SVT on Impact

We've got more problems
Than we'll ever need
You got gang violence
And bloodshed on the street
You got homeless people
With no food to eat
With no clothes on their back
And no shoes for their feet

We've got drug addiction
In the minds of the weak
We've got so much corruption
Police brutality
We've got streetwalkers
Walkin' into darkness
Tell me
What are we doing
To try to stop this

I said you wanna be startin' somethin'
You got to be startin' somethin'

It's too high to get over (yeah, yeah)
Too low to get under (yeah, yeah)
You're stuck in the middle (yeah, yeah)
And the pain is thunder (yeah, yeah)

You love to pretend that you're good
When you're always up to no good

Ain't the pictures enough, why do you go through so much
To get the story you need, so you can bury me
You've got the people confused, you tell the stories you choose
You try to get me to lose the man I really am

The major ingredient of any recipe for fear is the unknown
And this person or thing is soon to be met

Just because you read it in a magazine
Or see it on the TV screen
Don't make it factual
See, but everybody wants to believe all about it

Honey, come set me free
Don't you know now is the perfect time

No time for castles in space
Or livin' in make believe

If you wanna make the world a better place
Take a look at yourself, and then make a change

Just take it slow
'Cause we got so far to go

So keep the faith
Don't let nobody turn you 'round
You gotta know when
It's good to go
To get your dreams
Up off the ground
Keep the faith, baby, yea
Because it's just
A matter of time
Before your confidence
Will win out
Believe in yourself
No matter what it's gon' take
You can be a winner
But you got to keep the faith
...Gon' keep it brother
You got it

Nothing good ever comes easy
All good things come in due time
Yes it does
You gotta have something to believe in
I'm telling you to open mind

Don’t stop til you get enough
Let that rhythm get into you
Don't try to fight it
There ain't nothin' that you can do

Nation to nation
All the world
Must come together
Face the problems
That we see
Then maybe somehow we can work it out

There'll be no more mountains for us to climb
We can touch the sky and light the darkest day

If they say -
Why, why, tell 'em that it's human nature


____________________________________________________________________________

All lyrics from All Michael Jackson Lyrics. Listed here in the order quoted above:

Ok, so perhaps its a little silly, but Acumen Fund and the others behind the Pulse initiative have declared today, June 16, as World Metrics Day. Yes, it’s fairly arbitrary and no, those of us in the ‘metrics community’ don’t expect families to be gathering with picnics to listen to local bands and buy cupcakes at bake sales. But, it is nice to see enough interest in this topic to even jokingly proclaim a celebration, let alone to actually convene people around such an important topic and build tools to make the concepts tangible.

Pulse is a platform designed to help Acumen Fund, and soon others, track basic performance data from its investees. Acumen Fund worked with a variety of heavy-hitters including Google, Rockefeller Foundation, Salesforce.com and PWC to define a metrics taxonomy and build a platform which on-the-ground organizations can use to enter performance data and funders can use to get a better sense of the returns of their investment. Pulse is an ambitious endeavor that is already gaining traction.

Interest in the space will be increasingly beneficial in that tools such as Pulse can not only bring more accountability to investors, but have the potential to help organizations actually perform better through data-driven decision making. Now... to realize that potential.

There seems to be increasing agreement among donor/investor communities that accountability is important. Various initiatives, from Pulse to New Philanthropy Capital’s idea of an “Association of Nonprofit Analysts,” to name a few, are evidence of this trend. This, we feel, is quite positive. It is important, however, not to get tracked into focusing only on the funding site of the equation. Though we very much applaud funder efforts to ensure their grants and investments are indeed productive, the point of impact reporting should not be to put funders’ minds at ease, but to ensure that the programs that are funded have tools to continually improve their work and thus become more effective at reaching programmatic goals.

There is much debate about who should determine metrics and require organizations to report on them. There are logical arguments on both sides—funders have a right to know if their money is being used wisely and organizations have a right to tell their story fairly. For us, the debate is not so much about origin but rather about end goal. Organizations and their supporters should be aligned with regard to end goals, and those end goals are what should determine metrics. What this means is that context is key. Performance measures hold little value without a contextual understanding of the conditions/sector/geography/geopolitics/etc. in which an organization operates.

So what does this mean with regard to metrics determination and implementation? Regardless of whether funders or organizations drive the process, those doing the actual work on the ground must have a say in what performance indicators are used. They must accurately reflect what a social enterprise or NGO can achieve in its operating context and, above all, provide valuable information it can use to do what it does, where it does it, even better. If that’s not also the funders’ end goal, then there is a misalignment.

World Metrics Day may be simple fun or the initiation of a movement (hopefully the latter). Regardless, it denotes the early stages of what will hopefully be a move from counting simple outputs to truly enabling social and environmental organizations to continue to learn, grow and ultimately do the best work they can with the resources at hand.    

Many who love the concept of SROI thrill to the vision of a universal performance measure that places human and environmental well-being on par with financial wealth…. Or to the vision that do-gooders might really be able to account for their performance…. Or that philanthropic money might be allocated against more objective criteria…. Or that SROI could be compared directly with financial ROI to reveal a new, sustainable “efficient frontier”…. Or that SROI will reveal the financial returns driven by social investments…. Whichever particular vision it is, they love SROI!

On the other hand, many of those who dislike it can’t stand that it implies that you could sum up all that is of value into a single, quantitative ratio…. Or that it caters to the dangerous tendency of mainstream capital markets to abstract everything to the point that it is no longer anchored in a real source of value.

