The New Old-Fashioned Global Economy

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I gave the following talk at the recent World Knowledge Forum in Seoul.

Society is thinking a lot about Corporate Social Responsibility these days because we would like to differentiate those businesses that behave in a way that is beneficial to society overall from those that do not. But what if we step back from this buzzy term “CSR,” and imagine that we have the power to design our world of business from scratch?

We might begin by asking, “what do people value?” If we were to make a list, and simplify our answers, we might come up with things like:

  • The well being of our friends and family. Our own health and happiness. In short, Health.
  • Our educational opportunities and financial well being: having the financial means to take care of what we and our family need, and to pursue our interests. In other words, Financial value.
  • And not only our own financial well being, but that of others. The economic well being of our communities. Economic value.
  • Going further, something so fundamentally valuable is it that we hardly think about how crucial it is and how our very lives depend on it, the earth’s natural ecosystem: fresh air, clean water, trees, and other things that we eat or use: rice, fruit, cotton. Environmental value.
  • We might even notice that we value our sense of trust in each other, and in our institutions. Trust.

To simplify: Health, Financial value, Economic value, Environmental value, and Trust, are umbrella categories for the things people value. If we re-imagine that business world is designed to produce value in terms of all of these things, how would we account for this value so that we could manage and grow it?

Would we measure only one aspect, the aspect of Financial value?

Unfortunately this is what we have been doing. Conventional accounting, which all businesses, nonprofits, and governments around the world use to guide their operations every day, leaves out the explicit value of Health, Economic value (Financial value for those other than shareholders), Environmental value, and Trust.

On the one hand, conventional accounting does work well. Since 1950 the world’s wealth in financial terms has grown tenfold. And not only financial value has grown: the average lifespan around the world has doubled over the past two hundred years, even as the population has grown sevenfold.

However in recent decades, negative health impacts have been caused by activity even as it generates financial wealth, such as obesity and type II diabetes. Worldwide economic inequality has grown constantly since the early 19th century with the only exception being the first few years of the 2000s, with the rapid growth in the emerging economies and in particular Brazil, Russia, India and China. Environmental devastation threatens our planet’s ability to maintain the conditions that support human life. And the accounting profession – the tens of thousands of professionals whose job it is to present a fair and accurate picture of what is going on – has never ranked so low among trusted institutions.

Our global economy has grown huge in large part because we figured out how to systematize the ways we measure, manage and communicate information about our market transactions through financial accounting.  But because we’ve been ignoring other aspects of value, we have been missing out on tremendous value that would make us all better off not only financially but in extra-financial ways as we and our communities have plenty of health, wealth and “natural capital.”

We can do not only just as well but much better economically than we have – if we develop ways to account for the rest of what human beings value. I call this “impact accounting.” By measuring these other aspects of value using impact accounting as a matter of regular business operations, we make it both more tangible and we enable enterprises to better identify and create this value. In so doing, businesses can create new wealth in a real financial sense.

Impact accounting is both possible and inevitable.

It is possible because the core principles and standards for social and environmental accounting are coming into existence. Thousands of business and nonprofit managers, public servants, scientific researchers, and other professionals around the world have made significant progress in the past decade on the development of practical and credible ways of accounting for social and environmental value. Developments such as the SROI Network with its principles for how to measure social value, the Impact Reporting and Investment Standards (IRIS) taxonomy of metrics of social and environmental performance, and the Social Performance Management (SPM) Network with its guidance for how to manage the social impact of the enterprise have taken firm root in dozens of countries around the world and are examples of the progress made.

Impact accounting is also inevitable. Here is why.

For most of human history, we humans lived and died within a few miles of where we were born. We knew everybody in our village, we knew whether they were trustworthy and treated people fairly, we knew whether they took more of the water or grass for their cows than their fair share, and we knew whether their products were reliable.

But then we learned how to make businesses big with industrialization, the population and cities grew, and as sourcing, production, customers and waste sites spread across the globe, we stopped knowing each other and whether folks did a good job or were a good neighbor. Not only was it easy to be unaware of environmental and human exploitation, it was increasingly difficult even for big businesses to know what their overall social and environmental impact was, even if they wanted to know. Suddenly, all that has changed.

You may have heard that this past month the one-billionth user signed up for a Facebook account. That means one in every seven people on the planet is connected to each other, and can capture, publish and receive at zero cost information about the activities of any enterprise, anywhere in the world.

