Implied Impact ( Ï )^TM is a different way of thinking about social return and the measurement of outcomes. It is a way of grounding impact assessment – as an investment hurdle rate – in investor expectations and requirements drawn from the wider financial market context and comparisons with financial investments of equivalent risk and maturity.

The concept is based upon the premise that all investment activity creates blended value – social and financial – and that the total blended return for any given investment equates to the financial return + social return. Implied impact ( Ï )^TM is measured as a capital pricing spread or deviation from the expected standard risk-adjusted financial returns based on comparable risk and maturity criteria of mainstream capital markets. It provides a quantitative means to reconcile any capital pricing discount that might be offered by investors when they seek impact as a bona fide return on investment.

By linking impact assessment to the wider framework of investor expectations, it:

• links the pricing of impact investments to impact expectations
• makes explicit the degree to which a given level of impact is built into pricing and returns
• provides a way of expressing impact returns in a “currency” common across different impact activities and comparable to returns in other markets
• is not a substitute for impact measurement
• is complementary to bottom-up methodologies of impact assessment

The term was coined in 2012 by Dr Rupert Evenett (Co-Founder of EngagedX) to describe in financial terms the implied social return of investments.

Capital pricing dilemma – reconciling social and financial returns

Social impact investing – which is a way of investing that deliberately seeks positive social or environmental benefit alongside financial returns – is frequently described as an investment approach that requires an implicit trade-off between social and financial returns. This trade-off, if and when it occurs, could be described as the Implied Impact ( Ï )^TM of investments – “implied” because it is only a financial inference to the potential for non-financial benefit (or the perceived associated financial risks) as a result of this explicit social or environmental focus. It not an actual measure of the explicit social or environmental benefit.

This capital pricing spread has been recognised by pundits but until now it has not been satisfactorily reconciled in relation to conventional investment strategies.

Application

EngagedX is exploring how to integrating the Implied Impact ( Ï )^TM coefficient into standard financial equations to test whether it produces consistent and practical results in accordance with the real-world variations in capital pricing, as observed in the actual investment decisions of social impact investors. The goal is to develop an analytical and mathematical framework for calculating risk-adjusted and impact-adjusted returns in a similar way to the currently accepted risk-adjusted return calculations, and thereby to develop a model with which to compare all investments, social impact investments and commercial investments, on a like-for-like comparable basis.

Read more here.