The problems of inequality and lack of resources are felt more and more sharply in the world, and many investors would like their investments to provide not only financial, but also social returns .This is what transformative investments are aimed at – investments in projects, from which, along with profit, improvements in the social sphere and the environment can be expected. But the trouble is: the predicted financial returns are expressed in figures that are understandable to everyone, and there is no universally accepted indicator for future social and environmental improvements: their forecast is usually just a guess.
Even information about past projects of companies does not provide investors with a reliable means to predict the future social effect. About three quarters of all large and medium-sized companies in the world now include data on social, environmental and legal aspects of their activities, but in most cases only programs and their costs are described. No quantitative estimates of expected community impacts are provided.
Realizing this, the main market players began to look for ways to better understand and control social impact. Among them were organizations such as Root Capital, McArthur Foundation, Omidyar Network, Skopos and Bridges Impact + social initiative funds, the World Economic Forum, and the Rockefeller Foundation. Their efforts led to the creation of several interesting metrics, including social return on investment (SROI). The impact management project, launched in 2016 by several foundations and investment managers, is aimed at developing practical recommendations, introducing best practices and finding a common language for managing social impact projects. For the past two years, the organizations we have been working with – the social-transformative investment fund Rise Fund, owned by TPG Growth, and the consulting company Bridgespan Group – were engaged in the creation of a tool for measuring the return on transformative investments, which is not inferior in terms of accuracy and objectivity to purely financial indicators. Acting by trial and error, our organizations, in partnership with experts, have developed a methodology for assessing the potential return on investment in social and environmental projects – even before they are launched. We called our indicator the impact coefficient of investments (impact multiple of money, IMM).
Calculation of IMM is a very difficult matter, and before applying this tool, companies should understand for which products, services or projects such significant efforts are justified. When planning its investments, the Rise fund conducts a qualitative assessment of their prospects in order to weed out not only financially unpromising ones, but also those that most likely will not pass according to IMM criteria. Companies that really care about social aspects get an advantage: Rise invests only in projects in which the minimum predicted social return on $ 1 investment is $ 2.50. Companies wishing to use this technique can set their own minimum threshold.
We acknowledge that it is impossible to apply our method without assumptions and alternative choices, so it can hardly be said that a certain numerical value is obtained in any case. Nevertheless, we are convinced that this is a very valuable metric of social impact.
Next, we show how to calculate IMM when choosing an investment object. The proposed method includes six steps.
- Assessment of significance and scope
Before you start investing, you need to evaluate the significance and scale of the future product, service or project. A household appliance manufacturer, for example, may think about investing in the energy-saving functions of products, and a network of clinics about the prospects for expansion into areas with poor populations.
To assess the magnitude of the expected changes, ask yourself: how many people can be affected by the introduction of a product or service and how strong will the effect be? As an example, we cite our work with the educational technology provider EverFi – one of the first Rise fund’s social investment experiences (the data on financial aspects and equity cited in the article are conditional, the real data is a trade secret). Rise singled out three EverFi projects that already covered a considerable contingent: 1) the online AlcoholEdu course, distributed in more than 400 universities, designed to reduce alcohol consumption among students; 2) the Haven program conducted at 650 universities, informing students about the problems of sexual harassment and violence; 3) a financial literacy program implemented in more than 6100 secondary schools, giving knowledge about credit cards, interest rates, taxes and insurance. Based on the projected number of students involved in these programs annually, Rise analysts suggested that over the past five years, starting in 2017, about 6.1 million students could be affected by investments in the company.
Of course, the scope of the project is determined not only by the number of people, it is important how significant the improvements will be. Sometimes serious progress in a narrow environment means more than a minor effect in a wide one. Consider another Rise project – investing in Dodla Dairy. This company buys and processes daily milk supplied to more than 220 thousand small farmers in southern India. The number of farms covered by the program is known, and the investor had to determine how much milk and at what price Dodla would buy from them. It was planned that over a five-year period, milk sales will amount to $ 2.6 billion. According to Rise, the investment in Dodla will increase the annual income of farmers from $ 425 to $ 735, that is, 73%. Having a reliable milk buyer,
- Definition of conversion targets
At the second step of IMM calculation, it is necessary to outline the targets of the planned social or environmental transformations and, based on scientific data, to understand whether they are achievable and also whether it will be possible to quantify them. Fortunately, huge amounts of research data are now available to investors, based on which the transformative potential of initiatives can be assessed. Over the past ten years, various foundations, NGOs and political structures (including the Innovation Investment Fund under the US Department of Education) have been constantly making decisions on financing social programs based on scientific statistics. The demand for techniques in this area has given rise to a whole industry engaged in the quantitative assessment of the impact of projects on societies. Among the leaders in this industry are the nonprofit organization MDRC,
To evaluate AlcoholEdu, we used data from a randomized controlled trial, which showed that among students enrolled in the program, the indicator “undesirable situations caused by alcohol abuse” decreased by 11% (we are talking about folly, inappropriate behavior, self-flagellation, etc.). In absolute terms, the decrease was 239,350 cases. According to estimates by the US National Institutes of Health (NIH), the proportion of alcohol-related incidents in causes of death among US students is 0.015%. Analysts at Rise concluded that in five years the AlcoholEdu program, encompassing 2.2 million students, would save 36 lives. Saving lives is the most important (but not the only) effect of reducing alcohol consumption, moreover, it is not difficult to evaluate in monetary terms.
