Measuring impact is a complex and increasingly important subject, extending beyond the booming market of Impact Investment and Social Business to a growing part of the economy. It is of prime importance, because if truly harmonised international standards are developed, unexplored avenues will open up for inventing new public policy instruments to direct business efforts and private resources towards subjects of general interest.
Measuring social and environmental impact, in other words the positive or negative contributions of projects or organizations to societal issues, is going more than ever at the forefront.
Of course, assessing social impact is by no means new and has been addressed for decades, by non-profits in particular. Yet this topic has shifted gears as private economic players – companies and investors alike – have become increasingly active in this arena.
This paves the way for further public policy invention: the question of impact measurement and valuation could indeed prove of help in inventing new models while new public policy instruments must channel private resources towards projects and companies serving the general interest.
In the light of the Covid-19 crisis, our interdependence as well as the collective and individual responsibilities arising from it, raised an altogether glaring, raw, and fundamental question. Health matters and food security cannot be in any way encapsulated in financial indicators alone, for example, even finely calibrated. It is therefore more than ever essential to direct the private resources and liquid assets – at all-time high leveles a mere few weeks ago and still abundant at the end of March 2019 after Covid19-related stock exchange breakdowns – towards addressing and resolving the major problems faced by society.
An increasingly important topic
Projects and initiatives that inherently couple economic performance and positive socio-environmental impact are indeed increasingly important in terms of number and surface, as described in our “Towards 2030” report :
- Impact Investment Funds are multiplying and the Impact Investment market is set to grow from $100 billion in 2016 to $12,000 billion in 2030;
- Invented in the UK (as, historically, were many financial innovations) about ten years ago, Social Impact Bonds schemes have inspired the launch of additional instruments: Development Impact Bonds and Environmental Impact Bonds. The principle is a tripartite scheme between a project owner, investors, and public authorities or foundations that remunerate the social or environmental success of a project, or even reimburse in the advent of success invested funds. Over the last decade, however, such projects have tended to be limited in size, due to their complex implementation. Now, two investment funds of 1 billion dollars each have been announced by Sir Ronald Cohen, for example.
- A “catalytic finance” instrument, Blended Finance has funneled approximately USD 150 billion toward the implementation of the Sustainable Development Goals in developing countries and federate public actors and private investors.
These approaches all have in common their underpinning positive and negative impact measurement most often with the help of third-party certifiers.
Heading on mainstream economy
This question now goes beyond the still limited, but rapidly expanding field of Social Businesses and Impact Investors. As extra-financial performance reshapes the risk/return trade-off, the shift is being operated at an unprecedented scale, from monitoring social and environmental risks to seeking a positive contribution from economic activities.
For instance, the recently released French CAC 40 companies ranking on the basis of their impact on social, environmental and societal impact and contributions to achieving the 2030 Sustainable Development Goals. This ranking emphasizes the positive contribution companies should aim for, beyond merely controlling and mitigating their extrafinancial risks. This is already essential in assessing a company’s value creation potential, complementary to its risk screening regarding ESG (Environmental, Social, Governance) performance analyses.
A crucial harmonization work
Still, measuring environmental and social impact is not only meant to support the integration of impact assessment in mainstream economy, or the development of Social Businesses and Impact Investment, which already have an eminently positive and growing impact across on a number of issues including social inequalities, gender equality, biodiversity, etc.
In fact, impact measurement is also likely to inspire the development of new public policy instruments in the future: through incentive mechanisms, it may channel private resources towards efficient mechanisms and at a lower cost – provided this measure is robust enough to be framed and embedded in large-scale policies.
That said, in a highly customizable field, where qualitative data often plays a predominant role, developing a made-to-measure understanding matrix for each project and organization, might seem tempting.
Yet comparability and international reference frameworks are paramount: in a word, a common reading grid, comparable to the IASB or IFRS accounting standards, for example, as digital technologies permit it.
The quality of the international standards to emerge is therefore essential to make impact projects, investments or companies credible and comparable, as emphasized by the OECD. The Impact Management Project (IMP), the GIIN’s IRIS+ method or SROI (Social Return on Investment) methodologies will undoubtedly be among the building blocks fundamental to the establishment of such international impact measurement standards.
New solutions to emerge for public policies
Once stabilized, a wide range of solutions could be envisaged by public authorities to effectively channel capital towards positive impact projects, such as lifelong training or financing of the energy transition. This could be achieved through their fiscal policy or strategies involving public financing and guarantee institutions:
- Consideration of the development expenses of impact projects as capital expenditures: a few weeks ago, it was stated by a government representative at an OECD conference that CSR expenditure should indeed be considered as investments. It follows companies therefore be allowed to consider qualified expenses as capital expenditures, so as not to reduce their annual P&L accounting. This would also serve to acknowledge the intangible capital vested in the adoption of general interest-oriented practices.
- Tax measures incentivizing corporations to mobilize resources – examples include schemes as the likes of:
• the modulation of the corporate tax rate, or relaxation of rules on the deductibility of interest or the tax losses carry-forward, based on the surface area of activities deemed as ‘contributive’ and the level of such a contribution;
• Over-depreciation, or the possibility of fiscally-depreciating “impact” capital expenditure for tax purposes, for an amount greater than its book value;
• Impact Tax Credit, enabling the recovery of part of the qualified expenses incurred. - Adaptation of Blended Finance mechanisms, to promote a reasonable reallocation of liquidities made abundant in the current monetary context:
• Senior or mezzanine projects financing
• Partial guarantees, in amount or proportion (“derisk”)
• Pay-for-result Incentives on pre-validated investment programmes, harnessing, for example, the SIINC mechanism implemented by the Swiss Agency for Development and Cooperation (SDC) in partnership with Roots of Impact. This would cast a new light on the risk/return ratio, by mobilizing reasonable amounts of public resources to reward social and environmental performance, rather than financing programs as a whole. - Reinforcement of frameworks setting the replication system of Impact Bond schemes in motion.
Complicated implementation ahead
Of course, the road to hell is paved with good intentions – and besides, the devil is in the details! One must be wary of deadweight effect risks, as well as questions as to independence of third-party certifiers, or risks of collusion arising from the promotion of certain economic activities by public policies.
Of course, establishing such mechanisms, thresholds and levels of incentive policies would inevitably be complex, subject to questioning, and would have to be exemplary in terms of transparency.
Besides, it would be unwise to consider that public policies should only be driven by these principles. Indeed, under no circumstances should the possibility of measuring and valuing the impact lead to phagocytize policies that promote social cohesion, social equity or biodiversity preservation. Not all can be “measured” and some topics should not be.
But as 2020 kickstarts the Delivery Decade, we need to accelerate model and paradigm shifts: private resources must be mobilized for projects and organizations whose positive impact can actually be monitored and measured, if not demonstrated.
The ideas presented above rely heavily on the quality and credibility of such measurements, and are just examples opening up potentially on even more food for thought.
Impact measurement and valuation indeed present a major societal and political challenge, in that they are a source of inspiration for public politicie: a necessary but insufficient condition for the organization of a much-needed rebalancing of economic activities and energy transition… all in the name of the necessity a more harmonious and balanced development model.
20+ years of experience in investment & asset management.
Raphael Hara works on relationships between finance and sustainability, in particular through the development and management of impact investment funds and projects.
