Burgess COMMENTARY

Peter Burgess

Is the success of impact investing dependant upon the big data industry?

Social impact investing is about making ethical investments which, aside from bringing a return on cash ventured, has the added effect of improving social conditions, infrastructure, or quality of life.

At first glance there is no shortage of opportunities into which ethically minded venture capitalists can sink their money, secure in the knowledge that they are likely to see a good return on their investment at the same time as doing some lasting good in the world.

Water scarcity, for instance, affects more than one fifth of the world’s population and every continent. And it isn’t simply the traditionally ‘poor’ regions such as Africa; the Colorado River is beginning to run dry in places and it is estimated that by 2021, Lake Meade, which supplies water to 22 million people in the US, will run dry.

For the Impact Investor, investing in companies or schemes which improve water security would seem to be a fairly obvious choice. There are millions, or perhaps even billions of lives to be saved, and yet charities such as Water Aid repeatedly turn to television advertising, begging for the general public to help them save lives and give out of their own pockets to build wells and infrastructure across the third world.

Philanthropy and charity are not the same as impact investing.

So where are ethical investors to turn if they want to find out where their money would be best used to make a difference in the world?

Welcome to the 21st century and the world of Big Data. Information is everywhere, generated automatically in areas as diverse as astronomy, business, healthcare, and telecomms. So much data is being generated in fields such as healthcare and housing that enterprises are turning to crowd-sourcing to sift through it and determine what the numbers actually mean.

Typically, big data involves recording every possible metric on a subject, and IDG estimates that during 2014, enterprises will spend on average $8 million on big data related initiatives and with 70% of large organisations deploying new big data initiatives during the 12 months.

Information gathering is a huge investment, but its value is next to nothing if worthwhile relevant data cannot be extracted from it. In short, with big data around, you need to know what it is that you are looking for.

So, how does big data relate to Social Impact investing?

Early last year, the Global Impact investing Network (GIIN), released its Getting Started with IRIS (Impact reporting and Investment standards) guide. IRIS is a range of metrics which allows investors to track the environmental and social impacts of the people, organisations and projects they are investing in.

To use the water example from before, in addition to the bottom line of return on investment, the impact investor will want to know how effective their money has been, or is likely to be, in improving access to water for those in need. The answer is out there somewhere, and the data is being actively gathered.

This data matters more than the casual observer would realise. In the aftermath of the second Gulf war, companies flocked to Iraq, anxious to make money for their shareholders by rebuilding infrastructure deliberately ruined by both sides during the conflict.

Without doubt an undertaking worthy of investment, and one which would reap a handsome reward. But a look at the companies concerned, the region in which they were operating and the history of the individuals involved would have horrified an investor with a genuine interest in improving Iraq.

In May 2013, ten years after the invasion, Stuart Bowen Jr, the Special Inspector General for Iraq Reconstruction told trust.org that electricity was still only available for a few hours per day; 15-20% of the money had been wasted on corruption; hospitals are in poor condition; telephone service is patchy and some new U.S.-funded buildings sit half finished. Overall, “U.S. rebuilding was ad hoc at best and the results were extremely mixed,“ he said.

Anyone who was looking to make a significant social impact by investing in companies involved in the Iraqi reconstruction would have found that they had in fact, invested less than wisely.

The IRIS metrics – the ‘big data’ of social impact investing, had they existed at the time, would have prevented the fiasco that was the rebuilding of Iraq. As well as the financial performance of companies and funds, the IRIS metrics also record the Operational performance, which includes metrics to assess investees’ governance policies, employment practices, and the social and environmental impact of their day-to-day business; Sector performance, including impact in particular social and environmental sectors, including agriculture, financial services, and healthcare; and Social and Environmental Objective performance, including progress towards specific impact objectives such as employment generation and sustainable land use.

These are not measures which can be falsified, and represent a means by which, if implemented correctly, investors can be sure that their money is going to the right places, and not being wasted or spent on bribes and corruption.

And no-one is suggesting that impact investors use all the data at their disposal to decide whether or not to invest. GIIN advises funds that they are not required to track all or even certain IRIS metrics appropriate to their own sectors, impact objectives, or stakeholder requirements. With this data on hand, investors can ensure that companies are never again able to create a catastrophe out of a gleaming opportunity for good, as happened in Iraq.

The big data gathered by IRIS is of immense value outside of war zones, information is gathered on not only what companies do and how they do it, but also where they do it is well.

If a fund manager wants to invest in a company which can potentially solve the water problems in the Southern parts of the US and is stuck deciding between two, IRIS data would show that one company tends towards rural farming areas while the other stays in the cities. It would show historically, how many more people had year-round access to clean water per dollar invested, and how these dollars were spent.

The data is out there. And for ethical investors, it is available for free here.