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Do Nonprofit Organizations and Social Enterprises Deliver Results?

Do Nonprofit Organizations and Social Enterprises Deliver Results?How can donors and impact investors learn whether nonprofit organizations and social enterprises are actually delivering results? In the second edition of Money Well Spent, we document some important developments over the past decade since the book was first published. 

It’s particularly appropriate to ask this question via GuideStar, which has played a key role in providing donors with information about charities, and has the promise of leading the field. (Indeed, here’s a little-known fact about GuideStar’s CEO, Jacob Harold: When the three of us were at the Hewlett Foundation, Jacob led Hewlett’s “Nonprofit Marketplace Initiative,” which jump-started much of this work.)

Let’s begin with conventional nonprofits. The most rigorous evaluations are done by GiveWell, which rates only organizations that address global poverty. Most of the charities that receive its top ratings fight diseases such as malaria and schistosomiasis (parasitic worms), or improve the economic wellbeing of the world’s poorest people. GiveWell doesn’t merely assess whether organizations achieve results; it compares their cost-effectiveness in doing so―for example, a comparison of the cost per life saved. 

Mainly because of its reliance on randomized controlled trials conducted by independent evaluators, GiveWell only rates organizations that provide direct services, and not efforts to address poverty’s root causes. Even with this limitation, few organizations have the evidence base to merit GiveWell’s scrutiny, and it rates fewer than two dozen charities altogether. 

ImpactMatters is a relatively new nonprofit (of which Paul is a founding board member) that performs “impact audits” to certify whether claims made by nonprofits about their results are supported by independent assessments. These audits are intended to help organizations improve their own learning and accurately communicate their impact, while giving funders information to maximize their reach through the effectiveness of the organizations they support. ImpactMatters only makes audits public with the organizations’ permission. As of today, it has published about a dozen audits, with others in progress. 

The paucity of charity evaluations by GiveWell and ImpactMatters underlines how difficult and expensive it is to do them well. GuideStar has taken a different approach which, while not nearly as rigorous, could encompass many more organizations. In collaboration with Independent Sector and the BBB Wise Giving Alliance, GuideStar has developed “Charting Impact” questions, which ask charities to state in their own words their goals, strategies, capabilities, measures of progress, and accomplishments so far. 

Although a charity’s ability to persuasively answer these questions may only indicate that it has a good communications staff, its inability to answer them persuasively should at least make a donor think twice about supporting the organization. As we write, Stanford PACS is conducting an experiment to learn whether donors can discern the difference between good and inadequate answers to the Charting Impact questions. 

Delivering information about an organization’s effectiveness provides only half the solution, howeveras the saying goes, you can lead a horse to water but you can’t make it drink. Research by the Camber Collaborative indicates that the large majority of donors aren’t willing to put much effort into learning about the impact of the organizations they support, and they are pretty uninterestedeven when the evidence is put in front of them. 

Several ongoing efforts are exploring whether donors might be led to learn about organizations to which they plan to make large grants—for example, imitating the grantmaking of an experienced foundation or contributing to an expert-managed issue fund, like Blue Meridian―that in turn re-grants to operating nonprofits. 

So far, we have focused on charitable donations to nonprofit organizations, but we would be remiss if we did not discuss impact investing. In the 10 years since Money Well Spent’s first edition, the field of impact investing in for-profit social enterprises has blossomed.  Assessing the effect of these investments involves two quite different matters: the impact of the investee enterprise and the impact of the investment on that enterprise. 

Assessing the impact of an investee enterprise is no different from assessing the impact of a nonprofit organization. Unfortunately, the measures developed to assess impact investing—the Impact Reporting and Investment Standards (IRIS) and their related Global Impact Investment Rating System (GIIRS)—have mainly been concerned with activities and outputs rather than results. As of this writing, however, TPG’s Rise Fund is developing an impact measurement system for its investments aimed at meeting the U.N. Sustainable Development Goals. 

Impact investments present a second question that does not arise with purely philanthropic donations to nonprofits: When, and to what extent, does the investment enable the investee enterprise to increase its socially valuable outcomes? The alternative (in technical terms, the “counterfactual”) is that the enterprise would achieve the same outcomes through funding from ordinary investors who have no goals other than making a profit. 

The question becomes one of “additionality,” referring to whether an impact investment enables the enterprise to create social outcomes in addition to what it would otherwise achieve. Unfortunately, the impact investing industry has at best ignored, and at worst resisted, the question of additionality. Many socially motived investors are satisfied with the warm glow of an investment portfolio that is aligned with their values, regardless of whether or not the investments create impact. But there is hope. The Impact Management Project is gaining adherents for a comprehensive impact framework that assesses an investment’s net impact on people and the environment, including whether it has additionality. 

In sum, we believe that philanthropists and impact investors have an increasing number of tools to aid them in making sound decisions. The big, open question is whether they will avail themselves of the opportunities. 

Do Nonprofit Organizations and Social Enterprises Deliver Results?Paul Brest (left) is former dean and professor emeritus at Stanford Law School. Hal Harvey (right) is CEO of Energy Innovation.

Topics: Nonprofit results Nonprofit Impact