The Center for Community Development Investments published, "Building Scale in Community Impact Investing through Nonfinancial Performance Measurement" by Ben Thornley and Colby Dailey. Based on six months of empirical research in 2010, the report is the subject of a new issue of the Community Development Investment Review from the Federal Reserve.
The lack of transparency in community investing is hampering opportunities for innovation and greater effectiveness not to mention accountability. Given that many, highly diverse investors seeking to create social impact with their money need to go through Community Development Financial Institutions to invest, it would seem to be both urgent and manageable to introduce better performance metrics.
Investors are putting money into domestic, low income communities in the hope of generating both financial and non-financial returns. Despite the fact that "nonfinancial performance measurement directly informs the investment process" and is essential to providing " latent sources of capital with market-level information on the tradeoffs between financial and social return," there has been a lack of effective measurement tools to understand investor preferences in a complex and diverse process that seeks to maximize impact, growth and risk avoidance.
Surprisingly, many impact investors fail to report non-financial impacts at all (p. 17-18)!
The report examines 4 questions:
1. Does nonfinancial performance measurement really matter for investors?
2. If it does matter, is nonfinancial performance measurement even possible?
3. If nonfinancial performance is possible to measure, what form should it take?
4. How will nonfinancial performance measurement increase community impact investing?
In particular, the authors survey 8 existing but underused measurement tools. They go on to identify both theoretical and practical barriers to effective measurement including those that stem from the diversity of investor preferences, lack of readily available tools, and an absence of accountability in the system.
They conclude that "nonfinancial performance measurement is critical because, simply put, willingness to pay is partly determined by the quality of the information that investors use to make decisions about financial and nonfinancial tradeoffs."
The report does not commit to a single way forward that will lead to adoption. They suggest 4 possible avenues: 1) industry self-regulation; 2) Community Reinvestment Act reform; 3) CDFI Fund regulatory mandate; 4) additional federal investment to support innovation in nonfinancial performance measurement?
I'm willing to agree with their conclusion that there is no, single tool or silver bullet policy prescription. Hence I think they should be demanding, shouting, calling for trying all four approaches urgently to see what works. The paper is more helpful support for the power of open data as well as a good excursus on the how to design law, policy and technology in tandem to produce greater innovation and effectiveness.