Why impact valuation will be the fastest growing segment of impact measurement and management (IMM)
By Bonnie Chiu
At Social Value International, we’ve been part of a growing movement to build a new economic model, which recognises social and environmental value alongside financial value. The world of finance has also advanced on capturing social and environmental impacts alongside financial impacts, through a practice commonly known as impact measurement and management (IMM).
We believe that impact valuation will be the fastest growing segment of IMM, because of two trends that will dominate the impact investing market.
1. Growth of impact-linked compensation among fund managers
The first industry-wide study on impact-linked compensation was published last year, and it defines impact-linked compensation as “a process of tying fund manager compensation to impact performance, is a tool that seeks to reinforce impact commitments through incentive alignment.” Around half of fund managers interviewed already have impact-linked compensation; and vast majority of these integrate impact targets into the calculation of carried interest (carry), which refers to the standard 20% share of the profits of the fund that a fund manager receives after certain financial targets (also called hurdles) are met.
Late last year, five venture capital funds, including Astanor (one of the three founding investors behind Impact Valuation Hub), developed a handbook on implementing European Investment Fund’s approach for impact-linked carry. European Investment Fund is one of the largest investors into funds in Europe, so the practice of impact-linked compensation is likely to grow even further.
Impact valuation is an important part of impact-linked compensation, primarily because all impact-linked compensation require some degree of quantification. Most impact-linked compensation targets are output-oriented, such as the number of emerging consumers reached, which do not tell the full story of change being created. Impact valuation encourages investors to look beyond outputs, to the changes in outcomes, by applying monetary values to these otherwise hard-to-measure outcomes.
Moreover, a lot of funds that currently adopt impact-linked compensation set environmental metrics, such as reduction in carbon emissions, as their targets. Impact valuation ensures that funds working on social impact, can also quantify their impacts, broadening the adoption of impact-linked compensation to a wider set of funds.
2. Growth of impact-linked financing in private and public markets
Similar to the idea of impact-linked compensation, impact-linked financing simply means that finance is provided ‘linked’ to impact, i.e. tying cost of capital to achievement of impact targets. In public markets, sustainability-linked loans and bonds are some of the fastest growing financial instruments in the world, accounted for more than $530 billion in issuances in 2021. A sustainable finance lawyer predicted in 2024 that, “The sustainable bond market is evolving and we can expect to see more novel structures gaining traction, such as outcome bonds and sustainability-linked loan financing bonds.”
In private markets, impact-linked finance is also a growing field. The cost of debt, principal repayments or other aspects of the financing is linked to achievement of impact targets. While there’s no data on how big the private impact-linked finance market is, a pioneer of impact-linked finance, Roots of Impact, closed a seven-figure financing round in 2024 for their company from influential backers, including Delta Fund, the European Social Innovation and Impact Fund (ESIIF), BMH, the public investment arm of the German state of Hesse, and the Swiss Agency for Development and Cooperation (SDC).
Impact valuation will gain further traction as impact-linked financing grows. Similar to the issues highlighted above, impact targets are often output-oriented as they are easier to measure. Not only do outputs miss the complete picture of change created by the investors and its portfolios, they can sometimes be misleading. The financial regulator of the UK in 2023, outlined certain concerns on sustainability-linked loans, including the fear of impact and green-washing, and the need to include “more meaningful, science-based targets”. More sophisticated adoption of impact valuation, including more transparent sharing of methodologies and value factors, can overcome these market challenges.
Do you agree with these market trends, and do you see the growth potential of impact valuation?
We’d love to hear your thoughts. If you’re exploring how to apply impact valuation in your work or want to connect with others doing the same, get in touch. We’re always keen to have more conversations about what this looks like in practice.
Bonnie Chiu is a Senior Advisor at Social Value International and Managing Director of The Social Investment Consultancy (TSIC), a global advisory firm specialised in social impact measurement and investment. She played an instrumental role in establishing the Impact Valuation Hub and continues to support its development as part of her work with SVI.