Many of us, however, see a middle ground: that SROI in practice may provide a coherent underlying architecture on which to build processes and tools that help organizations manage the social returns of their investments in a hands-on way.

The analogy to financial ROI implies that SROI is two things: one, comprehensive, and two, a single ratio. The dilemma, though, is that to arrive at a single ratio, the social value numerator has to be in money terms so that it can be divided by the investment denominator-- but a complete summary of all significant social value simply cannot be represented in exclusively monetary terms. For example, the value of "children not orphaned" simply can't be fully captured in terms of their increased earning potential.

Many, especially in the finance industry, see exciting potential in figuring out how to unify all information about non-financial impact into a single ratio that would be more directly analogous to financial ROI. In concept we think that would be cool too, but it is hard to imagine that it would ever be perfectly analogous to financial ROI, which is the comprehensive sum of all financial value relative to investment.

That presents us with a choice. We can narrow the definition of “return” to refer just to that part of the value that can be reasonably captured in dollar terms; we can expand the definition of what “return on investment” means to include multiple numerators (monetary, quantitative, qualitative and maybe even narrative), relative to investment; or, we can scrap the term entirely.

A lot of us who have participated in the SROI conversation, and put the idea or measuring social returns into practice, have felt like the first option would not really get us anywhere—after all, we were trying to move away from the straightjacket of financial ROI being the sole design criterion for everything, since that was so clearly leading us into the abyss.

So, some took the third option and moved away from the term to chart a course to other concepts that spoke more accurately to the actual steps in the process and to the product.

While others, including ourselves, find the concept represented by the term itself-- with the implication of comprehensiveness, systematization and relevance to capital markets-- to be too powerful a compass point to abandon entirely. But we recognize that for it to be comprehensive requires a more broadened definition of return, so we have settled for annoying the financiers with an interpretation of SROI that results in multiple facets of value relative to investment... and we've either made the best of-- or gone into temporary denial about-- the knotty information design problem presented by multiple types of social value numerators.

Fortunately digital technology and the internet open up the possibility of transmitting videos just as easily as 1s and 0s. What does this look like? Microplace is one example of an organization beginning to put financial returns into their social context systematically, by including information about who, where and how poor are the clients served by a given microfinance organization. E+Co is reporting information quarterly about their quantitative social and environmental outputs, like the number of people with new access to clean energy, on par with financial performance. And Calvert Foundation was an early pioneer of interactive output accounting with its “SROI Calculator.”

The debate over the meaning of SROI is surely a creative one, and hopefully its tension will continue to spur constructive debates that lead to interconnections between the profit-driven and mission-driven worlds. We hope that one connection made will be that more professionals in the finance world will realize that, in isolation from the other kinds of returns that go hand in hand with it, financial ROI is a needlessly imperfect gauge of value.

Nonprofits could visualize where the needs for their services are, and what impact they, or others, are having on those issues... as well as how much it costs them to do it in different places.  Funders could watch where services are drying up as the economy shrinks, and where the gaps between services and needs are greatest.

Roving digital journalists could team with both citizens and academics to tell important local and global stories, such as of how lending in one place causes changes in health, jobs, population, traditional culture, forestation, water, emissions, or waste; or how a shortage of funds in another place causes changes in literacy, poverty, homelessness, domestic violence, or entrepreneurship.

People around the world could add in stories, images, videos and other data they capture with their cell phones and send into the digital globe via SMS. The digital globe could be constantly updated in real time.

You could tap into all the world’s data and create your own, customized maps with your own data just for you and your friends to see. If you did something really cool, you could share it with others.

And there could be a big “fast forward” button.  NASA, Shell, the king of Saudi Arabia and the World Health Organization could model and play with 50-year scenarios geospatially. Maybe they’d get together and bounce ideas around.

There could be a big “refresh” button, that lets you reset all the data and assumptions, or just a select few.

What would you want to do with such a toy?



 

Why do we do this? What draws us to go far out of our way to convene face to face? Is it the thrill of travel? The exotic locations? Meeting friends and colleagues in person? The ease of brainstorming in real time? Probably all of the above. They are key elements of convening great minds to address a challenge and at least in part, why we continue to do it.

But what about the information to come out of these events however? Where does it all go? Given the vast number of meetings/conferences/dinners/gatherings that take place globally each year, why do we not have an equally tempting way to share all of the knowledge and insight derived from these discussions? In our case, monitoring and evaluation is top of mind for many organizations. Some great advances in thinking and process have been made, and there is a great deal of new information generated every day about what works. Why, then, does the community not know about these advances. Why, then, does the community not know about them and therefore continue to trudge down the same road as always?

Knowledge can be described in several ways. To simplify, let’s consider two categories of knowledge. The first is knowledge as wealth—units of knowledge that carry a value and a person with that knowledge can use it at another’s expense. In other words, the fewer people holding this information, the better off each holder as he or she can sell/trade/capitalize on it. Examples range from stock market analysis techniques to secret recipes at trendy restaurants. The second category is knowledge as a public good.  In this scenario, information (though still valuable) is freely accessible and the more people have access to it, the better off everyone is. The value is derived not from how much you can sell it for, but how you use it to build new products and services, help people, protect the planet, etc. Examples here range from open-source software to biology to the evening news. Despite their opposite natures, both types of knowledge can align well in certain circumstances (such as the development of non-Apple applications and on the proprietary Apple iPhone).

