Since long before the term “impact investing” was uttered, CDFIs have made financial investments generating deep and measurable impact in underserved communities in the U.S.
Today, the growth and maturation of impact investing on a global scale is leading to widespread adoption of principles and standards that go beyond measurement to the active management of impact. Impact measurement and management (IMM) begins with defining the positive social, economic, and environmental impact that a CDFI, investor, or asset manager seeks to create. The desired impact defines what gets measured and when. Most CDFI loan funds are accustomed to collecting impact data, often to satisfy the investment objectives of the institutions that provide them lending and operating capital. IMM focuses specifically on the measurement of both positive and unintended or negative impact that directly relates to the defined impact objectives. It seeks to answer the question: what has changed because of the loan or investment we made?
The field already collects data for hundreds, if not thousands, of metrics that speak to positive impact and the beneficiaries of that impact. IMM also includes consideration of the unintended negative results of a loan or investment, such as contributing to gentrification and the dislocation of income-challenged residents or locally owned businesses; or financing businesses or real estate that may increase a community’s carbon footprint or reduce air or water quality. IMM practices help us focus on a broader range of outcomes that relate directly to stated impact objectives. This requires identifying, measuring, and analyzing potential impact when sourcing and conducting due diligence (ex-ante) as well as actual impact following investment (ex-poste). IMM is a feedback loop that helps lenders and investors better understand and learn from the impact of their activities.
The adoption of IMM principles and standards has been occurring in the broader impact investment field for several years and has been put into practice by a handful of CDFI loan funds. Other CDFIs are being questioned by potential investors about their IMM practices.
A recent survey of Aeris-rated and -reporting CDFIs confirmed that CDFI investors are asking new questions about IMM in their discussions with CDFIs. Among others, these include (i) how impact due diligence and monitoring is incorporated into lending policies and processes and (ii) whether a CDFI tracks unintended negative impact as well as positive change. As capital availability for CDFIs expands beyond traditional sources (e.g., banks, foundations, government), CDFIs can expect that there will be more questions about how they measure, manage, and report on impact.
Last month, I had a great opportunity to moderate a panel discussion at the 2021 Virtual OFN Conference, where I was joined by three distinguished IMM thought leaders and practitioners: Lissa Glasgo, Senior Manager, IRIS+ and Impact Measurement & Management at The Global Impact Investing Network (GIIN); Catherine Dun Rappaport, Vice President, Learning and Impact Measurement at BlueHub Capital; and Ben Thornley, Managing Partner at Tideline.
Our session, entitled “Beyond Measurement: Impact Management and CDFIs,” was one of several at the OFN Conference that dealt with impact accountability and transparency. IMM seemed to be a topic of particular interest, with more than 150 attendees joining our session. We explored the IMM principles and standards that have emerged in the broader impact investing field; related them to CDFI impact measurement, management, and reporting practices; and shared insights that we hoped would be valuable to CDFIs, regardless of where they are in their impact management journey.
Here are some of the key takeaways from the discussion and participant questions/comments that explore the rising importance of IMM to CDFIs.
“If everyone understood what CDFIs do, it would blow their minds” (Ben Thornley)
With the increasing popularity of impact investing—which often promises to generate both positive social/environmental impacts alongside market-rate returns—so-called “impact washing” is a growing concern, which in part, is driving increased expectations about rigorous IMM practices.
We agreed that, even for mission-first institutions like CDFIs, IMM is an important discipline to pursue. Ben Thornley said that new, emerging sources of CDFI capital speak a different language than traditional CDFI investors. “A lot of this is about expanding our horizons as a community finance sector,” he said. “If we cannot articulate what we do with a holistic understanding of what impact means and a clear articulation of the gap that CDFIs are filling—using non-technocratic language—then the speed of access and amount of new capital for CDFIs will be limited.”
We also agreed that it is inevitable that CDFIs will face a greater level of accountability and scrutiny around impact. Just as CDFI investors/lenders require a financial audit from a CDFI, some day they also will require a verification of the CDFI’s IMM practices. We are seeing the beginnings of this requirement in the broader impact investing sector and for a small but growing number of CDFI loan funds.
IMM is a tool that can help CDFIs do their work better
The panel discussed the difference between impact measurement and impact management, and the important role that each plays in (i) achieving impact and (ii) communicating impact externally. Catherine Dun Rappaport shared that her CDFI, BlueHub Capital, uses IMM as a tool for shaping its work. Deciding what to measure informs BlueHub’s practice in ways that make it stronger and more mission-aligned, she said. BlueHub has developed an impact assessment tool (built on the Five Dimensions of Impact, see links below) that it applies to every loan it underwrites, which rates each loan’s potential to deliver impact.
Lissa Glasgo shared that IRIS+ helps users draw from the impact industry’s collected experience and knowledge to articulate their theories of change—and to employ commonly-used language in doing so. “You would never run an organization without performance reviews, because you honestly want to know how you are doing,” Glasgo said. “We [IRIS+] think about metrics in the same way: what are the pieces of information we need in order to understand if we are having impact?”
Ben Thornley noted that CDFIs collect a lot of data, and that CDFIs may benefit from “reverse engineering” their missions. He suggested that CDFIs “take a step back and ask, ‘what are we doing’ and ‘why are we doing it’.” The data that CDFIs collect and report should help measure progress toward achieving that defined impact.
Right-sizing IMM practices
Managing successful lending and technical assistance programs is challenging by itself. Incorporating IMM can seem overwhelming, especially for smaller, lean-staffed CDFIs. Catherine Dun Rappaport recommended that CDFIs start with their theory of business (or change) by defining the core elements of their missions and what success looks like for their organizations and for the communities they exist to serve. “Figure that out before going to the beautifully, well-crafted catalogue of [IRIS+] metrics,” she said. “What is the essence of what you do and how does impact show up in that? Let that drive you to select measures that drive your story.”
Lissa Glasgo of IRIS+ concurred. “You don’t have to jump in both feet first to all the metrics,” she added. “To the extent you can, sit down with your team and the communities around you and decide what is the change you are trying to drive. How do your products and services drive that change? Then look for metrics, ideally in language that will resonate with the field. You only need to identify a couple of metrics that can help you ‘check’ if you are getting there.”
We all agreed that sometimes an output can serve as an adequate proxy measure (e.g., affordable housing units in gentrifying communities), but sometimes more is needed (e.g., educational outcomes). CDFIs should focus on what can be measurable on a practical basis. We discussed the collaborative effort by the GIIN, a working group of loan funds, and Aeris to develop a list of commonly collected impact metrics. We noted that often the data already exists. The challenge is to identify and find the sources of that data and then ask: what else do you need?
Ben Thornley also urged CDFIs to build a culture that values data measurement by building accountabilities into the process. A quarterly dashboard to assess performance, and the impacts being achieved through loans and supporting programs can focus an organization’s attention on impact targets, which can be used to align staff incentives. IMM can create new insights that will raise the level of engagement around results.