In October 2023, investors, social enterprises, shakers and movers, intermediaries, and others gathered in San Francisco for SOCAP23 to invest in or seek investments for social good, and to debate the state of impact investing, social finance, and how capitalism can be a force for good. It was my first SOCAP and here are some of my reflections.
Facing Urgency: Impact at the Speed of Trust
The conference theme reflected the need for urgent action to address multiple global crises, such as climate change, economic inequality, access to basic needs, health, justice, etc. It was inspiring to witness the urgency at which capital market players are shifting their focus from shareholder to stakeholder capitalism and towards a model that is more inclusive, sustainable, and driven by purpose and an impact for social good.
Reimagining capitalism is not a novel idea, yet I was struck by the notion that the urgency of action requires us to trust that this time capitalism is the solution to the crises that it has, in many ways, created. For decades, businesses had one and only one responsibility: to increase value for shareholders. In other words, do everything possible to maximize shareholder returns with little regard for planetary health, social cohesion, economic equity, sustainability, etc. And now that income inequality has reached alarming levels and the relentless pursuit of profit has led to environmental degradation, climate change, and resource depletion – now, we should trust that capitalism is here to help.
I believe that impact investors and corporations are important partners in helping us find and fund solutions for these crises, and yes, we can “do well and do good,” but when it comes to human nature and financial returns, I prefer the old adage “trust but verify”. Admittedly, there is a growing acknowledgment that addressing societal issues through market mechanisms is inherently complex; it demands not only accountability and transparency, but also a commitment to long-term sustainability and the difficult work of stakeholder engagement, to build trust. However, I worry that this sense of urgency, when combined with the pressures to deliver quick results and financial returns, will lead us down the path of impact washing, unintended consequences, unethical practices, and a further deepening of mistrust.
Importance of Impact Alignment with Investment Strategy
Aligning an investment strategy with impacts by developing an investment theory of change is critical because it helps maintain a sense of purpose and direction, which can then help stakeholders to work collaboratively toward achieving social or environmental impact. The investment theory of change is more than a conceptual framework; it is a helpful tool that serves as a road map to guide decision-making, resource allocation, and a demonstration of impact. The theory of change may seem reasonably easy to develop, a linear if this, then that logic. However, for it to be useful, the process matters as much as the final product. One fund manager told me that her team developed a great theory of change for their funds but is struggling to get buy-in from the investors and other stakeholders. It’s mostly to do with wording, she remarked, dismissing the larger problem. In a separate conversation, someone commented that we need actions, not another theory – a notion that I would tend to agree with, except that the theory is meant to keep actions in check. These and other conversations left me thinking that the people developing tools such as a theory of change, impact investment strategies, or measurement plans may not have the skills, understanding, and experience to truly make them useful and valuable. These tools are important for planning, communication, transparency, accountability, risk management, and systems thinking, and should be used to question assumptions, contributions, attribution, counterfactuals, and what-ifs. I am not convinced that impact investors are following those painstakingly developed, tried and true, best practices to manage risks and maximize their impact.
Measuring impact is hard (and expensive)
This year marked the first dedicated IMM track at the SOCAP conference, underscoring increased recognition of both its importance and inherent difficulties associated with measuring and managing impacts. The insights from these sessions largely amounted to the fact that measuring impact is challenging and resource intensive. As someone who has been working in the evaluation space and impact measurement of public investments for over 15 years, I agree. But just because it’s difficult, it does not mean we should not do it.
Here are some other highlights from the IMM sessions:
- There is a call for regulators to ensure accountability. One of the IMM sessions called for the co-creation of effective rules that balance investor interest and social impact. These calls for regulation follow the EU lead in adopting European Sustainability Reporting Standards (ESRS). The ESRS was designed to provide investors with clear information about the sustainability impact of companies, enhancing transparency and aligning investment decisions with the EU's green deal agenda. While some critics argue that the EU has missed an opportunity to enforce more stringent standards and mandate improvements in data quality, it is a step in the right direction. It remains to be seen what actions the US and Canada take.
- Standardization of data. While IRIS+ has become the most commonly accepted system, there is no universal system of IMM for investors. A litany of frameworks, indicators, measures, benchmarks, and IMM strategies have been developed (or are in the process of being developed), reflecting real and perceived differences in IMM across sectors, geographies, themes, and categories. There is a call to harmonize impact management standards and frameworks to drive greater alignment and increase coherence, consistency, and comparability of data; however, there are also some trade-offs between standardization and customization. We must not forget why we measure impact – if the measures are not relevant or flexible enough to meet the information needs of entities and communities, they will not be as useful.
- Leveraging Technology. Collecting, analyzing, and telling an impact story is expensive because it requires significant effort, skills, and time. Technology can help. Emerging tools using AI will revolutionize how we collect information, engage with end-users, and understand the impacts created. Current technological tools focus largely on measuring and reporting outputs. And yes, outputs are important for managing investments and are easier to measure, but they don’t tell us the story of change and impact.
Technological tools on their own cannot (at least not yet) create an effective impact strategy and methodology for data collection, engage stakeholders in a meaningful way, facilitate shared learning, and interpret qualitative data within the appropriate context. As a leader of a tech-centric advisory firm, I strongly support leveraging technology to reduce costs, increase productivity, and broaden the scope of impact measurement. But the IMM must be centred on the values of the investors, enterprises, and communities. For instance, a platform that aggregates impact data can enhance efficiency, yet the interpretation of that data and the subsequent strategic decisions must be deeply rooted in human values.
On an ordinary day, my glass is half-full but also half-empty. I am a cautious optimist. And so, I left SOCAP feeling inspired and skeptical at the same time; inspired by the innovation and ingenuity of those who are working hard to find solutions for the most challenging problems we face, but also frustrated with the lack of understanding that, unless we prioritize accountability and equip ourselves with robust data and informed decisions (rather than just good intentions), we risk failure. The ramifications of such failures extend beyond financial losses for investors - real lives are affected and trust may yet again be broken.