Should you be auditing your impact?

Today we are launching a report that takes a major step forward to increasing the transparency of our impact investment fund. It is a report about openness, about learning, about ensuring that we have as much positive impact on the word as we can, it is… an Impact Strategy Audit.

If you’re anything like me the mention of the word ‘audit’ on a hot July day will not get your pulse racing. But I promise you this is not a report full of accounts and numbers to make your eyes swim. The summary shows clearly where we are meeting our strategic goals, and where and how we could improve. We have found the process of opening ourselves up to independent scrutiny an extremely valuable one but is it right for you? Below I answer a few common questions to help you decide whether an impact audit would be right for you.

So what is an impact strategy audit? Last year we published our new impact strategy that sets out our ambitions for social impact and how we propose to achieve and measure that impact. The audit explored in detail where we are delivering on this strategy, where and how we could do better, and how our approach compared to others in the impact investing industry.

Why commission an impact audit? Our main motivation commissioning this audit were to increase our transparency and to be open about the strengths and weaknesses of our approach. We see this as being particularly valuable in the impact investment sector where many impact approaches are not shared or discussed. By opening opening ourselves up to independent scrutiny we hoped to learn about where we could improve. We also wanted to provide assurance to our investors and stakeholders that we really do what we say we do and that they can trust what we say.

Quite simply, if you think that social impact is as important as financial returns and every year you undertake a financial audit you should consider applying a similar level of scrutiny to your impact work.

What is involved? We opened up our impact processes, documents, tools to an independent third party, ITAD. ITAD had full and unfettered access to all investment, reporting and board documents under a non-disclosure agreement. In addition to desk research ITAD also interviewed the team, our Investment Committee and three of our portfolio companies. These companies were ultimately chosen by ITAD and our input into the decision was helping them to understand our past relationship with those companies.

Why didn’t we do an evaluation? What’s the difference? The big difference as we see it between an impact audit and evaluation is that an audit does not try to assess the impact of fund, instead it focuses on whether we are well set up to deliver impact and the integrity of our processes. There are two big reasons why an audit was the right choice for us:

• We wanted an approach to transparency that was cost-effective and would be of interest to the impact investment industry as whole. This audit approach was twice as expensive as a financial audit so if undertaken every two years we think that these are reasonable costs to absorb in an impact investment operating model. A good quality evaluation would cost many times this.
• Our strategy is very new, it is unlikely that there would have been much front line impact to evaluate at this stage. For us the impact audit does not preclude an evaluation in the future but actually makes it likely that one would be more useful by allowing us to course-correct an fine-tune our model.

Who might it be useful for? We believe this approach could be useful for any impact investment fund or grantmaker. We believe the value of the audit is increased if you are accountable to external stakeholders, such as investors. We also believe this is an approach that would be useful to front line organisations delivering impact. An audited impact approach may help to strengthen the case that organisations need only produce one report for all of its funders rather than providing bespoke reports for each.

What were the challenges? Inviting scrutiny on what were previously purely internal processes is always going to come with challenge. Now that the world can see our weaknesses as well our strengths this gives more urgency to our need to improve. In particular developing an exit strategy for impact, considering the unintended impacts of our investments and making the application and updating of our tools more systematic.

It is also worth noting a big practical challenge: our knowledge management system was not set up in such a way that made clear sense to an external observer. This made sharing documents much more challenging than it might have been.

How do you go about commissioning an impact audit? Each organisation has its own procurement processes but we recommend working the following steps into any commissioning process:

• Get clear on the primary purpose of the audit. As described above there are many potential purposes and knowing what your priorities are will help you to balance tradeoffs.
• Talk to potential suppliers so that you get a feel for what is realistic at what price.
• Talk to other people who have undergone audits to get a sense of what they did and didn’t get out of it. This is a new area and we need to learn lessons from each other.
• Bring together a panel of stakeholders to help select the auditor and feed in during the process. We didn’t do this but we will seek to do so next time as we believe this would further increase the validity of and buy in for the findings.
• Keep the brief relatively open and allow different firms to propose their own approaches. This is an evolving field with many high quality potential service providers so make sure you are giving them the freedom to propose latest best practice.

 

In short the process of having our impact strategy audited was low cost, low burden and enlightening. At Nesta across all areas of our work we are trying to increase transparency in our approach to understanding impact (read more about this work here). We need to demystify these processes, open up and be willing to talk critically if we want to move forward, both in the impact investment and foundation worlds.

If you are interested in talking more about whether this approach might be right for you or want to hear more about our experience please don’t hesitate to get in touch!

This blog orginially appeared on the Nesta website here: https://www.nesta.org.uk/blog/should-you-be-auditing-your-impact/

*Full reports available here.