Impact explained: what's at stake for organisations?

What does Impact mean?

In a business environment, there is a lot of ambiguity and confusion about what ‘impact’ is, how to measure it, and what kind of measurement is sufficient.

Despite increasing importance across different sectors of the economy and wider use of the term impact, the concept does not have a universally accepted set of indicators to measure or monitor multifaceted impacts.

Impact has been defined by various international organisations.

The most commonly used definition of Impact being the one of the Impact Management Project which uses the same definition as the OECD: positive and negative, primary and secondary long-term effects produced by an intervention, directly or indirectly, intended or unintended.

On the other hand,?Global Reporting Initiative ?defines ‘impact’ as any effect an organisation has on the economy, the environment, and/or society, which in turn either helps progress or delays the achievement of sustainable development goals.

Principles and concepts

Objectives behind the concept of impact

Impact is a concept that is applied both prospectively and retrospectively to actions, programs, activities, and operations.

It aims to help for-profit and non-profit organisations to:

• Predict impacts at an early stage in project strategy, planning, and design
• Decide whether or not to proceed with a planned course of actions
• Decide whether to stop, continue, scale up or adapt an ongoing activity
• Find ways and means to reduce adverse impacts and increase positive impacts
• Shape projects to suit the local environment and take into account local communities
• Present forecasts and options to decision-makers

Types of impact

Depending on their motivation to drive, deliver or manage impact, organisations’ intentions range from broad commitments to more detailed objectives.

These intentions relate to one of three types of impact:

• Organisations can avoid harm to their stakeholders by, for instance, decreasing their carbon footprint or paying an appropriate wage.
• In addition to acting to avoid harm, organisations can actively benefit stakeholders. For example, proactively upskilling their employees, or selling products that support good health or educational outcomes.

Categories of impact

Organisations are increasingly including within their scope of impact measurement , the social and environmental dimensions. They are broadening the scope of impact assessment which has traditionally focused on economic impact and financial returns.

1/ ENVIRONMENTAL IMPACT

When organisations’ decisions and day-to-day operations affect and influence:

• People’s environment: the quality of the air and water people use, the availability and quality of the food they eat, the level of hazard or risk, dust, and the noise they are exposed to, the adequacy of sanitation, their physical safety, their access to and control over resources…
• Larger ecosystem: disruption of the rain cycle, increase in land temperature, destruction of ecosystems, fauna, and flora, acidification of the oceans…

2/ SOCIAL IMPACT

Social impact encompasses all issues that affect people, directly or indirectly.

A convenient way of conceptualising social impacts is to look at whether there are effects on one or more of the following:

• People’s way of life: how they live, work, play, and interact with one another on a day-to-day basis Their culture, their shared beliefs, customs, values, and language or dialect
• Their community: its cohesion, stability, character, services, and facilities
• Their political systems: the extent to which people can participate in decisions that affect their lives, the level of democracy in place
• Their health and wellbeing: health is a state of complete physical, mental, social, and spiritual wellbeing and not merely the absence of disease or infirmity
• Their personal and property rights, particularly whether people are economically affected or experience personal disadvantage which may include a violation of their civil liberties
• Their fears and aspirations: their perceptions about their safety, their fears about the future of their community, and their aspirations for their future and the future of their children

Organisations can conduct an Environmental Impact Assessment and/or a Social Impact Assessment, that includes the processes of analysing, monitoring, and managing the intended and unintended environmental and/or social consequences, both positive and negative, of planned interventions (policies, programs, plans, projects).

Some of the many methodologies that can be deployed to assess environmental impact at various levels of an organisation's operations and value chain include assessment of carbon footprint, life cycle assessment at product or service level, to name a few.

Similarly, social impact can be measured using primary survey of affected stakeholders, case studies, to name a few.

Impact in the investment industry

Today, more and more investors are talking about “impact”.

They are 3 types of investments that take?sustainability ?and impact into account:

ENVIRONMENTAL, SOCIAL, AND CORPORATE GOVERNANCE (ESG)

The 3 criteria, E, S, and G, constitute the three pillars of a company’s extra-financial analysis. Investors use the?ESG ?approach to evaluate investees on expected practices (existing policies and actions on dedicated topics) and metrics (whether the company reports on certain KPIs).

ESG ?also provides a framework to assess the exposure of a company to sustainability ESG risks (through the lens of financial or double materiality).

Companies that meet?ESG criteria ?do not necessarily demonstrate reduced negative impacts nor positive impacts.

For example, a company can have a commitment for climate action in place and monitor its GHG emissions yet contribute significantly towards climate crisis.

SOCIALLY RESPONSIBLE INVESTING (SRI)

It entails screening investments to exclude businesses that conflict with the investor’s values or that focus on businesses that prove to have the best social practices.

SRI can be implemented using various approaches. Sometimes, ESG ratings and indices are used to select or shortlist companies for SRI. Often, companies for SRI are selected by exclusion of those that do not integrate international conventions on sustainability or operate in controversial sectors.

SRI dates back to John Wesley, the founder of the Methodist movement in the 18th century, who urged his followers to avoid investing in “sin stocks” that generated profits from alcohol, tobacco, weapons, or gambling activities.

SRI goes further than ESG. Not only is SRI an investment that takes into account ESG criteria, but it is also part of a broader sustainable finance policy. All SRI-labeled funds usually meet ESG criteria. However, a fund that meets ESG criteria is not necessarily part of an SRI approach.

Examples of SRI investment: investing in companies operating in education, water, recycling, renewable energy, and divesting from fossil fuel and firearms industries.

IMPACT INVESTING

It is a relatively recent practice, first mentioned in 2007 by the Rockefeller Foundation. It is characterised by a direct connection between values-based priorities and the use of investors’ capital. Impact investing meets a dual objective: to generate a substantial financial return and to create and quantify a positive societal impact.

Examples of impact investment: investing in an organisation that contributes to building schools in underdeveloped countries, investing in a company whose core products help reduce GHG emissions (e.g. plant-based food), etc.

According to US SIF (The Forum for Sustainable and Responsible Investment), socially responsible investing (SRI), environment, social and corporate governance (ESG) investing, and impact investing assets grew from $3 trillion in 2010 to $12 trillion in 2018 to $17.1 trillion in early 2020.

COMPARISON BETWEEN ESG AND IMPACT INVESTING STRATEGY

There is room for both ESG and impact investment strategies in the market, and investors may want to allocate funds to each in different proportions.

Both can deliver superior financial performance and make the world a better place, but they work in different ways, and there are some overlaps between the two strategies.

The International Finance Corporation (IFC) provides a useful framework to understand the nuances between ESG and Impact investments and compare actions taken at each stage of the typical investment process in the light of these differences:

To conclude...

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