Russian billionaire Roman Avdeev adopted 19 orphans after his discouraging attempts to help orphanages. Tara Winkler, co-founder of Cambodian Children’s Trust, closed the orphanage she herself had created in Cambodia, returned the children to their parents (who, surprisingly, turned out to be alive) and refocused her help on families. Both came to realize that children benefit more from help within families than from orphanages. Studies arrived at the same conclusion. Tara Winkler ended up writing a book, «How (Not) to Start an Orphanage: By a Woman Who Did».
Morgan Simon, co-founder of Transform Finance Foundation, became disenchanted with impact investing done «the wrong way» and also wrote a book, «Real Impact: The New Economics of Social Change». One of her examples is about microfinance — loans to develop small businesses). For a long time they were the pride of sustainable development, but then it was established that microfinance had no positive effect on fighting poverty and even started converging with the harmful practice of payday loans (high interest loans until the paycheck).
Meanwhile, 73% of impact investors report «decent work and economic growth» as impact, according to the Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey. This is UN Sustainable Development Goal No. 8, and if applied literally, even most non-impact projects can claim meeting it.
These stories and statistics demonstrate that both philanthropists and impact investors are often destined to an inefficient use of resources. Some heroically find a better way, as Roman and Tara did, while others don’t. The problem is a lack of user-friendly guidance on how to apply funds to create true impact: no impact recipe has yet been created.
The Five Dimensions of Impact by Impact Management Project(IMP), as well as GIIN’s and other resources provide helpful materials which, in theory, impact investors should follow. But at the investment decision stage, most don’t, and those who do are still unlikely to determine in advance the most efficient approach to orphans or microfinance, because such information is not usually synthesized into an investor-friendly format.
Instead, according to GIIN’s Annual Survey, most investors simply refer to the UN Sustainable Development Goals (the SDGs or the UN Goals) to set impact objectives. The SDGs are a universal call to help people and the planet, but not all are well suited to determine whether a particular project is impactful. Technically, a project can meet some UN Goals and classic impact measurement metrics and yet still have nothing to do with impact.
So why do investors insist on using the UN Goals? The reason is obvious — they are reputable, understandable and appear on one colorful page. Many might not even be aware that the 17 UN Goals have their own 169 targets and 231 indicators, many of which are better suited to governments and international organizations than investors.
In my view, impact investing and philanthropy should, first and foremost, decide «what counts» before «how to count». For organizations which are thought leaders in defining and measuring impact, creating an impact recipe to identify «what counts» should be no less of a priority than the popular topic of measuring impact. Implementation of such a project, and especially building a simple, appealing bridge between the UN Goals and the definitions of impact as part of such project, will empower both impact investing and philanthropy.
The principles of such impact menu, for impact investing and beyond, are as follows.
First, impact decision focus. Usually, sponsors are most able to influence a project when deciding whether to contribute funds, start a project and on what conditions. That is why shifting the focus to guiding investors to the right initial decision is of utmost importance.
Second, practicality. Investors have already voted with their money — they base their impact investment decisions mostly on the UN Goals. Most investors shy away from the established measurement systems at that stage. Therefore, to help them make the right decision, it would be practical to develop UN Goals-centered guidance. Such a user-friendly system would maximize the chance of being adopted most quickly and widely.
Third, brevity. Helpful materials on impact investing are abundant, but hard to navigate. The Reimagining Measurement report by Deloitte’s Monitor Institute highlights a still unmet need to synthesize existing impact literature. The popularity of the 1-page list of the UN Goals teaches a lesson: the guidance needs to be short and straightforward. Ultimately, this guidance could be converted into an interactive digital format.
Fourth, simplification. The classical definitions of impact investing, whether in GIIN’s four core characteristics or IMP’s five dimensions, are in essence checklists of factors, not menus of choices. There are good reasons for this, including unleashing the invention of new types of impactful projects. While GIIN’s materials demonstrate how to trace the UN Goals through lists and metrics, the burden is still on investors to apply the checklists of factors, decide their relative weight and vote «yes» or «no» on the presence of impact. It’s much easier to just point to the relevant bright square on the 17 SDGs poster, and that’s where investors gravitate to.
Bridging between the 17 UN Goals (taking into account the 169UN targets) and impact will do part of the investors’ and philanthropists’ job by offering a menu of courses of action which statistically create real impact. Conclusions on the outcomes of impact-intended actions are usually drawn from complex systemic research (beyond the reach of a single investor, whether in terms of conducting it or synthesizing the results): for example, it took the impact investing industry over a decade to realize that microfinance was not fighting poverty, unless it conformed to specific requirements. Therefore, organizations like GIIN are in a much better position to determine the most impact-effective areas and best practices than a particular investor.
According to GIIN’s report The State of Impact Measurement and Management Practice, over 70% of impact investors hope for improvement in «integration of impact data into decision-making». An impact menu is precisely a way to represent such integration, and it will simplify the investment decision process and make it less prone to error. For example, SDG No. 8 (decent work and economic growth) will indicate its inapplicability to private projects absent special circumstances, and SDGs targeting «financial inclusion» will guide investors towards the underserved and fair terms for providing them with financial services. The impact menu will increase funding of more effective impact areas and reduce the temptation to report impact where there is none.
Fifth, universality. Contributions to impact investing and philanthropy are converging into a common concept of «Impact Currency», but the relevant organizations are still separate. It would be helpful to have a universal impact menu, suitable for investors, philanthropists, charities, impact startups and others. It would be especially helpful to indicate whether a type of project would be more effective if implemented through philanthropy or impact investing. The understanding of theSDGs may need to be broadened, for example to accommodate arts and culture or issues specific to children and families. These and other issues are traditional philanthropy themes that might not clearly fall within the current UN Goals.
Who could implement the project? Only a very reputable organization could undertake the task of adapting the UN Goals.It could be within or outside the UN group, for example, the UN Department of Economic and Social Affairs (UN DESA), UNPrinciples for Responsible Investment (UNPRI), United Nations Development Programme’s (UNDP) SDG Impact Standards,IFC’s Operating Principles for Impact Management, the Organisation for Economic Co-operation and Development(OECD), the World Economic Forum (for example, its Global Future Council on SDG Investment), GIIN, IMP, Global Impact Investing Rating System (GIIRS), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) or similar institutions. We suggested to the GIIN to create the impact menu as part of their developing Methodology for Standardizing and Comparing Impact Performance, and are now collaborating with the GIIN.
The desired outcome is increasing the effectiveness of impact investing and philanthropy through achieving harmony between the UN Goals and the definitions of impact, between research on best impact practices and those who can implement them, as well as within the decision-making of participants in the market of the good.