This extraordinary human milestone marks a return to a very old-fashioned way of living. Now, the people next to the mine or the field or the dump can broadcast to the consumers and shareholders what they see, feel, hear, taste and smell going on.

Albert Einstein said, “We cannot solve our problems with the same thinking we used when we created them.” Both the methodology and technology exist to enable impact accounting to become standard practice, but the final key to unlocking the global economy’s potential to increase human well-being is one of mindset. For decades we have accepted that the private sector flies largely blind to its impact on the planet and people. At last we are on the cusp of a sweeping transformation in thinking.

Any moment we will look around and realize that it is now inconceivable that businesses and charities ever operated without impact accounting as a standard practice. The idea that they did will seem as old-fashioned as traveling by horse and buggy, and as debased as slavery– since truly without it we have been selling short not only our ability to pursue happiness but our very survival. Instead, with the universal adoption of impact accounting, we will become just as good at generating health and environmental sustainability on a massive scale as we are at generating wealth.

 

Your invitation to the USA SROI Network

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I would like to extend a formal invitation to you to join the fledgling USA SROI Network that Cynthia Gair of REDF and I organized starting at the tail end of 2010. We have a Google group to exchange ideas, an SROI intern to help capture the discussion and create a web presence, and we’ve been holding monthly discussion calls. The Network is for those using the principles of SROI analysis to measure, manage and communicate the extra-financial value of businesses, nonprofits, and other entities.

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Open Letter to OPIC and Cambridge Associates on the Impact Investing Initiative

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From OPIC’s press release March 8: “The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, has engaged investment advisor Cambridge Associates to invite input from investors, advisors, entrepreneurs and other interested parties about how best to design a call for proposals to catalyze ‘impact investments’ – projects which deliver significant social and environmental impacts to emerging markets while at the same time generating profits. Read More

The Right Price for Impact

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In the world of impact investing, it is understandable that any one investor may be reluctant to pay for impact information, since so few of their peer investors are yet doing so. The playing field needs to be leveled.

***

Many of you will recall that there was a time, not long ago, before Wall Street was interested in microfinance. One of the many reasons was that the only way institutional investors can incorporate a given investment into a portfolio is by understanding how risky it is compared with the financial return it offers.

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A Big Bang is coming in Korea, but not the kind you might think

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I hesitated to tell my parents that I was heading to Seoul on December 5, less than two weeks after North Korea shelled a South Korean island killing two soldiers and two civilians. Pretty much the only geopolitical scenarios any of us had thought or heard about for years when it came to the two Koreas were either increasingly brittle tensions, massive armed conflict, or all-out nuclear holocaust, and right about then the latter two possibilities seemed a little too real. Read More

World’s first PhD in SROI

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Hugo Narrillos Roux this week was awarded his PhD in Economics, Universidad Complutense of Madrid, with the work entitled: “SROI: a good method to evaluate the social impact of Social Firms.”

He enclosed an article (in Spanish) about SROI he has just published in the magazine of the Spanish Association of Foundations. The article is on pages 4 & 5.

Congratulations, Hugo!

An Unreasonable Invitation- Please Reply by December 15!

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Dear Entrepreneur,

This past year, I had the chance to serve as a mentor for a US-based acceleration program for young entrepreneurs tackling social and environmental problems called the Unreasonable Institute. Because it could be a useful opportunity for you, I’d like to invite you to apply!

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The Government, Entrepreneurship and Impact Management, a Series: PART II Thailand

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[Pattraporny Yamla-Or continues her reflection on the impacts of the recent political upheaval in Thailand and the surprising potential up-side for social entrepreneurship there.]

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Former SVT Client Mobius Tech Recycles Foam into EPA-certified Powder that Can Absorb Oil Spill

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I was just searching for photos from companies we’ve worked with that embody what a sustainable, equitable economy will look like, when I went to our old client, www.mobiustechnologies.com, and discovered that the polyurethane powder they made out of recycled foam can help clean up the oil spill!

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SVT teams with with Golden Mean and partners in Ghana to pilot on-the-ground impact verification and management systems

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We are driving toward radically affordable, high quality impact management systems. The issue is how to add more value to the business than distraction of entrepreneurs’ attention. As we continuously refine the formula for success in this endeavor, we are delighted to be heading to Ghana to pilot a system in collaboration with Golden Mean Capital LLC.

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