Shaping the Future of Impact Investing in Inclusive Finance

Impact investors have an opportunity to further the inclusive finance agenda by adopting an outcome-oriented strategy for their impact measurement and management (IMM) activities. With a strong focus on outcomes, this approach aims to allocate resources toward investments that offer the highest potential for significant and influential results. It enables investors to understand the effects of their investments on customers and then take action to adapt processes and improve outcomes while maximizing their financial returns.

Why is such an approach needed?

Our sector is at a crossroads. We have made a lot of progress in terms of access and usage of financial services, but this isn’t enough. To maximize the impact of inclusive finance, we need to accelerate efforts to develop a broad range of financial solutions that enable development outcomes and solve for the problems low-income and vulnerable individuals, households, and MSEs face. To get there, our starting point needs to fundamentally shift to focus on the development outcomes of inclusive finance. In embracing this shift toward development outcomes, impact investors can maximize their impact and play a more pivotal role.

In recent years, impact investors have started to move beyond access and usage to make this shift toward development outcomes. Several have developed sophisticated IMM strategies that are more outcome-focused, including defining inclusive finance outcomes for investments (e.g., Global Partnerships), developing outcomes indicators and using direct surveys for data collection (e.g., Oikocredit, 60 Decibels), and testing proxies, and implementation of outcome management programs. With that said,  outcome-focused IMM remains an emerging practice as it is operationally challenging.

If we want to see more adoption of outcome-oriented approaches to impact investing, we think it is important to reflect on four key questions:

1. What development outcomes should be prioritized and defined for inclusive finance investments, given the complexity of defining these outcomes and attributing them to investments? 

There are multiple pathways to drive positive outcomes with inclusive finance, and impact can vary depending on the type of financial service provided and the target population. Outcomes (such as resilience) can also take years to materialize and even can be cross-generational. Contextual factors such as gender norms, regulations, etc. can significantly impact inclusive finance outcomes. In addition to positive outcomes, investors need to consider negative outcomes, such as increased risks for new customers of digital services. The task for investors of defining outcomes and articulating an effective roadmap for how to get there is challenging and multi-layered. At the same time, it provides the foundation for an intentional and strategic approach to investments and brings clarity for investors in defining their own contribution to development outcomes.

2. How to translate this roadmap into a practical and cost-effective measurement framework that can be used not only to measure progress but also to guide investment decisions? 

Measuring outcomes can be time-consuming and expensive, and there is often a tradeoff between the depth and accuracy of impact measurement and cost, speed, and financial return. Outcomes measurement often requires qualitative indicators to understand what types of impact have occurred—and why—and what has yet to happen. Depending on what needs to be measured, it may require surveying customers or conducting interviews or focus groups. Today, most financial service providers (FSPs) lack systems to measure outcomes, and even when they do, there is a risk of mistrust if the data isn’t independently verified. All of this can be costly, which also raises the question of who pays for IMM – investors or investees. 

3. Do impact investor IMM objectives align with those of FSPs, and can they be brought closer together?

Investors may have different impact objectives than investees. For investors, outcomes data is used to prove impact that is aligned with their impact goals, such as eliminating poverty or achieving gender empowerment. As described above, this is complex to measure, can take years to unfold, and can be costly. For FSPs, the usefulness of outcomes data is to inform strategic and operational decisions. For that, FSPs need data within short timeframes and frequently, which leads them to seek cheaper and simpler ways of collecting data, and often to move away from a focus on outcomes.

4. What are the incentives for impact investors to measure and manage outcomes?

There is mounting pressure from asset owners, governments, and the general public for impact investors to demonstrate their impact. For example, governments are taking various steps to encourage responsible and sustainable investing practices through disclosure regulations aimed at ensuring standardized, transparent, and high-quality reporting (e.g. European Union Sustainable Finance Disclosure Regulation, UK’s proposal for sustainability and impact funds labeling). Many development finance institutions (often taxpayer-funded institutions) have their own requirements for delivering on their development impact mandate and paving the way for private investors. All these efforts can create a favorable environment for impact investors to adopt robust IMM systems. At the same time, unclear or burdensome regulatory requirements, and pressure to manage risks and financial returns expectations may be diverting attention and resources from outcomes measurement and management. After all, sustaining a more operationally complicated IMM strategy requires ongoing commitment, resources, and expertise – requirements that are often beyond the abilities of some impact investors

Against this backdrop, CGAP is continuing to investigate the IMM practices of impact investors in financial inclusion. Our goal is to reflect on what is working and what is not regarding outcome measurement and management, identify good practices including producing case studies, and ultimately identify future areas of work where CGAP could add value. Stay tuned for our findings, and please reach out if you would like to share your perspective on this topic.