How measuring impact shapes what markets value

Ethical investors look for more than just financial returns. These days, financiers are often involved in ‘impact investing’—seeking positive social or environmental outcomes as well as financial returns. This means directing capital towards issues including inequality, health, employment, and environmental sustainability. This is no longer a niche activity: the Global Impact Investing Network (GIIN) estimates that more than 3,900 organizations manage $1.571 trillion in impact-investing assets worldwide.

But how do you accurately measure whether or not an investment has made a genuine and meaningful difference? It’s not easy. How do you gauge the extent to which people’s lives have improved, for example, or determine whether an investment is directly responsible for an outcome?

Research by Esade professor Guillermo Casasnovas and Dean Lisa Hehenberger, and their co-author, Kyriaki Papageorgiou, from the Norwegian University of Science and Technology suggests that the answer matters for more than just reporting. The tools used to measure impact can help determine what the market deems to be valuable. Their study, published in the Journal of Management Studies, examines this process by looking at the development of impact investing in Spain.

The hidden power of measurement

The researchers talk about ‘impact inscription’: turning broad and sometimes ambiguous ideas about social and environmental impact into useful measures for organizations. But measurement is not neutral. As the co-authors explain, measurement tools embed judgments about what is labeled as valuable.

The research identifies three connected ways this can happen. First, organizations make a decision about what counts as impact and, equally importantly, what does not. Second, they create measurable targets based on their social objectives. This in turn can influence financial decisions and incentives. Third, organizational priorities, responsibilities and governance adapt and change in response to these measures.

In other words, measurement is not merely a way to describe a market. It can play a role in creating a market. Once an organization defines its measurable objectives, those choices can influence what people deem to be important, what goals reap rewards, and ultimately how they behave.

Spain's impact-investing market

Spain’s rapidly developing impact-investing market provides a useful setting for examining this process. A 2023 study by SpainNAB and the Esade Center for Social Impact showed that direct impact investment in the country reached €1.517 billion, which was 26% more than the previous year. Including impact banking, the total supply of impact capital reached €3.341 billion.

The researchers followed this emerging market over six years, examining how different actors developed and used impact-measurement practices. These included investors, fund managers, public organizations and social enterprises. Measurement frameworks such as Theory of Change helped connect activities with outcomes, while Social Outcomes Contracts linked financial arrangements to specified social results.

The tools empowered participants to turn abstract objectives into more concrete goals. They also forced them to make choices about which outcomes to include, how ambitious to be, and who should be responsible for achieving them.

The difficult balance: ambition versus practicality

The researchers identified a difficulty at the heart of impact measurement. There’s an obvious benefit to understanding impact systemically: considering both positive and negative effects, unintended consequences and projected outcomes in the absence of intervention. Using a methodical approach can encourage genuinely transformative investment. The potential downside, though, is that measuring becomes so complex and demanding that projects become difficult to finance or even start in the first place.

To combat these issues, investors could choose a more focused approach. For example, concentrating on a particular population or outcome and select targets that are easier to measure and achieve. This way, impact investing is more manageable, but it can also result in smaller changes while leaving existing financial practices largely untouched.

The study describes three dimensions of this conundrum: scope can be systemic or focused; incentives can be ambitious or attainable; and organizational roles can be novel or familiar. The combinations are important. Systemic goals, ambitious incentives, and new roles can create the potential for significant change, but may be challenging to apply. Focused goals, attainable incentives, and familiar roles are easier to put into practice, but can lead to slow-paced, incremental change or ‘impact washing’, presenting an investment as transformative when its underlying practices haven’t really changed.

What happens when the numbers start changing behavior?

Once impact is integrated into measurement systems, it can influence how organizations operate. The researchers found examples of impact objectives being incorporated into incentives for fund managers and investee companies, while new governance arrangements, including impact committees, began to emerge.

With such changes, investors may become more accountable for the impact of their investments, while social organizations can take on greater responsibility for demonstrating meaningful outcomes. Measurement can have the power to move social and environmental objectives from an organization's intentions into its formal decision-making processes.

Yet the process is recursive. New measures lead to new incentives and roles, which can then alter the view of what organizations consider to be impact. The resulting practices can influence the next generation of measurement.

The lesson for every market

Impact investing isn’t the only area where measurement of social, ethical, and environmental goals is relevant. The researchers argue that all markets choose which of their impacts they are going to measure, and which they are not. Measurement becomes particularly important when economic activity creates social or environmental effects that are difficult to quantify.

For example, a green technology may have environmental benefits while also creating unfavorable impacts elsewhere in its value chain. Similarly, a financial product intended to provide support for vulnerable people may have positive effects while simultaneously creating other risks. Measurement can make these trade-offs more visible, but only if the right questions are asked.

Ultimately, organizations should look beyond asking whether they measure impact. They must ascertain what their measurement systems leave out, whose interests they reflect, and what behavior they encourage.

What does ‘good’ actually mean?

As markets are increasingly expected to help address social and environmental problems, measurement will play a growing role in determining how success is defined. But just measuring impact doesn’t automatically make a market more responsible or transformative.

As the researchers conclude, finding effective market configurations is a process of "trial, error, and collective learning." The challenge is to ensure that the things markets find easiest to measure do not become substitutes for what matters most.