In the world of performance management and impact evaluation, both types of knowledge are present. Though we have a long way to go, we are getting a better handle on knowledge as wealth as we build new and better organizations with social and environmental goals, as investors look for the next big thing, as funding-seekers look for novel ways to gain a competitive edge, and so on. But what about the public good knowledge? Where is it and how to do we access it? The answer to date is to attend every meeting/conference/dinner/gathering and then commit it all to memory, hoping to dig it out of your head when it is needed. This is not effective. Anyone who has ever studied a language knows the frustration of not using that language in a real setting for years, only to forget the words when the time finally comes.

The question now is how do we compile and access the public good information we all derive from our networking events? To do so will require three key things (at least):
1)    A low (or zero) cost and easy-to-use place to house, enter and access “public good” knowledge
2)    Sufficient incentive for those who have this knowledge to share it
3)    Awareness of the resource’s existence by its potential users

Like many public goods, however, there is a network effect of usefulness. In most situations, those who already possess the most knowledge have less incentive to contribute as there is little for them to take in return. It is only once a threshold of useful information exists that others have the incentive to join in. A basic example of a network effect is the familiar telephone. Originally there were two people talking- Alexander Graham Bell and his associate “Mr. Watson.” If someone came to sell you that third telephone, would you buy it? Unlikely as there are not many other people to talk to. But, if someone built the infrastructure (phone lines) and gave away the phone for free, soon there would be a greater incentive to join as your friends would soon be there too. Similarly, to have a functioning warehouse of institutional knowledge, the more people that are sharing the information, the more enticing it is for new users to contribute. So, how do we get people to share.

The challenge now is twofold: a) who should build the infrastructure (e.g. NGOs, governments, private enterprise, universities) and b) what is the business model for maintaining this network (e.g. a subscription fee, per-use charges, foundation grants)? To ease the burden of the network effect, an entity will have to take on the initial risk of setting up the means of housing knowledge, maintaining it, and creating something the very existence of which facilitates continued use by both those who have knowledge and those who need it…

Any ideas?

We have our ideas, and there are several projects underway around the world, but we would like to open this for discussion among the readers of SocialEdge, which itself addresses the network effect challenges of knowledge in our field. 

 

Imagine you went into a restaurant and rather than a menu, you were handed only a culinary Code of Conduct.

For your contribution of $10, we declare our intention to*:

1)    Hire employees from the area surrounding the restaurant
2)    Buy ingredients from a reputable supplier
3)    Cook them into something we hope you will enjoy
4)    Serve it to you in accordance with local health guidelines
5)    Ensure we compost our food waste and donate leftovers to the local shelter
6)    Send you an email once each year (with your permission) to let you know how many meals we’ve served

*These guidelines, developed by the Foundation Of Restaurant Knowledge (F.O.R.K.), are aspirational and we cannot guarantee they are met in all situations.

For a few very laid back customers, the F.O.R.K. guidelines may be enough to get them to put their money down and get ready for dinner. They seem fair and positive. Granted the customer has no idea what they get for their money, but it feels right and nothing else is being offered so they assume the best.

This situation is analogous to many social enterprises and their funders. In a time when economies are failing and funding is tight, it’s hard to imagine that any investor would put funds into an organization that can promise little more than an attempt to meet a set of guiding principles. But they do. Repeatedly.

Back at the restaurant, though, most customers might have a few more questions to ask, including:

• What type of food does this restaurant serve (Thai, Indian, Italian)?
• How much food do I get for my $10? A whole meal? A small plate to be shared?
• Do I get my choice of entrees or only what the chef feels like making?

Once these next-level questions are answered, the majority of people would likely stop at this point and either choose to place an order or move on to the establishment down the road. With this level of detail, most people will feel they have enough information to make a decision (and most do).

Still, though, some customers who are attuned to the particulars of achieving social benefit through business might want to really test the F.O.R.K. Code of Conduct itself, with questions like:

• What percent of employees are indeed from the local neighborhood?
• How much of the ingredients are local and/or organic?
• Does the restaurant support community gardens with its compost and provide job training in its kitchen?
•  How much of the above is achieved for each $10 spent by a customer?

Guidelines such as those put forth by the fictitious F.O.R.K. are pervasive in the social sector. They are everywhere, from niche voluntary carbon programs to broad consumer goods. Though it may seem counter-intuitive, investors and funders in the social sector often stop at the first level of detail- a Code of Conduct not even suitable for dinnertime decision-making, let alone one that affects positive social change.

One field that is notorious for this approach is sustainable tourism (or ecotourism). There are literally dozens, if not hundreds, of ways to get certified as an ‘ecolodge’ or ecotourism operation simply by making efforts to adhere to some set of guidelines. The primary means of certification is an evaluation of operational elements that point to efforts to meet the guidelines (such as intention to hire local staff, intention to protect the surrounding ecosystem, intention to build with native materials, etc.). Annual renewals simply check the continued attempts to meet the guidelines as opposed to setting benchmarks and tracking actual progress towards these guidelines.

Despite significant financial investment, it is rare that investors ask the simple question: Is this sustainable tourism operation indeed benefiting the local community and environment? And once in a great while, the question has a Part 2: If so, by how much, and in what ways can we improve our practices to achieve even more impact per dollar spent? It’s as if investors have forgotten to hold their social investees accountable as they would the financial recipients. To be clear, expectations should very different than a financial investment, but no less rigorous.

