In Part Two of our Opportunity Zones Q&A blog series with Howard W. Buffett, professor at Columbia University and president of Global Impact, we asked a pressing follow up question many have about calculating the impact value of money. Howard, who spoke with us during our Opportunity Zones webinar on February 12th about a formula he devised called “iRR” — impact rate of return, also spoke with us in length about social impact reporting in our first Q&A with him last week here.
The iRR® framework provides new ways for Opportunity Funds (among many others) to measure and report on their social impact. During this week’s webinar, we also spoke with Howard about his approach, and showcased what iRR® reporting looks like in the context of an advanced fund administration solution.
Prior to the webinar we asked Howard to discuss the key factors in creating an impact measurement capability.
What are the key factors to creating the iRR® impact measurement model?
Impact Rate of Return® presents an innovative and multi-dimensional approach to performance measurement and management. Specifically, it helps organizations calculate how efficient their financial allocations are at accomplishing social, environmental, and/or economic goals, and it is modeled after Net Present Value. However, instead of calculating the time value of money, as NPV does, iRR® calculates the impact value of money. iRR® does this by examining four critical elements to impact measurement and management:
- Magnitude: First, the model considers the overall magnitude of impact that an OZ investor hopes to or intends to produce. For example, a real estate developer may establish a goal of developing 3,000,000 square feet of sustainable commercial build out, a solar power developer may hope to generate 150 MW of renewable energy, or a small business incubator may aim to create 500 living wage jobs. Having a clearly established primary impact indicator denotes an investor’s unit of impact through which projects can be evaluated.
- Quality: Simply knowing the quantity of impact generated by a project provides a very limited perspective over the extent to which that impact actually improves social, environmental, or economic conditions. iRR® therefore also factors into its analysis measures of impact quality being delivered. For example, an affordable housing developer may want to include metrics related to housing density burden, access to public transportation, rental costs against household median income, and availability of early childhood education. The better a project delivers across these types of metrics, the greater its quality of impact as a result, and therefore it will achieve a higher iRR®.
- Time: Delivering impact inherently takes time, but time horizons can vary dramatically due to project design or how quickly a program gets off the ground. Imagine a funder with the goal to increase access to healthy fresh food in low-income neighborhoods. If two potential projects will deliver very similar quality and quantity of impact, but one does so in a far more time effective manner, then that project’s rate of impact will be higher.
- Cost: Finally, analyzing impact delivery must take into account the economics of a given project or development. The iRR® model incorporates a measure of a project’s dollars expended per unit of impact delivered. For example, consider an affordable housing project that delivers a high quality solution at a per unit cost 10% lower than a comparable project. The project with the lower cost model will score better due to its improved cost effectiveness (assuming other factors are equal).
The iRR® analysis provides a comprehensive evaluation of impact and can be performed before, during, and after the lifetime of a project, allowing organizations to compare a project’s predicted, ongoing, and actual impact. This results in a powerful impact tracking, reporting, and management tool from which organizations can make highly informed decisions. More information about the methodology can be found in my recent research publication Social Value Investing: A Management Framework for Effective Partnerships.
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The material in this interview is copyright Howard W. Buffett. Social Value Investing, Impact Rate of Return, and iRR® are federally registered trademarks of Global Impact LLC and all rights are reserved. This material is used with the express permission of Global Impact LLC/Howard W. Buffett.