Aggregating impact to drive decisions

We aggregate data to drive decisions about portfolio construction: aggregation shows us whether a current portfolio is on track to meet expectations or whether resources need to be re-allocated.

At Bridges Impact+, we often advise funds that manage capital on behalf of investors, or corporates that manage multiple projects on behalf of shareholders. This capital is then deployed across a range of projects or opportunities. While investors may ask about the performance of individual investments, they mostly want to know that the fund manager is optimising the impact performance of the overall portfolio to which they have exposure, within the constraints of their financial goals.

The table below illustrates some of the portfolio construction questions that aggregated impact data enables a fund manager to answer and make adjustments accordingly.

Table 1: Illustrative portfolio construction questions

For more on our Impact Radar, see www.bridgesventures.com.

With a clear understanding of why we want to aggregate and what questions we need to answer, we then turn to the trickier question of ‘how’.

To answer the questions in Table 1 above, we first analyse data at the investment level and then aggregate at portfolio level.

For some questions, we can use a quantitative calculation. For example, to determine whether the portfolio is underweight in terms of capital allocated to address a specific outcome, we can calculate assets invested to address a specific outcome as a proportion of total assets under management; or, to determine whether the portfolio is on track to deliver the quantity of outcomes expected by our investors, we can calculate the ratio of performance against targets for each investment and then calculate the average ratio for the portfolio.

Other questions require a different approach. We have developed a scoring system to convert quantitative and/or qualitative data at the investment level into a lower, medium or higher score. The merit of the scoring system is that it calibrates our judgment across different investment opportunities and allows us to calculate an average score for the overall portfolio, which can then inform decision-making.

For example, in order to assess the level of target outcomes risk that the portfolio carries, we might ask:

•   Is the investment’s theory of change threatened by internal and/or external factors?

•   Are we measuring outcomes rather than outputs?

•   Is the data reliable?

The answers are used to assess the level of outcomes risk for each investment, using the scoring system to calibrate whether that risk is lower or higher. We can then take the average score across the portfolio and determine whether we need to re-allocate resources to lower the portfolio’s risk profile (for example, by making future investments in opportunities that carry less outcomes risk, or working more closely with our investees to evidence their outcomes).

We recognise that a scoring approach might lead to inadvertent, inappropriate weighting. But if we don’t score, aren’t we weighting anyway, just intuitively and implicitly? By explicitly scoring, say, the quality of an investment’s outcomes or an investor’s value-added, we find that we can be more, rather than less, open to feedback and revision. This should, over time, enable the weighting itself to become a conversation, with investees and, most importantly, with the end users we ultimately serve, about what they value most.

By taking this approach, we do not mean to imply that one should not also aggregate comparable outcome data by stakeholder type, in order to paint a colourful matrix of all the good things that a portfolio is achieving. The 1,500 jobs created for the long-term unemployed and the 3000 students with improved grades are interesting reference points. However, without also using aggregation to answer the sorts of impact management questions outlined here, we have found that data loses context and we cannot use it to guide construction of an optimal portfolio.

This blog is from a wider discussion document on the challenges of aggregation, collated and put together by Social Value UK. The whole document provides perspectives from a range of sectors, and can be downloaded in full from the Social Value UK website.

If you're interested in learning more about measuring and managing your impact, you could join Social Value UK and EVPA's upcoming Impact Management workshop: the fundamentals on October 5th, 2016.