Recently, a coalition of heavy hitters (including the UN Foundation, Rainforest Alliance, UNEP, National Geographic, IUCN and several others) came together to develop a set of internationally recognized ‘criteria’ for sustainable tourism… with a major difference. The Global Sustainable Tourism Criteria (GSTC), released last year, operate in a similar fashion as most guidelines with the important exception that they are actively developing processes and tools to help organizations know if they are actually achieving positive social and environmental benefit, in a quantifiable way. The goal is to give operators actual tools to use in assuring they can deliver on their multiple goals (social, environmental and financial) and be able to communicate that to investors and funders. This should benefit more stakeholders involved - operators, investors, tourists, communities, and in general anyone spending money in this system. (Full disclosure: SVT is assisting in the development of these tools, as a volunteer member of the GSTC).

Tracking the real results of investment in the social sector is not as daunting as many believe. It is possible and critical. It happens every day in business with simple tools (as basic as an Excel spreadsheet); it is only a matter of rethinking how we define the ‘return’ in return on investment. Just as few of us would order from a restaurant that could only tell us they would try to make us good food without knowing what it is, especially in times when cash is tight, so should we know what our social investments buy us.
 

 
 

Many people have begun to suspect by this time that there must be knowledge about what works and what doesn’t that they should start with, or that could make what they are already doing smarter.  This is underscored for me every year when the Global Social Venture Competition rolls around, as judges, entrants and student organizers all grapple with how to evaluate the business plans’ “social return on investment” which each team is required to quantify in its business plan.

The few pages of instructions the GSVC provides for how to develop an impact assessment in a business plan feel somewhat less adequate to all sides with each year that passes. And, when a venture moves beyond planning and into implementation, the questions that come up are much more numerous, and require more than the high-level knowledge than can be found in the survey courses many MBA programs now provide. They include, to name but a few:

• Finance questions: How does a high social return on investment affect the cost of capital? Are there ways this can be used to decreased the cost of capital? How can this be employed as a strategy in capital formation? Can and should deals be structured to leverage large amounts of money without the social investors subsidizing the conventional investors? How?
• Accounting questions: What are the appropriate environmental, social or other impacts to measure in a given industry or sector? Are there any sector-specific performance benchmarks for carbon footprints, water footprints, health impacts or other kinds of impact? Whose job is accounting for this, and what training should they have to do it? Do audit standards exist? How can management use this information to inform strategy and improve results?
• Marketing and communications questions: What is the difference between marketing and “social marketing”? What are ways social media can be used to reinforce or undermine a venture’s intended impact? Are there principles or standards of practice for branding socially responsible businesses? How can branding and communications affect the value of sustainable business?
• Legal questions: What issues do managers need to understand about their right to remain true to a socially responsible business model when that comes into conflict with quarterly profit maximization? How can and should the needs of investors be balanced with those of other stakeholders and the environment? What legal and tax issues do managers need to understand about hybrid for-profit/non-profit business models?

Corporate social responsibility and social entrepreneurship courses are becoming more common, and touch upon these questions. However, we need to institutionalize the field's knowledge into our academic institutions if we are to reach a significant percentage of the population who will shape business in the coming years and decades. While leading practitioners have knowledge of every one of the topics above, 99% of their time they are in the field, not in the classroom. Over many years of experience they have accumulated datasets in their heads, and in some cases produced formal research for papers, conference presentations and university lectures. But this knowledge has not been codified into the scholarly disciplines that produce Ph.D.s who can be hired onto faculties, develop textbooks, develop curricula teach every day. In most cases I am aware of, it is only the faculty (and often these are only Ph.D.s) who can actually change curricula.

As a result, with minor exceptions, future business leaders—at least those who get MBAs—  are still being taught the same canonic skill set that managers were taught before the world realized that natural resources were not limitless, the climate could be made uninhabitable, and poverty may in fact be solvable. And, ten years into the competition, the GSVC's entrants are still having to rethink the same questions when they assess their potential impact, instead of building on the efforts of the rougly 1200 teams from around the world who have come before them. Social entrepreneurs and social investors will continue to operate on the margins of our economic system until this situation changes.

Although the canon needs to evolve, what this looks like will also be different than education prior to the advent of the global economy. One place where experienced entrepreneurial leaders are bridging academia, government and the private sector to address systemic gaps is here in Bangkok. Soon I’ll talk about the fascinating ways Ed Rubesch and Pattraporny Yamla-Or are teaming with the Thai national laboratory system and Thammasat to create a truly global entrepreneurship program. What other universities or programs do you think should be spotlighted as models?
 

Invitation: The public is invited to both the GSVC Symposium this Friday, March 20 at the Bangkok Art and Culture Center and to witness the semifinalists’ pitches to the judges there the day before.  See www.gsvc-sea.org for more information.

Update: the need to update MBA curriculum to speak to the systemic ethical and management failures the business world is seeing is addressed by Kelley Holland in the New York Times.

The underlying drivers of value the conventional economic system has left behind include trust, integrity, and the ability to sustain the creation of financial value; these are also interwoven with the health and well-being of the people who are employed by the business, buy its products and are affected by its operations, as well as with the natural resources within and upon which the business rests. These sources of value—trust, health and well-being of stakeholders, environmental resources, and sustainability—are, ultimately, assets. But none of these assets are directly accounted for in the financials on which the global markets trade, nor are they adequately defended by corporate law, or protected by market regulation.

Those charged with correcting the economy’s problems are attempting to find the rainbow… but they’re wearing infrared goggles.

