What sustainability topic do both investors and accountants get excited about? Impact assessment. Driven by thought leaders and a genuine need to finally measure the impact of corporate sustainability programs, the quest for a perfect impact assessment tool will soon dominate the sustainability scene.
The search is already underway. The investment company RobecoSAM, for example, is including impact measurement and valuation as one of the criteria for its Dow Jones Sustainability Index, which tracks the performance of leading companies in terms of economic, environmental, and social criteria. The World Business Council for Sustainable Development, a CEO-led coalition of companies, is developing guidelines to help companies assess their social impact. And in a recent Forbes article, Harvard Business School Professor of Management Practice Bob Eccles called for accounting standards to help companies advance their impact assessment, writing, “What the world needs now, in addition to love true love, is accounting standards for measuring so-called ‘nonfinancial performance.’”
The ability to show that business gains resulting from investment in sustainability initiatives are real is incredibly appealing to sustainability professionals. They think, “Imagine a conversation about sustainability with an accountant or investor where I’m understood.” They can achieve that with impact assessment.
But it’s not so easy for companies to conduct impact assessment, and it all boils down to purpose. Traditionally, the primary purpose of the corporate world has been to maximize profits; it’s been up to charities and other social sector organizations to generate social impact. So while the social sector has long debated how best to capture and measure impact, companies haven’t been part of that discussion. As a result, only a few companies are set up to assess more than the outputs of their sustainability activities, and the corporate sector overall has only limited impact measurement experience to share. That means that even if a sustainability executive wants to start measuring impact at her company, she often ends up thinking nobody is doing it, that it can’t be done, or that impact isn’t measurable.
There’s a lot to learn from the social sector, but it will take some time to develop frameworks that corporations can use across industries, and it will be a learning process. Based on my discussions with managers at the Sustainable Business Roundtable, which I coordinate, here’s how to start:
Besides the obvious reasons for conducting impact assessment—to assess whether our programs and strategies are working, and to guide future decisions—impact assessments help investors make better investment decisions. Matt Christensen, head of responsible investment at AXA IM, emphasized this, and pointed out that investors want to see clear and tangible outcomes from their investments.
Impact assessment is also becoming more important to customers, including in the business-to-business area; many companies I spoke with shared stories about customers demanding impact assessments. It is also important internally; measuring the impact of corporate sustainability generates higher levels of employee engagement and satisfaction, creates more awareness of sustainability issues, and signals transparency. Siemens’ Senior Manager Sustainability Daniela Proust summarized by saying, “It is not the technique, it is the people that matter when applying impact measurement.”
One of the recurring themes in my discussions with sustainability professionals is the need for clarity regarding what impact assessments will be used for. They first need to decide which stakeholder they want to influence with the impact assessment, and then make sure to translate the results into that stakeholder’s language. For some people, such as the CFO and investors, dollar signs will do the job. For others, such as the board of directors, risk avoidance plays a bigger role. Indeed, Alexander Cox from the environmental consultancy ERM, emphasized that companies can use impact assessments for proactive risk management. For example, a company can spend years implementing a large infrastructural project, only to realize afterward that its impact on stakeholders is negative.
Meanwhile, employees or local communities may be uncomfortable with, say, monetizing human life. For example, a company operating in South Africa may invest in life-saving antiretroviral treatment for employees and their families affected by HIV. Presenting impact of such a program by attaching monetary value to each life saved may not be the best idea. In these cases, the best language won’t be numbers. CB Bhattacharya, director of the Center for Sustainable Business at ESMT Berlin, advises presenting the results of impact assessments to such stakeholders by creating stories that will show the impact the company has on society. In the example above, a company could present stories of how employees’ lives changed due to a better access to medication.
Many companies stop at measuring outputs, but there are good examples of how to go further. AXA IM, for example, tracks outputs, as well as outcomes and impacts, during its Impact Investment Process, which assesses investments according to specified key performance Indicators. Outputs of generating financial inclusion, for example, might be job creation, employee training, or affordable products. Outcomes, on the other hand, might be the number of underserved clients or percent of women clients. And impacts might be income increase for clients, greater access to health, or housing improvement.
The International Association of Impact Assessment defines impact assessment as “the process of identifying the future consequences of a current or proposed action. The ‘impact’ is the difference between what would happen with the action and what would happen without it.” In other words, the focus is on the change, and the change can be measured using qualitative and/or quantitative data.
The future trend may be to monetize impacts. RobecoSAM Sustainability Analyst Rashila Kerai said that impact measurement and valuation will be a criterion in the Dow Jones Sustainability Index assessment; companies will be asked what types of valuation they use (qualitative, quantitative, or monetary). It’s not clear that the index would reward monetary valuation, but a clear monetary measurement of social impacts is something we may need to strive for in the corporate world, as it helps to translate impact assessment results into the common language: the dollar sign.
All of this may be difficult, but it’s possible. Adriana Rejc Buhovac, co-author of Making Sustainability Work, pointed out that there are methodologies and tools available to help companies measure their impact, including logic models, lifecycle assessments, and Monte Carlo analysis. What you currently think of as immeasurable may, in fact, be possible to quantify—what’s more, someone in the marketing or accounting department might already be doing it. The leading organizations in the social sector have been doing this work for years, and companies can use their experiences.
We’re at the beginning of the journey to conduct impact assessment at companies, but it doesn’t mean we have to quietly perfect our methods, and share the results with the world every five years or whenever we feel ready. As The Walt Disney Company Director of Corporate Citizenship EMEA Laura Scott put it, “Talk through your problems, as it helps you find a route through.” (Hence this article.)
Impact assessment boils down to the fundamental question: Why do we actually do corporate sustainability? Unless companies commit to measuring impact, their sustainability initiatives are bound to solve only pockets of social problems or have no real impact at all. Those who are serious about their mandate, however, will prevail.