How can measurement tell a complete story?
marilou test

Measuring the impact of sustainable investments

Long read

Impact measurement is a much-debated topic in the impact investment industry. The tendency is to make it ‘as simple as possible’ captured in a few metrics, making it easy for investors to compare ‘impact’ in the same way as they compare financial results. However, just as we believe bottom-line financial results do not tell the whole story, we also caution that impact measurement be reduced to a simplistic and therefore incomplete picture.

A flawed picture

The financial sector has always been fixated on numbers, percentages, and indicators, trying to capture the complexity of the financial and economic world in a few metrics. To us, this is too simplistic a way to capture an intricate reality.

On a macro-economic level, for example, traditional economic principles or dogma prescribe that we measure growth and prosperity purely in monetary terms of a country’s Gross Domestic Product (GDP). This is a one-sided indicator which at best gives an indication of economic development, but leaves important aspects such as wellbeing and happiness out of the equation. On top of that, many aspects are not considered in the GDP.  For instance, it does not reflect the true costs of production. Environmental damage, for example, is not taken into account. Robert Kennedy already challenged the GDP back in 1968 by saying: ‘We don’t measure what really matters. GDP measures everything except what makes life worthwhile’.

On a micro-economic level and in the business environment, on the company level, we do the same. The measurement of success - or lack of it - of a company unfortunately still boils down to two aspects: growth and financial profit.

Telling the full story

As an impact investor Triodos Investment Management aims for change on three different levels – individual organisations, sectors, and ultimately, the economy as a whole. We intend to contribute to the transformation of our current economic system into a more sustainable system where success is measured not only in terms of financial prosperity but also – or perhaps rather – in terms of wellbeing.

We view finance to be transformational and define it as directing money towards benefitting people and the environment over the long-term. This means we build long-term relations with our portfolio companies and other stakeholders and, beyond our role as capital provider, we intend to play a role as an enabler and inspirer. The impact we are primarily interested in - for each of our investment strategies - are the positive effects of our investment activities on society and on the environment, aiming to protect and improve both, while striving for a healthy financial return. This is why we think a qualitative perspective is as important as a quantitative perspective when it comes to measuring and reporting on impact.  

To demonstrate our vision and the extent to which we’re delivering, we share stories that illustrate the bigger picture. These stories provide the essential context and background for our activities and highlight work that is typical of our efforts.

The quantitative indicators are the other part of the story. For example, for Triodos Organic Growth Fund – which provides long-term, mission-aligned private equity to leading European organic and sustainable consumer businesses -  indicators such as ‘annual turnover’, ‘costs of goods sold’ and ‘percentage of organic offering’, are not goals in itself, but aspects that show the broader picture of sustainable production and consumption. When taken with the stories of the varying companies in the portfolio – each of them unique - these figures give a sense of the impact we achieve through the capital that we have invested.  We do not compare them to last year’s figures, simply because a higher number doesn’t necessarily mean more impact. For instance, financing a relatively small player in the organic food sector with an innovative and groundbreaking approach to increase its market share could yield more impact than financing a larger company in a mature market.  More detailed examples of how we have captured both the qualitative and quantitative components to impact reporting can be  found in our 2016 impact reports.

Different perspective

If we don’t change the way we measure ‘success’, either at a macro or company level, we continue to steer on the wrong outcomes. Dogmas are stubborn by definition. Yet there are positive developments, either when it comes to alternatives for GDP or when it comes to more inclusive ways of measuring and reporting on a company’s financial performance. In GDP terms, the efforts of the New Economic Foundation in the UK for example, replaces GDP by five indicators; ‘good jobs, wellbeing, environment, fairness and health. Another measure is the Gross National Happiness Index developed in Bhutan.

On an organisational level, much is happening to steer away from one figure telling the whole story. This is shown in efforts like true cost accounting by which the full costs and benefits are made evident through integrated reporting.  There is a growing awareness that change in the methodology of measuring economic growth and development is required.

When it comes to investing, simplicity, both in measuring and reporting financial results as well as impact is an illusion and we need to acknowledge that. Simply because, to end with a quote by Albert Einstein, 'not everything that can be counted counts and not everything that counts can be counted.’

Related articles