Take the management accounting issue. The experts working on solving our crisis are surely very smart about how the current financial system works, and hopefully about the triage that will help us get the credit markets and all that rest on them operating again. But when it comes to wisdom about the tools that create the conditions needed to support investment in and management of businesses that grow financial, environmental and social returns simultaneously, the expertise is not to be found within academia or on Wall Street quite yet. It is to be found among the doers- the managers and investors at work in the social capital markets.

There's a ton of knowledge out there. Development finance, environmental management and social marketing are becoming increasingly established fields with university curricula and faculty to boot… but out in the field there is a growing group of experienced social entrepreneurs, impact investors and even impact analysts who know quite a lot now about how the multiple kinds of value are managed within individual businesses, venture funds, and funds of funds. There are emerging marketplaces with lessons to offer that broker opportunities to invest in debt and equity that deliver not only financial return but also poverty alleviation benefits; to buy carbon credits with or without co-benefits of the underlying projects; and even to fund social return on investment itself. And while we haven’t seen “impact derivatives“ yet, we are seeing an increasing number of financial engineering innovations particularly in microfinance, like credit guarantees that leverage the risk tolerance more so than the capital of guarantors to make more capital available to MFIs, and securitizations that offer investors choices about risk and return so that ever larger pools of capital can be brought to bear.

While most of these microfinance innovations are still based fundamentally on the ability to predict financial cash flows, rather than on integrated analysis of the underlying social benefits that drive the success of microfinance, this is beginning to shift. Take for example the Grameen Foundation, which has just launched ProgressOutofPoverty with a section aimed at educating investors about the importance of social performance and impact metrics. Why?

Consider that from a financial standpoint, one of the most attractive things about microfinance is that it is countercyclical, meaning it does not seem to be affected by the ups and downs of the global capital markets. At the root of this is the fact that the very poor (microfinance’s customer base) have to make ends meet every day, or they and their families go hungry. They also trust their microfinance lenders not to rip them off the way the alternative lenders often do. This combination of customer drive and goodwill—which are essentially key performance metrics—translates into sustainability of both microfinance’s social returns and of its actual and potential financial return. They are intertwined: without the social assets, microfinance would not be its marvelously countercyclical self. Therefore, to properly manage investment in microfinance or any security derived from it, we must also manage the social assets.

The field of social entrepreneurship is behind in the codification of management tools and institutionalization of knowledge. Right now this is a bottleneck hindering us from moving out of the global economic crisis we face, and into the sustainable economy we need. The good news is, this crisis will help us close that gap.
 

To understand one looming danger posed by the move of carbon markets from voluntary to compliance– the danger of a bubble caused by losing sight of the real source of value—we need to look no further than the recent implosion of the US housing market. That market grew at a rapid pace due in part to falsely increased housing demand supported by the ability to separate the debt from the actual housing asset, repackage the debt with other debt, and resell it in numerous creative ways (otherwise known as “securitization”). Once the mortgage debt was disassociated from the people who had taken out home loans, it was no longer the concern of those selling them the loans whether homeowners were actually going to make their mortgage payments… and oversight of those selling the loans was no longer valuable protection for banks and homeowners. Instead it turned into a weight on the otherwise booming mortgage securities market; weight that it was all too easy to do without. Ultimately, those buying the disassociated loans in this market spent no time ensuring that the reason the market existed in the first place—the homeowners—remained financially healthy. It’s as if they forgot that people do not buy houses to make bankers rich but rather to fulfill their individual desires for home ownership.

A similar enthusiasm for profit through commoditization and securitization in the carbon markets could lead to the same misplaced emphasis on the units of tradable carbon themselves rather than the source value underlying the carbon credits. And perhaps more importantly, the markets could lose sight of—or never even see—the human and ecological need and value that spurred somebody somewhere to take the action that generated that credit. Let’s illustrate this with an example from Mexico, where Grupo Ecologico Sierra Gorda has worked for over 20 years to educate the residents of an ecologically sensitive region about the impact of deforestation on the ecosystem and watershed, their own economic future, and the life that lives within the forest….  And to create alternative means of making a living. These means include forest restoration and conservation work that results in sustainable microenterprise, ecotourism and high quality carbon offsets Sierra Gorda sells on the voluntary carbon markets for money it reinvests in the work.

The fact that Sierra Gorda is restoring the natural ecosystem while ensuring a living for resident families, who create carbon offsets prized by the industrialized world, is critical. Should these offsets be disassociated from their source, it would be very easy for market fluctuations to result in a situation where the source of carbon offsets is irrelevant, only that the supply of commoditized carbon offset meets demand, thereby resulting in a loss of incentive for specific offset projects to continue. This lack of ensuring the suppliers can continue to provide their products, in turn, could have a ripple effect and lead to the same instability in the carbon markets that we’re all suffering from in the global credit markets today. And worse, the people in communities may not only lose their economic incentives to continue environmentally positive action, they would likely revert to their survival ways of short-term gain from environmental destruction.

The voluntary carbon credit markets are comprised of independent projects around the world attempting to use their carbon capture and sequestration activities as a means of achieving various additional social and environmental goals—generally some combination of economic development and biodiversity protection. Carbon offsets are merely a means of harnessing an economic incentive for environmentally positive activity. As such, these offsets are essentially “premium,” in the sense that they offer “extra” environmental and social benefits. In a commodity market, this extra value is ignored, potentially at the peril of the people and other ecosystem benefits that would have been created had this value remained in view.

Looking inside out, what the carbon markets call the social co-benefits of carbon activity are really the carbon co-benefits of poverty alleviation and biodiversity preservation. Should that value go uncounted, the market built on that value could, and we posit, eventually would see great instability. Make no mistake though, the motivation of the people doing the work on the ground is not to “create assets for trade on the global markets,” or even to slow climate change; it is to survive and thrive.

