The premise of impact investing is that particular investments offer positive impact to society and appropriate risk-adjusted returns to investors. But are we precise enough about the impacts to society and those to shareholders to choose among different impact investments and be clear about our own expectations of the amount of societal impact?
The hypothesis here is that there are important lessons for impact investors in the experience of operating companies on understanding both the:
- Value to society from a business, project, initiative, or investment; and,
- Value to investors from their socioeconomic and environmental strategies (See “Applying Multi-Attribute Utility Analysis in Sustainability Valuation” in this issue).
There is a lot of great activity among leading impact investors to better understand the nature and scale of those impacts. Examples include the IRIS metrics of the Global Impact Investor Network (GIIN), B Impact Assessments, lots of custom analysis particularly in Base of the Pyramid impact investing, and others. We pay homage to this work and want to cross-pollinate it with the operating experience of companies.
Let’s start with some principles for good impact assessment. There a natural progression from action to impact:
The first principle is that the analysis should go as far along this progression as possible, with the knowledge that getting to impact isn’t always possible given access to data and management as well as the level of effort required.
Second, an impact assessment should be complete, which means looking at:
- Direct, indirect and induced impacts;
- Whole value chains and lifecycles; and,
- Full ranges of positive and negative impacts with no “cherry picking” only desirable impacts.
So what topics are “in bounds?” It’s a pretty broad range. The image below lays out a framework called Total Impact Measuring & Monitoring (TIMM) as applied to operating companies, business units, facilities, initiatives and specific projects. Just like “impact investing” has various names depending on the specifics, there are several names applied to this type of analysis: environmental profit and loss, natural capital, ecosystem services, societal return on investment, and others depending on the topics covered.
Third, impacts come in so many forms that it’s impossible to compare the meaning of different impacts without putting them into a single monetary term which enables an understanding of real tradeoffs among impacts that are pervasive. The conversion to monetary terms uses market prices, abatement costs, and economics of societal costs and benefits to generate transparent estimates of value to society.
This final point has significant implications that are unfamiliar. For example, a small quantity of water in Eastern Africa has more value to society than a larger quantity of water in Canada. Measuring acre feet of consumptive use of water only get one so far. But that’s only the start. With monetary quantification of unlike impacts, the assessment can illuminate tradeoffs and identify priority impacts for improvement. The point is not to simply pick the option that produces the most value to society, but to understand real tradeoffs in quantitative terms.
For more on these methods, see the PwC’s Total Impact Measurement publication. At the highest level, the steps are to identify those affected, measure impact drivers, quantify outputs and changes, and value the outcomes or changes in human well-being.
This may all sound fairly intimidating to an impact investor. Where are the accepted analytical frameworks? Where would we get all the data one would want to do this? How could we do this analysis across a whole portfolio of companies or fixed income holdings?
Recently, we’ve begun exploring how the framework may be of value to impact investors. The quantification we’ve accomplished in corporate analysis still feels pretty far off.
Is this useful to impact investors? Obviously, this is a lot of work for an operating company and impact investors typically have less access to the necessary information. But we believe the following elements are useful to impact investors:
- Seek completeness in the types of impacts to consider;
- No cherry-picking only favorable impacts and ignoring negative ones;
- Focus on the underlying theory of change, consequence maps that connect the actions to the outcomes and impacts; and,
- Be explicit about tradeoffs and seek enough quantification.
Don Reed, CFA, is a director in PwC’s US Sustainable Business Solutions practice, Don helps companies develop and implement sustainability strategies that create business value by growing revenue, enhancing brands, improving operating efficiency, and managing risks. He has over 15 years experience helping clients and investors analyze the financial value of sustainability strategies.