In financial services, we’re hardwired to look in detail at any company we’re planning to invest in. We scrutinise revenues, earnings, margins and any other piece of financially relevant information we can get our hands on. When faced with the challenge of measuring impact, many of us take a similar approach. First, we ask what products and services the company provides. Then we try to assess the impact of each of these. Is it positive or negative, and to what degree? And, finally, we use a metric like revenues to work out the relative importance of each product or service and calculate an overall “impact score” for the company.
This seems logical, but it isn’t. Let’s look at an example. Imagine a company that makes a pesticide that is damaging to wildlife and human health. We note that this pesticide is harmful, but also that it’s only a very small percentage of the company’s revenues. The same company makes many other products that aren’t harmful. As a result, the company’s overall “impact score” might be quite positive. Does that feel right?
I’d guess that your answer would be “no”. The problem is that, when you use revenues to gauge the importance of a product, you’re measuring its importance to the company but not its importance to everyone else. And impact is largely about everyone else, i.e. the planet and society as a whole.
To measure impact, we need to look outwards, at the communities and environments that are affected, not inwards at the company’s revenues. We should have spent more time on that middle step in our assessment and tried to gauge the actual damage caused by the pesticide. That damage is something absolute – insect populations are being destroyed. This is not something that can be scaled up or down depending on the revenues that the product generates. When it comes to impact measurement, revenues are at best irrelevant and at worst highly misleading, when serious negative impacts are devalued or “offset” by less harmful activities. Revenues can also undervalue positive impacts. A great example here is Microsoft. Its LinkedIn product has a huge positive impact on employment, with three people hired every minute through the site. However, LinkedIn is only around 7% of Microsoft’s revenues, so a revenue-based model would downplay this contribution.
The financial services industry needs to shake off its old-school approach. Everyone is talking about impact and double materiality but it’s ironic that, when we actually try to measure impact, we somehow end up focusing on what’s important to a company (single materiality) and don’t also consider what’s important to people and planet (double materiality). Of course, investors should try to understand the detailed operations of a company but, to measure impact effectively, we need a much more open and outward-looking mindset.
The challenge is that impacts are not easily measured. In our pesticide example, they could be spread across the globe, with direct impacts on biodiversity and health, but also potential knock-on effects on jobs, food supply, water quality etc… You can see why some impact scoring models try to skirt around or downplay this step.
However, while it’s difficult to measure impact, it isn’t impossible. Technology and global connectivity are on our side. We can now gather and assess huge amounts of information, using not just computer power and AI but also the collective intelligence of people all around the globe. We also have guiding principles in the form of the UN Sustainable Development Goals (SDGs), which include both environmental objectives like Life on Land and Life Below Water and social objectives like Zero Poverty and Quality Education. What is relevant for impact is not the contribution of a product to a company’s revenues, but its contribution (positive or negative) to one or more of these goals. We can address this challenge and we shouldn’t shy away from it or revert to outdated methodologies that fail to serve the purpose. With our collective approach to impact measurement, a global community of nearly 50,000 trained contributors decides whether something is material, and what its impact is on the world and the SDGs, not a single data provider with a revenue-based methodology. With this approach, double materiality becomes a reality, not just another way to greenwash an investment or company.
Find out more about Impaakt and their collective approach to impact assessment.
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