As profits from carbon’s commoditization (and by extension disassociation from its root value) increase, we run the risk of forgetting to ensure that those on whom the market rests—the homeowner equivalent, the people creating the carbon sequestration projects—remain in a position to maintain their carbon-offsetting practices. Imagine an economy where to pay their mortgages, US homeowners deconstruct their homes brick by brick and plank by plank, and sell those materials anonymously on an exchange, with little more than a certification that the bricks and planks are of high enough quality to be used in another construction project somewhere else.

The carbon markets are, and will continue to be, a great tool as they can provide clear and beneficial returns to those taking the offsetting activities. To be clear, we wholly support the evolution of the carbon markets, but they must be managed as a means to an end, an end of biodiversity protection and economic development. As the carbon markets grow, and profits are generated, we cannot lose sight of its larger purpose. Offsets are the architect’s pencil, not the architect.
 

Carbon markets generally fall into two categories: regulated (cap-and-trade systems, Kyoto Protocol, and often sold on an exchange) and voluntary (independent and 3rd party verified projects and often sold direct to consumers or through companies like TerraPass and others). With the increased pressures of climate change, it is no surprise that carbon trading and related offsets are quickly growing in popularity. Easy quantification of tons of carbon equivalent (CO2e), a movement toward project standardization, a regulatory market established globally under the Kyoto Protocol and an expected cap-and-trade system to come from the new administration in the US have rightfully created enthusiasm, and speculation, about the carbon markets.

While markets can be a very valuable tool in meeting certain social and environmental objectives (for example, for-profit companies now sell alternative energy, make green buildings, and generate employment), they are not well suited to predict social or environmental needs. In other words, markets can be a useful means of achieving social and environmental impact when employed to do so, but leaving markets alone to seek out and address the most pressing problems based on opportunities for profit rarely matches the greatest societal needs with profit seekers. As such, in order for carbon markets to grow and be sustained in the long term, it is important to not lose sight of why markets are being created: to compensate for environmental damage from emissions, protect biodiversity and help people who would otherwise have no choice but to destroy natural resources make a decent living.

I returned this weekend from speaking at the Voluntary Carbon Markets USA conference, an insightful two-day discussion specifically on the voluntary carbon market. Perhaps it was a coincidence that we were mere blocks from Wall Street, but the overwhelming majority of attendees were focused not so much on whether the projects underpinning the carbon offsets authentically lowered our global carbon footprint, protected biodiversity or benefited people by doing so, but rather when and if those projects would be regulated, commoditized and fungible (freely exchangeable as a discrete and interchangeable unit). In other words, when and if the offsets that are currently unregulated (voluntary) will be tradable on an exchange for profit.

For more information on commodities, check this site or this one.

The ability to benefit financially from positive environmental activities can be a great motivator (e.g. advances in clean technology, green building and ecotourism). Indeed, harnessing the profit motive to get people to reduce carbon seems like a win-win. But in commoditization there is also a danger—the danger of losing sight of the real source of value.  

To understand this danger, we need to look no further than the recent implosion of the US housing market. How so?

[Cliffhanger apology…] Stay tuned for Preventing a Carbon Bubble Part II coming shortly!
 

1. This is the era of “impact intelligence”
The world has moved beyond minimizing damage, figured out that we need to be able to measure our impact, and now we’re working toward getting smart about how to actually manage to impact.  This is the era of impact intelligence. 

2. Context matters
A first principle for impact metrics is that they should always be viewed in context. Two key questions are:
•    Does the measure capture something meaningful?
•    What does it tell us about progress relative to the desired goal?
The cardinal sin of impact measurement is to mistake size for value.

3. Distinguish between impact and value
For a measure of impact to be generally accepted as meaningful, there must be consensus on the part of those knowledgeable about the subject that the measure does capture something of value.

It’s worth noting that impact is not the same thing as value. We may all agree that a ton of carbon is being removed from the atmosphere, but we may not agree what the value of that is. Ultimately, value is in the eye of the stakeholder.

4. Value is in the eye of the stakeholder
Whether something is worth measuring depends upon who is doing the measurement. It is safe to say that presently the general public has achieved consensus that some impacts are important enough to track, including a number of large-scale environmental impacts. Other impacts will depend upon the goals of the entity performing the analysis, the interests of its main audience, the interests of other stakeholders who take an interest… and our knowledge of the ever-changing world in which we live.

5. Scope is an active decision
To frame the analysis, a good place to begin is with your “addressable impact.” Addressable impact is the total potential social or environmental problem that could be solved by a given solution each year.

6. There are benefits and risks to standardization
•    Benefits: easier collaboration to solve problems; and the ability to understand entities’ relative performance and the scale of impact.
•    Risk: measures can mislead when taken out of context.
Another issue that works against standardization is that there may simply not yet be sufficient consensus about the frame of reference or the value of the impact to make a standard—whether process, measurement or performance--  functional in a given sector.

With these principles in mind, it is possible to define the goals of impact measurement and successfully tackle any technical challenge. This year we will be exploring examples that illustrate various impact measurement topics from the perspectives of investors, philanthropic funders, companies and nonprofits as well as governmental entities.

