Addressing demand for transparency and risk management through outcomes

The demand for transparency in impact investing is growing due to global challenges, including climate change and the Sustainable Development Goals (SDGs). Regulatory frameworks, like the UK’s impact investing label, require asset managers to demonstrate measurable contributions to societal outcomes. Financial inclusion investments are at risk of scrutiny due to concerns about negative outcomes, such as over-indebtedness, which can impact both reputational and financial returns. In 2022, development finance institutions (DFIs) and private investors allocated approximately USD $60 billion towards financial inclusion, signifying its importance for achieving impact goals. As financial inclusion attracts more scrutiny, impact investors are encouraged to adopt outcomes-focused IMM practices to enhance risk management. Despite these developments, only a minority of impact investors measure outcomes rigorously, with many relying on proxies or occasional surveys instead of measuring actual outcomes.

Four key enablers for aligning interests and actions across the capital value chain

The report highlights four enablers essential for outcomes-focused IMM. First, building a shared understanding of outcomes-focused IMM, including clear use cases, strategies, and funding roles, can address gaps in implementation. Distinguishing between intermediate outcomes (e.g., resilience and financial well-being) and developmental outcomes (e.g., poverty reduction and economic empowerment) is crucial to ensure clarity on short-term versus long-term impact. Second, overcoming methodological constraints—like data reliability—can be supported through innovative technologies such as Natural Language Processing and machine learning, which reduce data collection and operational costs. Blockchain technology, for example, can be used to provide a secure record for verifying outcomes data, enhancing transparency and trust.

The third enabler is creating conditions for integrating outcomes data into decision-making across the capital value chain. Misalignment in priorities between Limited Partners (LPs), General Partners (GPs), and Financial Service Providers (FSPs) often creates a reporting burden for FSPs and affects data quality. Setting clear expectations and establishing governance structures that support impact-based decisions can improve alignment. LPs, for example, can require outcomes data from GPs during fundraising, while GPs can collaborate with FSPs to develop indicators that integrate outcomes into key processes. Finally, transparency in outcomes data is critical, with standardised indicators and quality reporting fostering accountability. Initiatives such as 60 Decibels’ Microfinance Index and Cerise+SPTF’s framework provide comparable benchmarks that improve credibility across the sector.

Key priorities for paving the way forward in outcomes-focused IMM

To advance outcomes-focused IMM, stakeholders should collaboratively define clear use cases and strategies. Developing standard indicators for both intermediate and developmental outcomes will support consistency in measurement across the sector, ensuring short-term and long-term impacts are appropriately captured. Enhanced data infrastructure, supported by both private and public sources, is recommended to improve accessibility and inclusiveness of outcomes data, avoiding the creation of data silos.

Transparent reporting is vital, with Impact Frontiers’ Performance Reporting Norms recommended to ensure reports present both positive and negative outcomes. Furthermore, the report suggests incorporating actual outcomes into impact verification processes to improve accountability and trust. Notable cases like Oikocredit’s client self-perception survey, which captures client perceptions of change in well-being, and Incofin’s tiered support approach for FSPs at different readiness levels, exemplify effective approaches in outcomes-focused IMM.

Improved governance and a learning-focused organisational culture are also seen as critical to embedding outcomes-based IMM practices within institutions, promoting adaptability and accountability across investments. Through these enablers and recommendations, the report emphasises the need for sector-wide alignment to achieve transparency, mitigate risks, and enhance the effectiveness of outcomes-based impact investing.