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One of the most important topics for social enterprises today – and for the people who invest in them – is how to actually measure social and environmental impact. Methods for measuring financial performance of a company are well-established – Generally Accepted Accounting Principles (GAAP) provide a consistent, agreed-upon method for companies to report finances and be audited against. No such set of standards exist for measuring social and environmental impact. So, if I’m a foundation making a grant to an NGO, how do I measure whether that money was well spent? Historically, rating organizations like Guidestar have focused on percentage of revenue spent on administrative expenses as a way of measuring the efficiency of an NGO or nonprofit organization. But that’s a really silly, shallow, and completely misguided approach. Personally, I’d rather support a high-impact organization which spends 20% of revenue on expenses than an organization which spends 4% of revenue on expenses but has virtually no impact on the cause.

I attended a panel discussion yesterday at SoCap09 on this topic, featuring Chris Park (from Deloitte), Andrew Kassoy (from B Lab) and Brian Trelsted (from the Acumen Fund). The general consensus is that from an investment perspective, it’s increasingly difficult to disaggregate an organization’s financial performance from its social and environmental performance. If you are investing in a nonprofit, their financial health and social impact are parts of the whole by which you make an investment decision. Similarly, if you are investing in a traditional for-profit company which touts their Corporate Social Responsibility programs, you want to be able to assess whether they are actually “good”, or just have good marketing.

The social capital space is naturally fragmented by the breadth of people’s passions. But there are some really meaningful initiatives being driven right now the major players in the space, working to establish a GAAP-like set of standard metrics for measuring, tracking, and comparing the social and environmental impact of an organization. The Rockefeller Foundation, along with several other leading organizations, is working to develop and refine Impact Reporting and Investment Standards (IRIS) in order to – in their words – “create a common language for assessing social and environmental impact”. A related project, Global Impact Investing Rating System (GIIRS) is being developed in parallel – venture capitalist Kevin Jones wrote a great piece in the Huffington Post recently on the topic of GIIRS and how it will “make more money flow to good”.

The tagline of the SoCap09 conference is “The intersection of money and meaning”. That intersection has, in the past generation, moved from being fairly loose and undisciplined (nonprofits soliciting unconditional donations and being culturally-adverse to the entire idea of “metrics”) to being sophisticated enough today that there are now entire venture capital funds focused on “impact investing”. But we need to make it to the next level, where impact investing can be considered a legitimate asset class in a mainstream investment portfolio – thereby increasing the flow of capital into the category.

As Chris Park from Deloitte said on the panel yesterday, “A bad investment made with good intentions is still a bad investment”. By establishing a taxonomy, common language, and common set of metrics for social and environmental impact (just as accounting standards are used for judging financial performance), we can move impact investing toward being an accepted asset class in mainstream capital markets. By getting there we will not only increase the flow of capital into the category, but we’ll also be able to know what’s working – in addition to simply believing.

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