Of course, 2008 was also a time of great challenges. The global economic crisis has affected everyone—companies, investors, funders, NGOs, entrepreneurial endeavors of all kinds, and of course individuals. In times of crisis there is a tendency to ‘stop the bleeding.’ That is, to get things back to a stable state and try to solve the underlying troubles once this stabilization has happened. The flaw in this reasoning, however, is that doing so means recreating the stable yet troubled state that led to the problems in the first place. Hundreds of billions of taxpayer dollars (and their monetary equivalents) are currently allocated to ‘bail out’ industries from banking to automobiles. Bailouts, unlike any fundamental restructuring, essentially bring troubled industries right back to the the brink of disaster. This is inefficient at best.

A better solution would be to learn from what went wrong and use such significant funding to find a better approach, rebuilding from the current state rather than recreating the past. The idea of creative destruction is not new, but unfortunately what we're seeing so far is that governments around the world have made financial commitments to industry with little thought as to how that money could be used to fundamentally alter its course to a better place. The opportunity does still exist to use this government investment in a way that reflects the new understanding of industry's role in our global lives that all of us in the social capital markets share.  2009 remains a moment when we can make a real shift, from industry being something that succeeds at the expense of people to something that helps people succeed.

Doing this means at least two key things: 1. aligning the needs of individuals with the abilities of companies, and 2. holding them accountable for achieving a set of social and environmental, as well as financial, goals. Clearly this economic redesign is a large topic that can cover many years of blog entries (and will no doubt be touched upon in SocialEdge in the coming year). But in short, for profit entities can exist to proactively help people and planet and still be profitable. To do so, managers and investors must arrive at a clearer understanding of stakeholder needs. They must work through how a business’ offerings can address them. They must set clear milestones. And they must measure, and be held accountable for, performance. We have all seen numerous illustrations of this new business ideal on a smaller scale. Renewable energy is a perfect example as it attempts to solve a need that is both human and environmental, and to turn a profit by doing so. Now, though perhaps a revolutionary thought to many, the global community can apply these practices to other industries in ways that are perhaps less obvious.

This change, however, will require innovation; innovation in processes, practices, materials, and ideas. Though troubled times may heighten survival instincts, causing people to be conservative and ‘hunker down,’ now is the time we need innovation most. Fortunately, innovation is often at its best when times are worst. It is through innovation, and in our context, through entrepreneurship, that we can devise new approaches that are informed by past failures and that aspire to a new vision. Now more than ever is the time to foster innovation, to support the creative minds who can conceptualize new ways of addressing needs that do not bring us right back to the edge of disaster where we just were. We can take advantage of markets and investment to steer progress away from simple growth and aggregation of wealth to something that not only solves current challenges, but prevents future ones. This is of course no easy task, but not an impossible one either.

2009 is a year of opportunity. It is a year not to merely stop the bleeding, but to begin to reform the global economic infrastructure using the tools social entrepreneurs have forged. Social entrepreneurs and impact-oriented investors should see 2009 as a ripe time to find the best solutions to the social and environmental challenges we face and solve them in ways that benefit all involved—through innovation, accountability and alignment of the interests of all parts of the economic ecosystem. The opportunity is ours to put forth a better way.

Here's to an innovative new year!
 

A whole lot more MFI capacity is needed, and “a significant global expansion of microfinance will require the resources of the mainstream capital markets….” Those capital markets require that investors have tools to understand the risks and rewards of microfinance.

In other words, investors whose fiduciary mandates have nothing to do with ending poverty are now establishing frameworks by which to evaluate the invest-ability of MFIs.

At least in the case of this working group and it appears Standard & Poor’s, they are doing so in collaboration with social investors, and this report has a lot of great information and recommendations, but I’ll excerpt one line that runs particularly deep. The working group concluded that one of the questions that should be reviewed in evaluating the governance of an MFI is: “Are the owners subject to political instructions or influence or will they pursue policies that reflect that reflect (sic) the objectives of their organization at the expense of the MFI?” Depending how you define “influence” and “at the expense of,” this question opens up a whole lot of room for culture clashes between mission and non-mission driven investors in the governance of MFIs.

Deep definitional issues are thrusting microfinance into a kind of identity crisis, in which institutions have to articulate with a precision never before needed what makes them MFIs, why they ought to be that and not something that might better conform to the expectations of (non-social) capital investors, and how they can prove they really are what they say and not just pretending.

It also exposes a gap that didn’t matter so much before non-mission aligned investors came into the picture, but one the entire social capital markets are beginning to face: there simply aren’t universally adopted systems in place to quantitatively measure, manage and communicate to the capital markets either MFIs’ social performance, or how their social and financial performance are interrelated. 

For decades this was much less of an issue between microfinance investors and MFIs. Mission-driven investors who were the original MFI investors simply knew it was working—they had not only seen it with their own eyes, they trusted the integrity of their MFI partners. Frankly, it was almost an insult to ask a founder who had been living among the poor on a shoestring herself for decades whether she had actually made “enough progress” toward ending poverty.  But those days are ending fast, and not just in the microfinance world.

When an industry needs to increase the capital that underpins its mission-achieving ability by a factor of 2x, 5X, 10X or more—that is, when an industry moves to actually address the entirety of a large-scale social or environmental problem— there simply have to be management and oversight tools that assess whether or not real progress is being made on that problem, and whether it is being made efficiently.

A lot in the world has changed in the year and a half since this S&P report was published, not least of which is a fresh awakening to the difficulty actually taking one’s own advice when it comes to assessing whether the management and oversight of risk are adequate, even in the case of conventional credit risk analysis. It seems that the human factor has been insufficiently taken into consideration by conventional methodologies. It is up to us all to make sure the definition of the new governance methodologies consider the well-being of people to be a required part of “return on investment.”


