This is the last post in a six-post series on impact by ACS Associate Will Nielsen.
Spoiler Alert: Current efforts to put our financial resources towards initiatives that generate positive impacts may be well intentioned but are often limited in their ability to measure impact and rely on under-developed economic principles. In response, an accounting of impact measurement methodologies could support realignment of financial resources away from unknown impact and towards known impact.
Implications for Business and Investing
The development of impact-oriented ventures, such as impact investing, conservation finance, social enterprises, have arisen, in part, from an inability to completely understand how traditional business impacts society — both in terms of benefits and costs. These mission-oriented initiatives are a response from a desire to understand if and how a business or investment is doing something positive (or not) for society. Often, it is assumed that if it is unknown whether a business is doing society any good, it must be doing harm. This shift towards an increased understanding of impact can become a virtuous cycle as those who both own and spend the money demand and request it be invested in areas without known negative effects. Transparency initiatives will further limit investors ability to escape public scrutiny. As our understanding if impact increases, global markets will be reoriented towards an improved risk, return, and impact profile.
While the desire for impact measurement has increased, the ability and practice of actually measuring it is weak. As Sasha Dichter of the impact investing firm Acumen put it: ‘there is a justifiable concern about both the costs and the benefits of rigorous impact assessment’. Billions of dollars labeled for impact purposes are devoted to companies implementing impact measurement initiatives that are providing minimal relevant information to the investor and stakeholders. Further, there are many more potential externalities, that are not tracked, that could skew the perception of the positive impact from a venture, compared to the often few impact metrics the venture can/will actually track. Thus, impact assessment is not only challenging, it should be viewed with a critical eye.
While access to information continues to be a challenge, impact-oriented ventures cannot afford to completely abandon economic principles either. Businesses focused solely on profit understand economics. And, economists devote much effort to studying the dynamics of such businesses, often creating a feedback whereby the economists determine what is most theoretically efficient for profit-seekers and businesses then pursue that efficiency through activities such as innovation, policy reform, or organizational restructuring. Thus, a current obstacle is that business as usual economics breeds business as usual businesses. If impact enterprises are going to flourish, we will need to shift the field of economics in a way that supports them. One potential avenue to do so is through an improved understanding of the impact and building that into the traditional risk-return paradigm.
To sum up this impact blog series, I hope to have communicated to you the the various facets and complexities of trying to understand impact and shed a small light on the potential paths to take for improving our understanding of impact. A next step is an assessment of the methodologies used to measure impact and how it can help guide financial investments. To do this, a Taxonomy of Impact Measurement Methodologies will be needed that identifies the core concepts of measurement and the assortment of details that define a meaningful measurement. This Taxonomy is what has been keeping me up at night. Stay tuned…