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Sophoi Sensemaking 2 - On developing KPI frameworks for impact investment results

In Sophoi Sensemaking 1 we discussed how the theory of change (ToC) is a useful tool to illustrate and explain the impact thesis of an investment – the processes and pathways by which an impact investment or fund will deliver positive change. Building on the ToC, a key performance indicator (KPI) framework guides investment managers on how to design and operationalize an impact measurement and management (IMM) system. A KPI framework sets out how results (social, environmental and financial) generated up to impact level will be robustly, consistently and routinely demonstrated and reported. As such, a KPI framework is essential to robustly and transparently demonstrate impact.

Designing a KPI framework for impact investment in the plastics circular economy

Sophoi Impact recently developed such a KPI framework with our clients, Archipelago Eco Investors (AEI), building on the ToC we created for their Plastics Fund One (PF1). This is illustrated in the graphic below. As consumer habits shift towards more sustainable products and services, investors are spotting opportunities to generate value from plastics reduction, reuse and recycling. With increased consumer demand and policy-maker attention on plastics consumption and use, this is a rapidly growing sector with significant positive social and environmental benefits. Impact investors like AEI want to deliver and demonstrate social, environmental, and financial return on investments in this nascent but expanding sector.

Developing firm-level indicators and measuring overall fund performance

Sophoi Impact and AEI created a KPI framework that, at its foundation, is based on three quantitative, impact-level KPIs: i) CO2 emissions avoided, ii) Tonnes of virgin plastic avoided, and iii) Financial Return on Investment. Below these three impact-level KPIs, the firms also report outcome-level results in terms of the number of sustainable green jobs created, and the new and additional green investment funding they have attracted.

The AEI KPI framework is structured so that results can be aggregated upwards from individual investee companies, through AEI as the fund manager, and up to overall impact. Firms collect evidence of outcome and impact-level results against these indicators (using indicator baselining and reporting guidelines that will be the subject of a future Sophoi Sensemaking blog!) and report them to the fund manager, AEI. AEI collects the evidence provided by various firms and aggregates them to establish fund-level impact. We also tailored the investee company KPIs (and reporting guidance) depending on their role (recycling, reusing, or reducing plastics waste), operational scale, and reporting capacity.

Beyond the direct, aggregated impact of the firms up to the fund-level, the KPI framework also considers how the PF1 as an impact investment fund may catalyse and contribute to wider, systemic change in the plastics sector - how investments contribute through a demonstration effect to technology uptake, diffusion, and ‘crowding in’ investment. These outcomes are less tangible and reported in as case studies, alongside core KPIs.

Archipelago Eco Investors Plastics Fund 1 KPI Framework

Linking to the UN SDGs

The principles and structure underlying the AEI KPI framework are primarily guided by the UN’s SDGs – particularly Goals 9 (Industry, Innovation and Infrastructure), 12 (Responsible Consumption and Production), 13 (Take urgent action to combat climate and its impacts) and 14 (Life Below Water). The SDGs are useful for articulating, aligning with, and then aggregating impact, often at a national level, and offer helpful advice on how the contribution to these goals can be measured.

Adopting emerging IMM standards and metrics

Standard social and environmental impact metrics are becoming more established and coherent as the impact investing / IMM sector develops and agrees on shared principles and standards. Standard metrics can be thematic or sectoral, as seen in the comprehensive IRIS+ indicator database with guidance from the GIIN. Indicators can describe activities and outputs or the outcomes and impact of activities and results, and tracking and reporting them can be complicated and time-consuming.

IMM principles and standards for the circular economy

There is also a growing knowledge base on how to design and structure KPIs in the circular economy. A useful starting point for fund managers is the UNDP SDG Impact Standards which are helpful if the SDGs also guide your overall impact. When it comes to impact investing in the plastics in the circular economy, the Ellen MacArthur Foundation has advanced the sector in establishing the principles and an overall strategy for transformation in the ‘new’ plastics economy.

The ‘value’ of KPI frameworks to the impact investment sector

There are multiple potential benefits to robustly and accurately reporting a broad range of impact investment results against tailored KPIs. Robust evidence reflecting positive environmental, social or financial results supports better impact investment decision-making, where fund managers learn which investments work and why. The positive performance then acts as a proof of concept, especially for emerging technologies, thus ‘crowding-in’ other investors in the sector and scaling up impact. These multiplier effects, ‘doing better by doing good’, can contribute to scaling positive investments with positive consequences, growing the impact investment sector overall. So, reporting evidence of investment results is really at the heart of the future viability and success of impact investing as a whole.

Sophoi Impact combines its expertise practical monitoring, evaluation and learning (MEL) in social and environment development interventions with a rapidly expanding knowledge of emerging IMM metrics and standards. We have combined these skill sets to design and operationalize practical and useful KPI frameworks to establish robust IMM systems. While we continue to learn more through our work, we will share our insights on the rapid developments in this space and them with you in our Sensemaker series.