Measuring Impact: The Financial Health Approach

We cannot manage what we cannot measure. Can more holistic financial metrics help standardize and communicate social impact?

As firms’ transition, either through demand or regulatory pressures, to impact-centric models, the need for impact measurement and management framework is felt. Broadly speaking, these impact measurement metrics must have a few characteristics:

1. They must be transparent and inspire trust in investors.
2. They must be implementable.
3. The compliance cost and learning curve must not be too steep.
4. The metric is comprehensive enough to include multiple drivers of impact and accurate attribution
5. The metric must be able to evaluate both risks and the impact of the business model.

Finding metrics that meet all five criteria is particularly tricky. This is because impact-centric business models need to measure not only the financial return they generate but also the social, economic, and environmental outcomes at a beneficiary and community level. More so, in line with principles of double materiality, they must be “bi-directional” in their assessment of risks – how the business model impacts the environment and social parameters, and vice versa. For firms, these evaluations are also essential to communicate their impact – to stakeholders, the public, and regulators.

With this approach in mind, the Impact Management Project (IMP) organized convenings with over 3,000 enterprises and investors, from 2016 to 2018, to come up with impact measurement guidelines. This framework asks enterprises to think of five aspects:

1. What,
2. Who,
3. How Much,
4. Enterprise Contribution and
5. Impact risk.

In this article I explore the financial health outcome approach by UNCDF, and UNEP-FI, and if it can be a helpful metric for enterprises to measure and metric across these five aspects.  

What is financial health?

Simply put, the financial health outcomes approach tries to factor in the well-being of the beneficiaries – their life outcomes.  Its key thesis is changing the focus from output centric policy approach (financial inclusion for instance) to output metrics (Financial outcomes and wellbeing). The concept can be broken down into 4 components [1] :

1.      Financial resilience

2.      Financial independence

3.      Financial security

4.      Financial control

The diagram below elaborates on each of the 4 components [2].

Figure 1: 4 Components of Financial Health by UNCDF

Financial health outcomes themselves can be measured through various proxies – access to funds, digital and financial literacy, confidence about financial future, insurance covers, spending habits, etc. The objective of this article, however, is not to delve into the Financial Health approach itself, but to examine if it provides a viable tool for impact assessment. 

Measuring the “What”

The first step for enterprises is to think about the specific outcome the business expects to achieve. This means an evaluation of the business model and estimating if the outcomes would be positive or negative. This question is essentially the business “raison d'etre”, and in a way, provides an impact-centric approach to the business model itself.   

Take, for instance, the case of Azuri PayGo Energy in Africa. The Azuri Paygo service combined solar and mobile phone technology, to bring clean energy to people living in Sub-Saharan Africa [3].  Under the model, the solar home system has a small one-time installation fee, and a mobile phone top-up is used for further use. The impact model thus must measure multiple aspects

1. Carbon saved
2. Social benefits of access to electricity
3. Financial benefits

from switching to solar from kerosene-like fuel sources.

There are also intangible benefits – digitization of the economy, increased comfort with using mobile banking/fin-tech services, and public fund savings due to administrative and budgetary expenses from kerosene. On the risk side, the pricing itself could have been contentious – too high an upfront cost can alienate the intended beneficiaries or push them into debt. Too low, the business model can fail.

Pay-go reported that beneficiaries have recorded up to 50% savings versus kerosene. However, due to the pandemic, data indicates that the write-offs have doubled to 14% in 2020[4].

Financial health can thus be a vital tool to understand the business model – are consumers defaulting due to poor credit habits? Is it because prices are too high? Or is the flexibility too high compared to other repayment options?[5] Further the cost-benefit of the interventions - outcome to monitor the impact of the intervention and act as a proxy for externalities (Both positive and negative) because of the adoption of the Pay-go service.

Measuring the Who:  

The target audience or beneficiaries of intervention are central to the impact thesis. Often this is measured in terms of age, geography, location, income level, gender, and degree of vulnerability. Here too, financial health outcomes can play a helpful role. Data can provide important demographic insights, either through perception surveys or through data available with institutions. Data on insurance penetration, credit rating, monthly income, and money supplies can be some possible proxies to be used for ensuring proper targeting.

Figure 2: Financial Health as a tool to assess the "Who"[6]

The who is also central to the business impact thesis. Take the case of Vision Spring Foundation – a non-profit. The model clearly articulates the who, and the impact made through corrective eyewear. This aligns with their theory of change, “Eyeglasses improve daily functioning, productivity, and earning potential, creating a greater likelihood of a pathway out of poverty.”, linking the intervention, output and outcomes.

As encapsulated in the Duke Case study, Vision Spring's earlier attempts at expansion in Central America were unable to meet the impact or business goals, partially due to the inability to target the right groups of beneficiaries [7]. To find the balance, and avoid “mission creeping” to better-paying customers, Vision Spring narrowed its measurement metric to  

1. Percentage of customers who are first-time wearers (FTWs) and
2. Customer income levels.

They were thus able to ensure that 50% of their target was First Time Wearers and 80% of customers earned $4 or less per day. These metrics acted as a proxy for people whom the market has not yet reached.

Figure 3: Vision Spring 2021 Impact metrics https://visionspring.org/impact

How much is the impact?

The scale, duration, and depth of impact is a crucial metric for businesses to both measure and communicate. Financial metrics can be particularly helpful here, where both community and granular level impact can be assessed.

