Scrutiny of impact investing has never been higher.
The ability to credibly project expected outcomes and demonstrate their actual performance—both positive and negative—is crucial for long-term confidence in the market.
This is particularly critical in financial inclusion, a sector and impact theme that represents a significant portion of capital. So, what can we learn from the financial inclusion sector to ensure that investments maintain credibility and drive meaningful change for people, communities and the planet?
Enabling stakeholder alignment
CGAP has identified four critical enablers that can help align interests and actions across the capital value chain:
- Building a shared understanding of use cases to focus on outcomes: Our research indicates that relationships and the operating context influence key decisions around impact measurement and management (IMM) including why outcomes should be prioritized, in what contexts, and what for. For example, a DFI considering a follow-on investment in a fund manager’s second financial inclusion fund, which targets Series B investments, wants to understand the outcomes performance of the first fund before committing new capital. However, the fund manager only has FSP social performance data, and limited customer outcomes data. An impact VC fund investing in an early-stage FSP that is still refining its product and business model may seek to track ‘product-impact’ fit rather than demonstrate long-term improvements in customers’ lives.
These two simple examples illustrate how relationships and operating context influence why, in what contexts, and for what purposes outcomes are prioritized. From there, stakeholders can determine when, how, and by whom outcomes should be measured, and who pays. What is emerging is that there is no one-size-fits-all approach to IMM; these considerations form the foundation for developing use cases that inform right-fit outcomes-focused IMM strategies and reporting.
- Overcoming methodological and operational barriers: Digital financial services and technology-enabled IMM are creating new opportunities to collect, analyze and interpret outcomes data. While technology is already providing some solutions, it could offer even greater value in gathering outcome data, directly engaging with end customers, reducing biases, and managing shared or large datasets. For example, CGAP is exploring how machine learning can help understand how credit and digital payments can benefit customers in different local contexts. The effectiveness of technology depends on its alignment with specific use cases, as well as the management of concerns such as data security, privacy, and cost.
- Creating conditions for integrating outcomes data into decision-making: Our in-depth analysis into fund managers’ experiences has shown us that integrating outcomes data requires a shift in leadership, priorities, and culture. The leadership of fund managers and FSPs needs to value and invest in the practice, as well as in governance structures that can drive strategic alignment and facilitate the integration of outcomes data into strategy, investment, and operational processes. We have also observed the crucial role asset owners can play by setting clear expectations, collaborating with fund managers and creating incentives. These actions can cascade down the capital value chain, driving outcomes integration.
- Enhancing transparency in outcomes data: Transparency has been crucial to the growth of financial inclusion investments by fostering trust. Early on, CGAP and other organizations played a key role in this effort by developing performance and reporting data standards, setting benchmarks and encouraging data sharing. Today, many players are advancing the transparency agenda. While progress is underway, there are still specific opportunities to strengthen outcomes performance reporting, improve verification of impact claims, and enhance data infrastructure. These actions can make outcomes data—both positive and negative—more transparent, comparable, and credible across the sector.
Cases of over-indebtedness and exploitative lending by some financial services providers (FSPs) led to higher loan defaults, causing devastating effects on customers and increased operational costs for FSPs. Beyond financial losses, both FSPs and impact investors had to grapple with growing skepticism regarding their capacity to drive positive change in the lives of customers.
On the other hand, there is growing recognition of the potential of financial inclusion to enable outcomes such as financial health, resilience and women’s economic empowerment. For example, evidence shows that credit enhances women’s ability to control their personal and household financial resources, enables them to travel and socialize independently, and improves their access to jobs. These outcomes, though, are contingent on how services are designed and delivered and on the broader context, and more research is needed to fully understand these complexities.
Given the mixed evidence, impact investors need credible ways to measure, manage and report both the good and the bad. CGAP’s research shows that some fund managers are making strides in linking financial services with outcomes. They are also taking concrete steps to consider, monitor and manage negative outcomes and maximize positive ones, in alignment with their goals.
Global Partnerships, for example, adopts an impact measurement and management (IMM) approach that revolves around using outcomes data to guide investment strategy, portfolio construction, portfolio management, and engagement with FSP partners and fund investors. Outcomes data come from several sources such as client-level data through surveys, FSP client data, and sector-specific evidence, all of which are triangulated. Together, this information enables Global Partnerships to capture not just the positive outcomes enabled by financial services such as household economic resilience or food security, but also the potential risks of negative outcomes. This specific progress has been supported in the wider ecosystem by organizations such as 60 Decibels and Cerise+SPTF.
Yet these examples are the exception rather than the norm. Our research found that IMM practices remain largely focused on the reach and access of financial services, such as the number of loans disbursed, or percentage of clients served. This is not measuring outcomes. When outcome performance is reported, it is typically based on proxy indicators or one-time customer surveys, sometimes triangulated with the evidence base. This isn’t always enough to support strong impact claims and underscores the uncertainty around how and when to measure outcomes directly.
So why does this situation persist? Simply put, the stakeholders involved in the process of allocating, managing, and distributing financial capital—such as asset owners, development finance institutions (DFIs), fund managers, and FSPs—have different priorities and incentives. This fragmentation in the capital value chain makes it hard to focus on outcomes. Additionally, constraints with resources and know-how doesn’t help.
While these four enablers present opportunities to improve the focus on outcomes in IMM, we know these changes won’t be easy. Budgets are tight, capacity is limited, and aligning incentives across stakeholders is challenging. But without tackling these issues head-on, we risk defaulting to the suboptimal output-level data or proxies, missing the opportunity to drive meaningful outcomes and allowing impact washing to undermine the sector’s credibility.
Now is the time to act. By mobilizing around these four critical enablers, capital value chain stakeholders can enhance the impact of investments, ensuring that financial inclusion delivers positive, lasting changes in people’s lives. This will not only strengthen the credibility of the sector but also help maintain long-term confidence in the ability of impact investing to drive meaningful outcomes.
Estelle Lahaye, is senior financial sector specialist, and Charley Clarke is impact measurement and management specialist at CGAP
