Setting Standards for Evaluating Impact Investing: What Does Africa Want?

Looking ahead to 2030, African evaluators may wish to boost their knowledge of finance and investment. Current estimates indicate that the implementation of the Sustainable Development Goals will require investment capital of some $2.5 trillion annually for the next 15 years over and above official development assistance and national government spending. How evaluators with deep experience in grant-based programs funded by the public sector can shift their practice to investments driven by the private sector is an interesting and timely question.

One notable point of intersection between finance and development is impact investing, a $60 billion industry worldwide that has grown steadily for the past decade. An impact investment involves the placement of capital in an enterprise, project or fund explicitly designed to produce a social or environmental benefit as well as a financial return. The provision of capital can allow promising innovations to thrive, or enable greater access to essential products and services through scaling.

In Africa, impact investors mainly use debt (loans or guarantees) or equity (share ownership) instruments to place their capital in investee companies. Consider, for example, a business that pays fair prices for organically grown shea butter, creating new income streams for small holders, and also sustaining the environment. Impact investments are also made in other sectors, including healthcare, education, renewable energy, and financial services, to name only a few.

So far, impact investors active on the continent have concentrated on growth-oriented investee enterprises, but there is even greater need for the financing of early-stage businesses that have the potential to yield substantial social benefits. And to date, most impact investors in Africa have been foundations, private equity funds, and non-profit intermediaries domiciled in the Global North, the development finance institutions (DFIs) of donor countries, and a few African governments. There are still too few African foundations, equity funds, pension funds and development banks involved in this space.

Late last year, however, the African Union and UN Development Program organized a session at the African Finance and Investment Forum that resulted in the publication of the Cape Town Declaration on Impact Investment in Africa. The Declaration called on all stakeholders—private investors, DFIs, governments, civil society, and donor agencies—“to catalyze and strengthen impact investing in Africa” through networking, advocacy, investment preparation, and appropriate policies, plus a new pan-African impact investment fund and other market infrastructure.

The Declaration also called for the “development and adoption of clearly defined and agreed upon impact measurement standards, monitoring and evaluation processes, and professional practice.” Such standards and practices are essential to the creation of an impact investing industry in Africa that is transparent, and whose actors are held accountable for their claims. Strengthened in these ways, the industry will gain real potential for scale and sustainability across the continent.

Our view is that African evaluators should play a key role in this effort. While market-based approaches to development may be unfamiliar to many evaluators, these trends represent a compelling opportunity for the evaluation community across Africa, and we have previously written about how to get started. But who else should be involved, and how could this process proceed? We suggest that there are four sets of standards and guidance, each with their associated proponents, which must be engaged.

First, there are the Quality Standards for Development Evaluation of the Development Assistance Committee of the OECD. These standards have been tested and honed over the past 15 years and are widely used by donor agencies and their partner countries. In addition to underscoring the importance of ethics in evaluation and professional codes of conduct, they provide guidance on analysing the context, understanding the logic or theory of the intervention, and ensuring a methodological approach that is systematic. As is well-known to African evaluators, these standards also refer to core evaluation objectives that include relevance, effectiveness, efficiency and sustainability, and make the distinction in types of results among immediate outputs, medium-term outcomes and longer-term impacts.

A second important source of guidance—and one adopted widely, especially by several European development finance institutions and applied to their investee financial institutions, funds and firms—are the Environmental and Social Performance Standards of the International Finance Corporation. These eight performance standards require investees to ensure: assessment and management of environmental and social risks and impacts; appropriate labour and working conditions; resource efficiency and pollution prevention; community health, safety and security; fair land acquisition and involuntary resettlement practices; biodiversity conservation and sustainable resource management; respect for the rights of indigenous peoples; and protection of cultural heritage.

Third, there are the Impact Reporting and Investment Standards (IRIS) of the Global Impact Investing Network, which are used extensively by the growing number of “impact analysts” who work in the industry. Launched nearly a decade ago and aimed at establishing quality standards, common terminology and comparable indicators across the impact investing industry, the IRIS system comprises an extensive glossary of terms and a set of output metrics, mostly aimed at the fund or firm level, of social and environmental performance across nearly a dozen sectors. IRIS has also cooperated with the Global Reporting Initiative, the microfinance industry, the agriculture sector, and other sector-based networks in order to find common ground and harmonize with their respective measurement systems and practices.

Finally, a set of useful guiding concepts and practices was developed by the Impact Measurement Working Group of the G8 Social Impact Investment Task Force and published in its report in 2014. The Working Group proposed a common results chain for the industry—which it called the impact value chain—and recommended a phased, cyclical approach to assessing the results of impact investments, including: goal setting, framework development and indicator selection, data collection and storage, validation, data analysis, data reporting, and data-driven management. While this approach was targeted at investors, the report encourages impact analysis to engage other stakeholders—particularly investees, beneficiaries and eco-system actors—in the impact assessment process.

While these standards and guidelines are all important and relevant to evaluating impact investing in Africa, they also all originate in the Global North. Such geopolitical asymmetry raises the question: what does Africa want? What kinds of terms, indicators and guidelines would African impact investors, impact analysts and development evaluators recommend in order to direct and police this emerging industry? How would they be different, and how would they be similar? What matters most to Africans?

Africa will remain a leading destination for impact capital in the years ahead, so these are important and timely questions. The African Union and UNDP, along with many other actors—particularly African evaluation associations, universities, impact investing funds, impact analysts, DFIs and policy makers—should be mobilized to bring the various stakeholders together to work on the standards issue. Appropriate, made-in-Africa standards will not only help to optimize the development value of impact investments, but will also help to discipline private sector investment in the SDGs. And, by elevating the transparency and legitimacy of how impact investments actually generate positive social impact, they will pay dividends for a very long time.