As we saw above, vision spring has used financial metrics, along with outputs as an impact measurement metric. The 2021 Accelerator Cohort at Financial Solutions Lab at JP Morgan Chase & Co. includes Everyday Life, an enterprise working to reduce barriers to buying life insurance. Their approach focuses on reducing premiums over time and providing “best fit” insurance, basis their customized needs [8]. The idea that financial institutions, especially banks and insurers, can leverage the financial health outcomes approach to improve customer wellbeing is something I have elaborated on in some of my previous writings.

Similarly, The Mission Shakti Living Lab in Odisha, India through a partnership with UN Capital Development Fund (UNCDF) is looking to measure the impact of pathways of women’s economic empowerment by working directly with women's self-help groups through income-generation activities and skill-building. By tracking the financial health of the women beneficiaries, the living lab, aims to test out the pathways, the depth of impact, and if short-term benefits translate to long-term wellbeing.

Assessing the Contribution:

A problem with impact measurement is attribution. The IMP standards refer to using depth analysis, analyzing other contributors, and undertaking contra-factual stress tests to assess what the projected impact would have been without the intervention, and in a way estimate the “outcome per unit cost” for the intervention. It also is an important communication piece - What are the changes investors can reasonably take credit for?

Figure 4: Neumann, Peter & Cohen, Joshua. (2009). Cost savings and cost-effectiveness of clinical preventive care. The Synthesis project. Research synthesis report.

For instance, research [9] on the impact of quality-adjusted life years, mapping cost-effectiveness ratio, provides us a robust case for investment in nutritionists in schools, diabetes screening in public health centers, and increased immunization drives. By translating health outcomes into customer financial metrics, the results become comparable to the other costs in the economy, and the risks of “no intervention”.

Figure 5: Contrafactual Analysis of intervention (Neumann, Peter & Cohen, Joshua. (2009). Cost savings and cost-effectiveness of clinical preventive care. The Synthesis project. Research synthesis report)

Understanding Risks

Just as with financial returns, there is a risk of enterprises not meeting their impact goals. The framework provides nine types of impact risks: from evidence risk (impact is unknown due to lack of data) to execution risks (impact of externality).

The financial health outcomes approach can be a way to anticipate and mitigate these risks. Experiences of economic hardship such as housing and food insecurity are symptoms of a deeper hardship in financial health. Financial health can be a proxy for other forms of economic insecurity (housing insecurity, food insecurity, energy insecurity), and can help policymakers and enterprises assess this risk at an earlier stage. This can also ensure that efforts are aligned with goals, such as food security, housing security, and other economic hardships, in a more consistent, and data-driven manner [10].

The Financial Health Network, based on data from twenty consumer finance studies and more than eighty-five financial services providers and industry experts, created a framework that considers financial health more holistically. This is particularly important for the financial sectors, where financial risks can be anticipated, and products tailored to meet the needs of the individual. At a firm level, financial health outcomes of interventions can be a proxy for risk management and transparency, an ESG rating Factor [11].

As per S&P, ESG credit factors can materially influence the creditworthiness of a rated entity through factors such as Governance Structure, Risk Management, Culture and Oversight, Transparency and Reporting, and Other Governance Factors [11] can have.

Conclusion:

The What, Who, How Much, Contribution, and risk are important questions for any business. Social policy, in general, is complex, and the adoption of market-based approaches has been slow. The pandemic gave a push to both social protection measures, and digitization of services – creating an opportunity for better data for policymakers and businesses. Amongst these, financial well-being can be one of the integration impact metrics – enabling comparison and tracking for stakeholders. It also leverages the rising technological penetration and weaves in inclusivity with the model [12].

The SDG Impact Standards are organized around four interconnected issues – Strategy, Management approach, Transparency, and Governance – and the ability of financial outcomes to link across the themes makes a persuasive case for greater research and adoption of the approach.

[1] https://www.uncdf.org/gfh/global-financial-health

[2] https://financialhealth.uncdf.org/financial-health/

[3] https://unfccc.int/climate-action/momentum-for-change/financing-for-climate-friendly/azuri-paygo-energy#:~:text=Azuri%20PayGo%20Energy%20has%20combined,power%20to%20charge%20mobile%20phones.

[4] https://nextbillion.net/covid19-impact-paygo-solar-data-study-financial-sustainability/

[5] https://www.cgap.org/blog/growth-vs-sustainability-credit-risk-paygo-solar

[6] https://www.uncdf.org/article/7883/why-financial-health-must-be-treated-as-the-true-north-to-augment-the-success-of-financial-inclusion

[7] https://centers.fuqua.duke.edu/case/wp-content/uploads/sites/7/2020/11/FINAL-Scaling-Pathways-VisionSpring-Case-Study-5.16.17.pdf

[8] https://everydaylifeinsurance.com/about/about-everyday-life-insurance/

[9] https://www.researchgate.net/publication/51766836_Cost_savings_and_cost-effectiveness_of_clinical_preventive_care

[10] https://journals.plos.org/plosone/article/file?id=10.1371/journal.pone.0233359&type=printable

[11] https://www.spglobal.com/_assets/documents/ratings/research/100701190.pdf

[12] https://www.bbva.com/en/sustainability/financial-health-has-an-impact-on-physical-health-and-social-well-being/