The Principled Agent

Thoughts on development economics and impact measurement

Measuring Impact in CSR, Impact Investing

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The Corporate Social Responsibility (CSR) and Impact Investing movements have each developed reporting guidelines and impact reports to measure the positive social impact of business activities. On the corporate side, there are GRI’s Sustainable Reporting guidelines, and IFC/World Business Council for Sustainable Development’s “Measuring Impact: Understanding the business contribution to society.” Social investors have created their own assessment tools and come together to develop industry standards with the Global Impact Investment Rating System.

Disclaimer: I consider the firms mentioned in this report to be pioneers in the field – some of the best in class – which is precisely why I chose them for this post.

While their attempts should be applauded, I argue that none of the guidelines or reports (e.g., Oxfam/UnileverStandard CharteredSEAF) that I have come across actually measure impact, or business contribution to society. Further, if the existing indicators are used to drive decision-making, they will systematically lead businesses away from opportunities where their impact is greatest and towards activities that would have been successful without their influence or even existence.

The bottom line is that whether an organization is non- or for-profit, it’s contribution to society (or “impact”) is incremental. That is, it is the difference between what occurred with the organization (the reality) and what would have occurred without the organization (the counterfactual). Measuring incremental impact isn’t easy, but an estimate, at the very least, is essential.

If a non-profit provided an advisement session to the 1,000 best students from a low-income area, could it accurately state that it’s economic and social impact encompassed the students’ future wages and college admission? Clearly not. This is an acknowledged bad (albeit common) practice in the non-profit world, yet it is simultaneously being promoted as best practice in the CSR and impact investing communities.

Case 1)  The socially-conscious business: Standard Chartered

In a report titled The Social and Economic Impact [emphasis added] of Standard Chartered in Indonesia”, the authors claim that “added together, the direct, indirect and induced impacts of Standard Chartered’s operations and onshore financing in Indonesia amounted to USD 4,504 million of value-added in 2009, or about 0.8% of Indonesia’s GDP. … [With a] total impact of 1,029,000 jobs.”

The authors do note:

…the results derived in this way give a prudent picture of the economic activity [emphasis added] that is associated with Standard Chartered in Indonesia. … Most of the jobs and value-added created with the help of Standard Chartered Indonesia and Permata Bank would most likely still exist if the banks were not in the country [emphasis added], as their role as financiers, purchasers and employers might be filled by other financial institutions.”

Standard Chartered conflated their social and economic impact with economic activity.

This isn’t to knock Standard Chartered. There are certainly incremental social and economic benefits generated by their operational activities in addition to the financial value they capture and distribute to equity holders and the government via taxes.  Further, if you read the report to the end, you will find non-operational activities, e.g., spending $4 M to help with natural disaster recovery, that clearly have a social impact, but receive minimal attention or quantitative analysis in the report.

Case 2) The social investor: Small Enterprise Assistance Funds (SEAF)

If the history of results-based management has taught us anything, it’s that you get what you measure. Current non-incremental measures add to the existing financial incentive to fund businesses that would have succeeded anyway.

For example, “[Small Enterprise Assistance Funds] targets entrepreneurs active in industry sectors with price/earnings  or other acquisition multiples that SEAF believes are likely to grow substantially given the stage of development of a given economy.”

Yet SEAF then measures it success by the growth of these firms! While trying to measure its impact, SEAF is really measuring its ability to select firms that will be successful. To return to the non-profit analogy, I am not going to judge the impact of an NGO that targets high-performing students by the future performance of those high-performing students.

Furthermore, SEAF’s impact measures create an incentive for mission drift.  If our hypothetical NGO measured their success by the future performance of their students, they’re going to move upstream out of the market where they can make the most incremental impact in student performance, and toward the market where students are more likely to be successful anyway.

I’m not cynical about CSR or impact investing. I think that in practice SEAF, for example, does attempt to serve businesses that would not be able to achieve scale through other financing vehicles. The problem is that this isn’t captured in the current measures! If we want to empower individuals to manage or invest for social performance, it’s essential to systematically estimate the counterfactual. Otherwise, both CSR and impact investing risk the same crisis of faith that microfinance has experienced, when the crowds stop accepting claims of social impact with no supporting evidence.

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Written by Chris Prottas

April 4, 2011 at 7:25 am

Posted in measurement

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