Thomas Garvey 7/2/19 Thomas Garvey 7/2/19

How to Draw the Bottom Line(s): Impact Management in 2004

Imagine, if you can, a world where “The Facebook” just went online, and you would be insane NOT to bedazzle your jeans. That world seems far away, as things have changed hugely since 2004. Impact management, which was just beginning to find itself in 2004, has also changed. However, to understand the field today, it is important to understand where impact management came from and what practices looked like circa 2004. The “Double Bottom Line Project Report: Assessing Social Impact in Double Bottom Line Ventures” is a wonderful snapshot of these early impact management practices, as it may have been the very first measurement methods catalog for impact investors.

Targeting an audience of both social investors and entrepreneurs, the Catalog provides summaries of the practices a range of leaders were using to manage impact, as there were not yet established standards in the field. A quick scan of these practices reveals a lack of coordination or common understanding of basic definitions. For example, each enterprise had a different definition of the term ‘impact,’ which could make it difficult to actually manage the stuff! The report’s coauthors put together the Impact Value Chain below to help universalize these key definitions; today’s shared fundamentals of impact reflect the evolution of this early stake in the ground.

In 2004, there were a number of different investors and double bottom-line companies (companies concerned about impact), ten of which were profiled in the Catalog. Though there was plenty of overlap in both style and function among the practices each used to assess impact, each had a different level of feasibility (”the extent to which [a practice is] useful and applicable in the strenuous environment of a growing venture,” including cost and person-hours from one year to the next), and credibility (how thorough and trustworthy the practice is).

The practices in the catalog were grouped three ways: those that track outcomes by benchmarks, those that use a rating system, and those focused on cost-benefit analysis:

Impact Tracking The enterprises in the first grouping—Acumen Fund Scorecard, Social Return Assessment, Ongoing Assessment of Social Impacts, and Poverty and Social Impact Analysis—tracked short and long term outcomes so that investors could manage their impact to reach certain ambitious-yet-feasible goals they have set for themselves. The outcomes that these enterprises track, however, are entirely subjective based off of their own definitions of ‘impact'. For example, the Social Return Assessment approach focused mainly on tracking the number of jobs the enterprise created, which is a good start, but does not address other potential outcomes, both positive and negative that may be created.

Impact Rating The second grouping consisted solely of the Atkisson Compass Assessment for Investors method. This practice used a point scale rating system based off of a compass—North=nature, South=society, East=economy, West=well-being, and synergy (the relationship between the cardinal directions). A company would receive a rating in each of these categories, which would then be compared to other companies to see where their strengths and weaknesses lie. For example, investors might have use these ratings to find which company has the best, most efficient energy usage within a certain sector.

Cost-Benefit The last group, comprised of Social Return on Investment and Benefit-cost Analysis, expressed social impact in monetary terms, “combining the tools of benefit-cost analysis, the method economists use to assess nonprofit projects and programs, and the tools of financial analysis used in the private sector.” The three major tools of this type of analysis are measuring net present value, benefit-cost ratio, and internal rate of return.

There were many risks to the credibility of these early practices stemming from weak social accounting frameworks: differing definitions of ‘impact,’ seemingly random selections of inputs/output/outcomes unrelated to material impact, and overall weak research designs. However, these practices did lay the groundwork for modern impact management.

Today, the Impact Management Project (IMP) is providing “a forum for building global consensus on how to measure, report, compare and improve impact performance,” and has produced a more refined, consensus-based definition of impact, but is still based on the approaches evidenced by these early practices. For example, according to the IMP, modern impact managers still track specific information related to certain impact goals (Impact Tracking’); use rating systems to benchmark impact performance (‘Impact Rating’), and compare social and environmental benefits to financial cost (‘Cost-Benefit’), just like in the three groupings above.

When one understands how impact management looked when it began, and observes what has remained the same and what has changed, one’s confidence in the durability and value of today’s impact management lingo and approaches grows.

The practices in the catalog were grouped three ways: those that track outcomes by benchmarks, those that use a rating system, and those focused on cost-benefit analysis:

Thomas Garvey 7/1/19 Thomas Garvey 7/1/19

Impact Measurement Approaches: Recommendations to Impact Investors

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.