Forecasting the social and environmental gains on an investment has historically been largely based on intuition and instinct. In partnership with Y Analytics and Bridgespan Social Impact, The Rise Fund created a methodology to assess potential impact before a single dollar is committed. The new metric is called the Impact Multiple of Money (IMM). We deploy the IMM with the same rigor and commitment to diligence as our financial underwriting, and it enables us to manage, measure and track impact results throughout the course of our investment. Calculating the IMM allows direct comparisons between investment opportunities to evaluate their positive impact.
You can read more In Harvard Business Reviews' Calculating the Value of Impact Investing.
Here are the six steps to calculate the IMM of a potential investment:
Assess the Relevance and Scale
The process commences by considering the relevance and scale of a product, service, or a project for evaluation.
Investors should start the process by considering the relevance and scale of a product, service, or a project for evaluation. With regard to scale, investors must ask how many people will the product or service reach, and how deep will its impact be? Of course, a program’s impact is not just about the number of people touched; it’s about the improvement achieved. Fewer people touched deeply may be worth more than many people hardly affected.
For example, Rise determined that EverFi’s programs could reach more than 6 million students over a five year period, while research shows that farming models like Dodla Dairy employs can increase farm families’ annual incomes by a significant margin – more than 70%.
Identify Target Social or Environmental Outcomes
The second step in calculating an IMM is identifying the social and/or environmental outcomes and determining whether existing research indicates that they are achievable and measurable.
The second step in calculating an IMM is identifying the social or environmental outcomes –including positive and negative externalities – and determining whether existing research indicates that they are achievable and measurable. Investors can draw on a huge array of academic journals and studies to estimate a company’s impact potential. This “what works” movement has therefore spurred the development of an industry around assessing evidence-based outcomes.
Before investing in educational-technology company EverFi, The Rise Fund looked at a range of peer-reviewed studies to determine that the social outcomes that the company’s products pursued were achievable and measurable.
Estimate the Economic Value of those outcomes to Society
When the target outcomes have been identified, The Rise Fund seeks out an “anchor study” – academic research which will robustly translate those outcomes into economic terms.
When the target outcomes have been identified, social impact investors need to find an “anchor study” which will robustly translate the outcomes these companies produce into economic terms.
In the case of Cellulant, a regional Africa provider of mobile payment platforms, the Rise Fund used a reliable study to compare the impact of the company’s mobile application which enabled farmers to more efficiently access government agriculture subsidies. The study found that farmers who participated in the subsidy program similar to Cellulant’s earned an additional $99 than the previous season due to improved maize yields.
Adjust for Risks
Despite demonstrating that academic research can be used to monetize social and environmental benefits, we recognize the risk in applying findings from research that is not directly linked to a given investment opportunity.
Despite demonstrating that academic research can be used to monetize social and environmental benefits, social impact investors need to recognize the risk in applying findings from research that is not directly linked to a given investment opportunity.
We calculate the realization risk of the specific impact pathways that we incorporate into the IMM. The Rise Fund assigns values to six risk categories and total them to arrive at an impact-probability score on a 100-point scale.
Estimate Terminal Value
This is not a new concept in financial analysis and due diligence, but it is a new concept in impact assessment. Attention usually centers around qualifying present or historical impact – we seek to estimate impact through the lifetime of our investment.
In finance, terminal value estimates a business’s worth in dollars across a forecast period. However, this is a new concept in social investment, where attention usually centers around qualifying present or historical impact.
In most cases it makes sense to estimate a terminal value. For example, installing solar panels can have a longer-term impact as the panels save energy long after they’re installed.
For each investment, Rise assesses the probability that company outputs and social value will continue for some period beyond exit. Rise applies a discount rate to terminal value impact.
Calculate Social Return
The final step in calculating IMM differs for businesses and investors. Investors, like The Rise Fund, must take an extra step to account for their partial ownership of companies they are invested in.
The final step in calculating the IMM differs for businesses and investors. Business can take the estimated value of a social or environmental benefit and divide it by the total investment.
Investors, however, must take an extra step to account for their partial ownership of companies they are invested in.
For example, The Rise Fund invested $100 million for 50% of EverFi. It adjusted its share of EverFi’s projected risk-adjusted $1.1 billion in social value to $534 million and divided that amount by its investment to arrive at an IMM of approximately 5x.
*Data is hypothetical and for illustrative purposes only.