In the case of the Haven program, we primarily focused on preventing sexual abuse. Every year, 10.3% of women and 2.5% of men become its victims in the student community in the United States. A 2007 study showed that after seminars on the prevention of sexual crimes in one of the colleges in the northeastern United States, their number for women decreased by 19%, for men – by 36%.
- Assessment of economic benefits
After determining the target indicators of a socially oriented project, the investor must find a study whose findings reliably reflect these indicators in economic terms. A good example is Cellulant, which in various regions of Africa promotes a mobile payment platform used by banks, large retailers, telecom operators and government agencies. By order of the Nigerian Ministry of Agriculture, Cellulant has embarked on a reform of the government’s subsidy program for seed and fertilizer purchases. This program got stuck in corruption, about 89% of the appropriations were lost. To block the way for fraudsters, Cellulant has created a mobile application that allows farmers to buy subsidized goods from local merchants directly, excluding intermediaries. The ground under fraud was knocked out
Our task was to determine the economic effect of farmers getting seeds and fertilizers under this program. We used a proven scientific source – a study according to which farmers participating in the program earned $ 99 more than farmers from the control group.
When choosing a reliable source, we paid attention to several aspects. First of all, the rigor of the research methodology: how systematically did the authors evaluate the results of previous studies? Do they provide data from a randomized controlled trial that allows comparing the performance of groups covered and not covered by the transformation? Well, if the answers to these questions are positive, but the applicability is no less important: is the study talking about the same or socially close to your target groups? The more similarities and the fresher the data, the better. And one more thing: it is advisable to proceed from studies that are often referred to in the scientific literature.
If you have doubts about the value of the source or do not have access to reliable data, try to consult with experts. For example, when we, working with the consulting firm Acorns, examined the impact of programs that help people with low or middle incomes establish a saving regime, we could not find suitable materials on the topic and turned to the Chicago Center for Innovative Financial Services for help. Here, evidence was found that even small savings help poor people not get into debt. And to present the financial results of the AlcoholEdu program, we took advantage of the US Department of Transportation’s recommendations for reducing the number of accidents. This document uses an indicator called “the value of statistical life,” and the loss from the death of one person is estimated at $ 5.4 million.
In the case of Haven, the reference study for us was the materials of the National Institutes of Health (NIH), which described in sufficient detail how to economically evaluate the consequences of sex crimes. The average cost (legal, medical and economic) per incident was estimated at $ 16,657, taking into account inflation. Rise analysts multiplied this amount by the number of crimes prevented by Haven, and received about $ 632 million. And since official statistics on sexual crimes are usually underestimated, the real effect of Haven can be even more significant.
The EverFi financial literacy program was based on a study conducted in 2016 in American schools where a similar program operated. It was shown that young people who have passed it and reached 22 years old have an average debt of $ 538 less than their peers not covered by the project. For five years, program participants saved $ 81 on average in paying interest on debts. About 1.3 million people participated in EverFi, so in five years their combined savings could reach $ 105 million. In total, three EverFi projects gave an economic effect of approximately $ 931 million over five years.
- Risk adjustment
Although we were pleased to see that scientists’ research can be used to assess the economic effect of social and environmental transformations, we understood that risks were associated with the involvement of other people’s experience that was not directly related to our situation. Therefore, it was necessary to adjust the indicators obtained on the basis of data from benchmark studies, taking into account both their quality and relevance. For adjustment, we used a special “impact realization index”: we identified six risk categories, assigned them certain values and calculated the overall probability indicator of the desired transformations on a 100-point scale.
The two components of our index reflect the quality of the study and the measure of its relevance to the project of interest to us. In total, these two components account for 60 points out of 100 possible. Materials based on a meta-analysis or a randomized controlled trial receive higher scores, while those obtained through simple observation receive lower scores. The first category includes research on AlcoholEdu, the second – research on Haven and the financial literacy program.
When you establish a connection between a study and a project of interest to you, you often have to make assumptions and assumptions, and the more there are, the higher the risks. In the case of the EverFi financial program, the study found a direct link between training and debt reduction, and the index turned out to be the highest. But in two other cases – with AlcoholEdu and with Haven – there were no such obvious connections. In evaluating AlcoholEdu, training was expected to reduce the number of unwanted incidents caused by alcohol consumption and ultimately reduce the number of deaths. Similarly, a study for Haven was taken on the assumption that training will lead to a reduction in the number of sexual crimes.
The remaining components of the index (each of them has no more than 10 points): 1) context (a measure of the similarity between the social environment in the reference study and in our project, in particular, are both oriented to urban or rural conditions) ; 2) the conformity of the income level (do countries in either case belong to the same profitability group according to the World Bank classification); 3) the similarity of products or services (how close are the features of the activity in two cases, including orientation to specific age categories) and 4) the intended use (is there a risk that the client will use it for other purposes after purchasing the product; remember how many people who bought a membership to the gym, they don’t really attend it).
The indices we calculated for EverFi programs were: 85% for AlcoholEdu, 55% for Haven and 75% for a financial literacy program. Adjusted for these indices, the economic effect was, respectively, $ 164 million for AlcoholEdu, $ 348 million for Haven and $ 77 million for the financial education program. Thus, the cumulative forecasted effect of the three risk-taking programs was $ 589 million (against the originally projected amount of $ 931 million).