Every business has social and environmental impact, for better or worse, but it is often difficult to understand exactly what these effects are. In 2007 the Rockefeller Impact Investing Collaborative was convened to explore interest among institutional investors in coordinating efforts to address this and related questions. Among the many difficult questions to be answered at the time were: How can investors tell if they are actually making progress toward a better economy both socially and environmentally? How does the pursuit of this better economy affect the finances of investors and the portfolio companies? Is the value created worth the costs? What is the best way for institutional investors to assess and manage their impact? The “Catalog of Approaches to Impact Measurement: Assessing Social Impact in Private Ventures,” was commissioned by the Collaborative to document the impact management practices used by private equity investors in 2006, identify patterns, and offer recommendations to investors and portfolio companies seeking to better manage their impact. A summary of the Catalog’s findings are found here. This article summarizes the recommendations laid out in a sister report to the catalog titled, “Impact Management Approaches: Recommendations to Impact Investors.”
Two general approaches to impact measurement that were emerging at the time were the use of “impact ratings” to gauge environmental and social performance, and “impact assessment” by proxy to evaluate the actual effects of investment activity.
“Impact ratings” Just as a great restaurant may receive a Michelin star, an investment may have a certain rating that demonstrates it reputability. For investors studied in the Catalog, these ratings were based on an assessment of a given portfolio company’s impact management practices, translated into a standardized scoring system. For example, the report characterizes “B Corporation [certifications as] the emerging standard for small- and medium-sized enterprises,” where “standard” in this case means a standardized list of questions about practices, and a weighted scoring system for assigning points to each answer, where the maximum total score was 200. Better ratings indicated better practices, and carried the implication of more positive effects on people and/or the planet, although the underlying questions for the most part did not directly measure those effects. For portfolio companies, these rating systems provided a structured way to think about their own environmental or social performance, and a performance level (80/200 points to qualify for certification as a “B Corporation”) to strive for. However, at the time the study was done, there was no universal, public, generally-accepted rating system in impact investing.
“Impact assessment” Impact Assessment at the time this document was published was closely related to Impact Rating systems, but without the added layer of abstraction/standardization of a score. In the Report the term impact assessment was defined as, “periodically [evaluating] characteristics, practices, and/or results of portfolio investments.” At the time, most impact assessment systems typically tracked some measurable output, or leading indicator of impact, as a proxy for the actual effects the business had on people or the ecosystem; for example, a business’ carbon output or energy consumption. These indicators could in theory be used to compare the portfolio company’s impact to that of other businesses. Essentially, these assessments were used by investors to identify the company’s strengths and weaknesses. For example, an assessment might show a company using excessive energy in creating their product. With this information, the investor can work with the company to find ways to lower their energy use to reach a desired energy consumption target. These assessments could also enable the comparison of the impact of different businesses within the same sector.
Based on these and other insights that informed the Catalog of Impact Management Approaches, including interviews with about 20 investors, SVT Group distilled nine recommendations for an approach impact measurement suitable for potential investors and portfolio companies, that could help facilitate progress towards a more socially and environmentally productive market:
Add value to companies: Only track identifiers that are key to the portfolio company and might affect their mission or profitability.
Ask for measurement of net results: Capture both positive and negative impacts caused by the portfolio company.
Screen up front for alignment with impact goals: Figure out the portfolio company’s impact goals…what does the company want to look like?
Adopt an industry-wide rating of basic standards: How does this company compare to all the others in the same field?
Adopt a common documentation protocol: Every measurement needs to be in the same units, format, and based on the same common assumptions/principles.
Adopt a Progress-out-of-poverty index (PPI): The PPI is essentially a set of questions that that focus on certain indicators of poverty so that you can gauge the level of poverty someone has (i.e. what is your roof made out of?).
Be accountable for impact: Keep impact in mind during all decisions.
Support R&D for assessment of the relationship between impact and financial return: Understand how a change in impact is going to change financial return.
Commit publicly: Being held publicly accountable shows other companies how it is done!
Though this report was written over a decade ago, these same recommendations still hold true. To shape a market driven more by social and environmental concerns, credible information about each company’s impact needs to be publicly available. This would bring greater social pressure to align financial decisions with ensuring a stable, healthy environment and with the well-being of others. However, there remains very little regulation governing how much a company needs to disclose. Without greater clarity about and demand for disclosures, most firms lack the vision and incentive to successfully manage their impact so that they at least do no harm and ideally benefit those whom they affect. In order for investors and others to embrace these recommendations, they will need a greater incentive to understand and proactively manage impact than has historically existed. One example where this incentive has crystallized recently is the issue of climate-related risk to investors, which is has catalyzed 30 central banks to demand clear disclosure of carbon and other environmental risks. The day may come when other impact issues, such as poverty eradication, income equality, or diversity get similar treatment; in the meantime, asset owners, employees and the public at large are slowly but surely growing the demand for information about impact.