Impact Investing: Our Rocketship to Social Change
One person can make a difference. Are you ready to make an impact? If the answer is yes, then you are ready to be a part of the Impact Revolution. In my last blog I discussed how we can begin to make a positive impact, but how can we know we are truly successful unless we are able to measure that impact?
Why Measure Impact?
Measuring impact has the power to galvanize action. To change the behavior of investors and companies, it is essential that we measure companies’ positive and negative social and environmental impacts in a way that is easily understood by everyone. Former U.S. Vice President Al Gore, among others, has for decades advocated the measurement of “externalities” created by companies, as part of his fight against climate change. But no dependable way of measuring and integrating the impact of companies has emerged to date.
Measuring impact also prevents the moral hazard of “impact washing,” when a business falsely claims to engage in socially beneficial work. For some businesses today, such claims are little more than a marketing ploy. To authentically integrate impact into business and investment decision-making, impact must be dependably measured.
If we regard impact investing as our rocket ship to social change, impact measurement is our navigation system.
However, to achieve the widespread use of impact measurement, we need to completely rethink how we consider impact. For too long, we have assessed it in ways that are imprecise and inconsistent.
Measuring Impact: Our Navigation System
There are currently over 150 different impact assessment efforts across the world, each approaching impact measurement from a different perspective. Even traditional accountancy firms have started to pay more attention to sustainability issues and what they mean for business. There is a real need for a standardized way of defining, measuring, and valuing impact in a similar way we do with profit.
One of the most promising efforts to galvanize such an approach to impact measurement is the Impact-Weighted Accounts Initiative (IWAI). This is a joint initiative between The Global Steering Group for Impact Investment (GSG), the driver of the impact movement across the world; the Impact Management Project (IMP), a body of two thousand practitioners, set up by Bridges Fund Management in 2016 under the leadership of Clara Barby, which is working towards a consensus on how to measure impact.
The CEO of the IWAI is George Serafeim, an inspiring Harvard Business School professor of accounting. I chair its Leadership Council with Clara Barby as the vice-chair. The IWAI brings together academics and figures from the worlds of business, investment and accounting. Its novel approach involves integrating the impact a company creates into its regular financial accounts. The goal is to create a framework through which the impact created by a company directly affects its value, in a similar way that its profit does.
Impact-weighted accounts reflect in dollar terms the impact - positive and negative - that a company creates through its products, operations, and employment. They enable us to measure this impact on both people and the planet. Therefore, we can add and subtract from a profit-and-loss statement the impacts that companies have created.
The IWAI has recently published the environmental damage, in dollar terms, created by 1,800 companies. We discovered that 252 of these 1,800 companies created more environmental damage in a year than they did profit.
In a world with impact-weighted accounts, these companies would become loss-making. Through impact-weighted accounts, we can begin to look at companies in a different way.
Impact-Weighted Accounts: The Next Frontier for Society and Capitalism
We’re at a historic crossroads. After the crash of 1929, there was no transparency about the profits companies made. In 1933, the Roosevelt administration introduced securities legislation that brought about generally accepted accounting principles and the use of auditors use. We’re at exactly the same crossroads with impact. Consumers, employees, and investors are driving impact transparency, but governments have the power to require businesses and investors to measure and report on the impact of their activities.
If governments mandated that companies should begin to publish impact-weighted accounts alongside their traditional ones within two years. It will take us to the next frontier for society and capitalism.
And in this new world, companies that fail to measure impact will be left behind.
Many companies that didn’t embrace technology were left behind by nimbler competitors who designed more disruptive, more effective business models. The same will happen to companies that don’t manage their impact properly, that don’t address the conflicts their business models pose between profits and impact. The market capitalization of oil producers has fallen sharply, for example. Companies are beginning to realize that ignoring the arrival of impact will hold the same risks as ignoring the arrival of technology.
To learn more about the Impact Revolution, order a copy of my new book, IMPACT, here.
The shift to optimizing risk-return–impact, which is led by entrepreneurs and investors, will have a much-needed and transformative effect on the flow of capital in our economies. There is no other way to cope with the scale and severity of social and environmental issues other than to attract investment capital from the $200 trillion of investable assets in our financial system. An evolution in our thinking, which brings us to the triple helix of risk-return–impact, is creating a revolution in our means, through impact investing, to meet the challenges we face.
This shift relies on reliable, comparable, and standardized impact measurement of the impacts created by companies. It is this impact transparency, through impact-weighted accounts, that will take us to the next frontier for society and capitalism.
Are you ready to be a part of the revolution? To shift your thinking? To discover a new way of doing things? If you are, then continue this journey with me by reading my book, IMPACT: Reshaping Capitalism to Drive Real Change. It dives deeper into what entrepreneurs, Investors, businesses, philanthropists and governments are already doing, and what they need to do next to accelerate the advance of the Impact Revolution.