How Can Organizations Report on Impact with Integrity?

A transformative balancing act

Why It Matters

As impact reporting becomes vital to organizations, we face a big challenge: the social finance world lacks common standards. How can practitioners agree on the same metrics and method to create truly reflective data, while still remaining accountable to their core stakeholders? This story is crafted in partnership with the MaRS Centre for Impact Investing in the lead up to the 2019 Social Finance Forum.

As investors and businesses search for greater social value in their activities, an important question emerges: how do you actually measure social and environmental impact?

If you really want to guard against ‘greenwashing’ [when corporations make exaggerated claims of positive impact], you’ve got to measure and report,” said Michael Unwin, Co-Founder of Act Analytics, a platform which assesses companies’ Environmental, Social and Governance (ESG) factors.

The principles of accounting provide clear standards for financial value, allowing organizations to be held accountable to those results. In social finance, however, the picture is much less clear. The ESG and impact investing movements have seen a proliferation of measurement companies, tools, and guidance principles. However, many of these systems don’t speak to each other, making it difficult for investors to compare results.

In the search for precise ratings and scores, there is a danger of losing sight of what genuine impact might mean in different contexts. If the point of social finance is to help stakeholders and communities, then measurements using narrow and pre-defined results may obscure the real impact.

How can organizations harmonize their rating methods while staying true to what impact means in different spaces? How can they maintain integrity when measuring impact, in a way that considers all stakeholders? 

 

Coordinating a fragmented system

Organizations from various sectors have been working to create standards for measuring impact, but we’re yet to see an agreed-upon version. The Global Impact Investing Network’s (GIIN), for example, have created a well-known catalogue of standardized metrics called IRIS+. Other organizations, meanwhile, have published principles and methods of impact measurement, such as the United Nations’ Principles for Responsible Investment (PRI) and the International Finance Corporation (IFC). 

“You need a common accounting standard which works across different types of organizations,” said Olivia Prentice, COO of the Impact Management Project, a forum working to build a global consensus on impact measurement. “What struck us was how standards were being developed in silos.

In the ESG market, analytics company S&P Global have repeatedly called for the standardization of an ESG framework so that investors can suitably judge social and environmental value, which should enable higher levels of investment. ESG investment measurements, in particular, have been accused of using ‘wildly diverging’ standards, and suffering from inherent biases.

Referring to how ESG ratings are published in public markets, Unwin explained, “In the public realm, there is a ton of segmentation. Everybody seems to be using different yardsticks, which makes it very difficult to compare impact – which is an important thing to do.

 

Context matters 

The movement towards objective scoring and comparability poses another major issue to impact measurement: context matters when creating positive social and environmental outcomes. In all the focus on metrics, the risk is that the very stakeholders to whom the projects should be held accountable to will be overlooked.

While ESG investments tend to screen companies for policies and practices they have in place, including generalizable metrics (e.g. workforce gender diversity or carbon footprint), other forms of impact investing are often evaluated by the outcomes achieved in a specific context, such as expanding access to education in a developing country.

“Good impact measurement starts with really understanding the stakeholders you’re affecting,” explained Prentice. It’s not enough to say: ‘OK I’ve reached 5,000 people’. Really, who are those people? What changes have they experienced? What changes were they looking for?

Numbers must be combined with thoughtful, contextual, qualitative data. “For some reason, when it comes to social change, companies have been particularly slow to use feedback in a meaningful way,” Prentice continued. “There is definitely an undue weight given to quantitative data.”

This necessitates a shift in mindset, explained Sara Olsen, Founder of SVT Group, a firm helping investors, companies, nonprofits and foundations manage their impact measurement. Instead of looking for a specific pre-defined metric, we should strive for a standardized set of information about impact. You can never understand every possible context that might matter,” she explained.

 

The dimensions of impact

The Impact Management Project has brought together more than 2,000 individuals, businesses, philanthropists, investment organizations, and regulating bodies to try to define what a standardized set of information on the ESGs should look like.

Rather than seeing impact as a fixed objective, the Impact Management Project has instead outlined five dimensions of impact which are applicable to all contexts. It includes what outcomes the enterprise is contributing to, who is experiencing the outcome, how much change was experienced, the contribution the efforts made (compared to what would have occurred otherwise), and the risk that the impact would be different than initially expected.

To illustrate these dimensions, Prentice asked that we think of a recommended minimum wage. We know that a number of other data points are needed to put its impact in context. “Who is affected, who gets that wage, what does a good wage level look like in this particular country — and what level of change is required to get there?” Prentice asked.

Using the five dimensions of impact allows a combination of comparable quantitative data and contextual qualitative data. “[They] reflect a huge amount of collective intelligence on the part of practitioners who’ve been on the ground doing this,” said Olsen. “The difficulty arises in actually getting to all five within the constraints we find each other operating in. One can be sympathetic to the daunting challenge of trying to account for impact in a huge multinational corporation.”

Ensuring genuine impact over ‘business as usual’ needs bold leadership to promote the value of these dimensions, and their measurement. Olsen pointed to the example of SK Group in South Korea, saying they made social value a “major top priority for the entire conglomerate”.  The group recently unveiled a system to measure the social value created by its affiliates and report those results to the public.

 

A race to the top

Looking to the future, Prentice explained, “What we do need is more transparent data to help companies make judgements as to whether they could be doing better, so that it becomes a race to the top, rather than hiding as much information as possible for fear of becoming the next vilified organization.

Realistically, said Prentice, companies across the board are unlikely to follow a coherent set of best practices without some form of regulation. “At a minimum, it would be great if companies had clear guidance on how to share information,” she said. “We need one set of standards that works for any organization or investor.”

In the public market, there are moves towards standardization in collecting and publishing data. “There needs to be a body that gives us the factors and metrics,” Unwin said, pointing to financial regulatory bodies as a potential option. Another would be financial exchanges — the London Stock Exchange, for example, recently bought a system which analyzes ESG data. 

When companies are ready, transparency could prove very valuable to social finance. “As companies report, I think money will flow to the more transparent companies,” said Unwin. “Money often does the talking.”

The measurement of impact, therefore, is not just a practical necessity. If all actors followed a set of best practices, agreed in a consensus across sectors, it would encourage far greater levels of transparency and accountability. That, in turn, could transform social finance.