Apis Partners and Accion Frontier Investments Group publish an operational framework for measuring impact in inclusive financial services investing.
A key aspect of investing for social impact is being able to effectively measure impact, which has always been challenging. Whilst there have been several well-informed attempts to create uniform standards to address this challenge (such as IRIS and GIIRS Ratings), these have largely been intended to compare impact investments across multiple industries. This can be a valuable exercise for multi-sector fund managers, but the approach invariably leads to a trade-off: using the same scale to measure impact across a number of diverse industries leads to a lowest common denominator analysis. These standards seek to measure impact across industry sectors, but they do not provide information about the nature of social change created within each industry. At the other end of the spectrum, several fund managers have developed bespoke systems to measure the impact of their own portfolios. These systems have been tailored for insurance at the base of the pyramid or poverty alleviation progress, and they do a good job of accomplishing those goals. Unfortunately though, they are often too specialised to allow for any comparison across impact managers.
Therefore, the most optimal approach to impact measurement is that which: (1) surfaces the specific nature of impact created in a sector, (2) remains broad enough to allow for some objective comparison across managers, (3) but does not seek to compare the incomparable. Such an approach only seems possible when impact measurement is focused on specific industries.
It is with this approach that Apis Partners and Accion Frontier Investments Group have chosen to operate. Apis and Accion are fund managers investing specifically in inclusive and innovative financial services for the un- and under-banked. Like other impact focused investors, we have a dedicated mission to provide social as well as financial return on investments; which requires the measurement of social impact in a real, quantifiable way.
We therefore set out to create a framework that would allow us to capture the unique aspects of impact in inclusive financial services investing in the broadest sense; we sought the optimal approach as described above. To do so, we surfaced the important values in financial services impact investing and compared these to the key performance indicators (KPIs) that are historically used to track company progress within these areas. This gave rise to three core categories which we think any fund manager investing in inclusive financial services can use to measure impact.
So what does this look like? Apis and Accion’s Financial Services Impact Measurement Framework has three overarching pillars: ‘Access’, ‘Quality’ and ‘Markets’ (also summarised in Table 2 of a recent JP Morgan report on Impact Assessment in Practice):
– Access is focused on the large population that currently does not have access to formal financial services. Here the company’s client base is identified, as well the distribution channels serving them and levels of outreach
– Quality is informed by the SMART Client Protection Principles and is defined as appropriateness and effectiveness of product fit. Sample KPIs here include product affordability, processing times, or complaints ratios
– Markets references the development of the financial sector, innovation, local talent and business model scalability. Measuring a company’s indirect, market impact is especially difficult (and has been the subject of recent publications), though our framework does offer suggestions for measurable KPIs, e.g. influx of new capital, new product offerings or a measure of job creation
The framework was designed not to be prescriptive around the specific qualitative and quantitative metrics “Impact KPIs” (IKPIs) to be measured, but rather to offer flexibility with these. We expect that each portfolio company will have differing emphases in each of the framework’s pillars, and this highlights the importance of consistently tailoring metrics to match the business model and impact thesis of each portfolio company – the companies we are investing in are different from each other, and their impact metrics should reflect that. This of course means that real thought is required to decide which IKPIs are the right ones to measure progress.
There is also value in using some consistent metrics for all companies in a fund (e.g. jobs created or countries of operation) to allow for portfolio-level measurement. In all cases though, we will try to leverage the data a company already collects and tightly integrate impact measurement into overall reporting, on the conviction that financial, operational and social performance can be mutually reinforcing.
So, what now? We’re taking an agile approach: we want to use the framework, test it out, evaluate the results and make it better before we scale. In version 1.0, we plan to select a limited number of IKPIs per pillar, per portfolio company and measure impact through those metrics. Whilst we expect companies from different financial services sub-verticals to have different metrics, we hope this framework provides for a consistent approach to measuring impact in terms of enhancing Access, improving Quality and expanding Markets. We are going to give this system a try, and we invite other financial services investors to try this framework with us. We’ll report back in a few months to share our progress and learnings, though we welcome your feedback before then.