Are you Developing an Impact Measurement Strategy?
Michael Solotke (MD/MBA, Yale School of Medicine and Yale School of Management) *[email protected]
Michael Solotke (MD/MBA, Yale School of Medicine and Yale School of Management) *[email protected]
Impact investing is the practice of investing in organizations that generate positive impact and financial returns, with impact typically being defined as positive social, health, or environmental effects. Regardless of the method used, measuring impact is an essential practice for all impact investors. This article explores the frameworks available for impact measurement, with examples drawn from one particular impact investing firm: DigitalDx Ventures, an impact fund with a focus on early-stage companies developing digitally enabled diagnostics. The authors of this article include the CEO/Managing Partner of DigitalDx Ventures and a Venture Fellow at DigitalDx Ventures. We share our impact measurement approach as a model for other organizations that are interested in defining an impact strategy.
Although impact investing in its current form is a relatively new space, investments incorporating non-financial factors are not new. As early as the 1920s, one fund excluded investments in certain “sin industries”. In the 1960s through 1980s, multiple funds excluded investments involving alcohol, tobacco, and military-related businesses. The first impact investing fund as we know them today was the Bay Area Equity Fund, which launched in 2001 and explicitly considered environmental, economic, and social impact. Since then, several other impact investing firms have launched. DigitalDx is excited to be part of this community of impact-oriented investors.
To aid in evaluation of impact, several organizations have developed and published frameworks for impact measurement. These organizations include the United Nations, Global Impact Investing Network (GIIN), Impact Management Project (IMP), Sustainability Accounting Standards Board (SASB), B Analytics, Transform Finance, and others. Some of these frameworks are intentionally industry agnostic, while others are designed for use in specific industries. As a healthcare-focused firm, we use both industry agnostic frameworks and frameworks that have healthcare components or are entirely healthcare-specific. We find that healthcare-specific frameworks allow us to describe the nuances of our portfolio companies’ impact, while industry agnostic frameworks allow us to capture the interrelations between health and other areas such as education and economic stability.
Although the frameworks differ in many important ways, there are several core components that commonly exist in impact measurement frameworks. First, most frameworks include an avenue to specify the ultimate effect that the company intends to have. In a healthcare context, this may take several forms, such as lives saved, reduced healthcare costs, or cancer cases diagnosed in stage 1. Defining the effect also may entail describing the affected stakeholder (e.g., low-income or underserved patients), the timeframe of the impact, and the scope of the impact. Some frameworks also include a term to capture how much of the intended effect is attributable to the organization’s actions.
Regardless of the impact measurement approach, organizations need to avoid the pitfall of spending an excessive amount of time measuring and reporting impact. There is a delicate balance between estimating impact using high-quality data and the amount of time and energy that impact measurement can take.
Ultimately, investors are free to measure impact how they want. That said, organizations typically choose an impact measurement method that aligns with their goals and/or constraints. For example, a foundation with a mandate to limit its environmental harm may use a framework that helps them avoid investments that cause negative environmental outcomes, whereas an investment organization with a mandate to save lives may use a framework that allows it to quantify the positive impact of its investments on healthcare. At DigitalDx Ventures, we publicly share our impact measurement approach, because it allows us to develop a community of LPs and portfolio companies that are aligned around a common vision of generating positive impact.
Although impact investing in its current form is a relatively new space, investments incorporating non-financial factors are not new. As early as the 1920s, one fund excluded investments in certain “sin industries”. In the 1960s through 1980s, multiple funds excluded investments involving alcohol, tobacco, and military-related businesses. The first impact investing fund as we know them today was the Bay Area Equity Fund, which launched in 2001 and explicitly considered environmental, economic, and social impact. Since then, several other impact investing firms have launched. DigitalDx is excited to be part of this community of impact-oriented investors.
To aid in evaluation of impact, several organizations have developed and published frameworks for impact measurement. These organizations include the United Nations, Global Impact Investing Network (GIIN), Impact Management Project (IMP), Sustainability Accounting Standards Board (SASB), B Analytics, Transform Finance, and others. Some of these frameworks are intentionally industry agnostic, while others are designed for use in specific industries. As a healthcare-focused firm, we use both industry agnostic frameworks and frameworks that have healthcare components or are entirely healthcare-specific. We find that healthcare-specific frameworks allow us to describe the nuances of our portfolio companies’ impact, while industry agnostic frameworks allow us to capture the interrelations between health and other areas such as education and economic stability.
Although the frameworks differ in many important ways, there are several core components that commonly exist in impact measurement frameworks. First, most frameworks include an avenue to specify the ultimate effect that the company intends to have. In a healthcare context, this may take several forms, such as lives saved, reduced healthcare costs, or cancer cases diagnosed in stage 1. Defining the effect also may entail describing the affected stakeholder (e.g., low-income or underserved patients), the timeframe of the impact, and the scope of the impact. Some frameworks also include a term to capture how much of the intended effect is attributable to the organization’s actions.
Regardless of the impact measurement approach, organizations need to avoid the pitfall of spending an excessive amount of time measuring and reporting impact. There is a delicate balance between estimating impact using high-quality data and the amount of time and energy that impact measurement can take.
Ultimately, investors are free to measure impact how they want. That said, organizations typically choose an impact measurement method that aligns with their goals and/or constraints. For example, a foundation with a mandate to limit its environmental harm may use a framework that helps them avoid investments that cause negative environmental outcomes, whereas an investment organization with a mandate to save lives may use a framework that allows it to quantify the positive impact of its investments on healthcare. At DigitalDx Ventures, we publicly share our impact measurement approach, because it allows us to develop a community of LPs and portfolio companies that are aligned around a common vision of generating positive impact.
