterprises already collected and relied on regularly. Notable features of the framework are that it (a) consists of both socioeconomic well-being and key business performance indicators, (b) organizes indicators by those that measure short-term and long-term impact, and (c) provides guidance for indicator selection based on the enterprise’s stage of growth. Additionally, WDI mapped each framework indicator to the relevant Sustainable Development Goals (SDGs) so the pilot could provide MIF with a holistic understanding of poverty, which could track progress towards broader development goals. Measurement enables investors and investees to be more deliberate in their use of data for course-correction and adaptive management. For investors, creating a standardized set of indicators to be shared across enterprises is beneficial for aggregating data, using their resources efficiently, and facilitating shared impact learnings across their network of investees. Standardized data can be collectively reviewed, providing a space to investors and their investees to speak using a shared language and reflect on lessons learned both within and across stakeholders. For investees, impact measurement can also expose vulnerabilities along the value chain that affect enterprise objectives and facilitate better management of common business challenges, such as turnover and client loyalty. Further, selecting indicators from a shared framework provides flexibility and learning opportunities to the organizations needing to select context-specific indicators.