_________________________________________________________________________________
*Solutions that can help these people escape poverty are being tackled by other entities such as Aflatoun.
 

Earlier this year, our company was commissioned to develop an investment evaluation framework for a group of high net worth individuals who were exploring the development of an ecolodge in Rwanda as a means of addressing, at least in part, the social challenges stemming from the genocide and the ecological stress of decades of environmental neglect plus the repatriation of survivors to previously unoccupied areas that lack the necessary carrying capacity to rebuild communities.    

Depending on how you read it, that last paragraph describes either a worthy attempt to use commerce and local assets to help solve a social problem or a grandiose vision that seems unattainable even with the best of intentions. As such, there are a few key questions you might be asking yourself:

1) What on earth is an ‘impact evaluation framework?’
2)    How does one set boundaries around this almost limitless challenge?
3)    Can a single ecolodge really make any difference to the people and ecology of a devastated country like Rwanda?

What on earth is an ‘impact evaluation framework?’
Think of this as social and/or environmental due-diligence. Any seasoned traditional investor will undoubtedly research the company s/he is about to give money to or the NGO about to get funding. They’ll base their decision to invest on some expectations of past performance, expected future returns, etc. What is often missing from those investigations is to what extent does this investment help or hurt local communities and ecosystems (excepting government-mandated environmental impact assessments). As social investment—financial relationships designed specifically to benefit people and planet— continue to grow, this type of evaluation becomes exponentially more important.

For our ecolodge project, SVT developed what we call the “ECOframe”- the Ecolodge Choice and Evaluation Framework. The Framework gives investors/funders/donors a linear process by which to determine their own priorities, evaluate opportunities, set expectations and ultimately create a dialogue with their investees/grantees.

How does one set boundaries around this almost limitless challenge?     
This question has no easy answer, though one is absolutely required for any social enterprise regardless of issue area, geography or financial structure. Answering this question allows an organization to set goals, prioritize them, manage to them and ultimately produce continually increasing social and environmental returns.

You have likely heard the saying “what gets measured gets managed.” While that may be true, it is only half the story. Einstein’s view on this helps paint a much cleaner picture, as he is usually credited with saying, “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” Thus, it is critical to first determine what matters enough to be measured, then what from that set of things can be measured and finally what should be managed to ensure maximum positive impact for the resources available.

For the ECOframe, we developed a defined process for determining what information should be collected and can be managed to. This process clarifies characteristics about the addressable challenge, the value the project can (and cannot bring), the primary and secondary stakeholders, key indicators for tracking social value, and quantifying and analyzing results.

Going through these steps adequately allows both the investor and the enterprise itself to clarify goals, assess the value created/to be created, include key stakeholders, continually improve impact and ultimately to tell a story. Of course there is an art to each of these steps...

Can a single ecolodge help the people and ecology of a devastated country like Rwanda?
This third question is a fair one and must be asked of any impact-driven investor, funder or ground-level manager/implementer. It is true that the answer might be no. That is ok. This is the equivalent of market research for a new consumer product and is critical for any endeavor. Supplier passions alone do not drive market demand.  But, by running a project through a process like ECOframe, it is possible to not only determine if positive impact will be made, it is further possible to allow managers to set expectations of impact and work to continually improve upon them, thus simultaneously maintaining control and having an open dialogue with project supporters, thus shifting the focus from ‘all or nothing’ results to management skill and growth.

For the Rwanda ecolodge, we were able to determine that should the lodge be built, it would indeed benefit the local community and ecology in the ways in which it could control—namely through employee hiring practices/wages, access to healthcare and education for families of staff, energy efficiency/composting/construction materials, etc. Can this one ecolodge truly solve the tremendous social and economic strains in the area? No. Should its success be judged by its ability to do so? No. Can it help improve conditions and act as an example for similar social investments in the area? Absolutely.    

In our next post, we’ll address a fourth question that may be on your mind… are all investors the same and if not (they’re not), how do tools like ECOframe accommodate their differences?
 

First let's clarify what we mean by the term “standardization.” According to Wikipedia, “standardization (or standardisation) is the process of developing and agreeing upon technical standards.” A technical standard is “a document that establishes uniform engineering or technical specifications, criteria, methods, processes, or practices.” So to illustrate, if I invent a light bulb, and you also invent a light bulb but yours is different than mine, we both still need electricity to make our light bulbs work. We could both hire electricians to figure out a customized way of linking our light bulbs to the electricity in the wall socket, but ultimately how electricity gets into our light bulb doesn’t matter as much as whether it gets there or not.  So, to save time and money, you and I and the electrician might sit down and agree that we’re going to make part of the light bulb fit into a socket, and all the sockets will be the same size. We just created a technical standard for light bulb sockets.  Now, the rest of my light bulb can still be the size, shape, color and anything else I want, but I’ve agreed to be consistent with you (and anyone else who makes light bulbs will probably join us voluntarily) on the electrical stuff. 

This is an example of standardization of a technical standard. For entrepreneurs who don't invent lightbulbs but who invent ways to create various social or environmental impacts, we would use a similar process to arrive at a process standard for how to measure a given impact, where each of us would go about measuring that impact in a consistent way.

Another kind of standard is a measurement standard (or standard measurement). If we have light bulbs and electricity, how can we describe how bright the light bulb is? Maybe I want to say, “it’s really bright!” and leave it at that. But you don’t know whether my “really bright” and your “really bright” are the same. So we might want some sort of objective gauge we can both use to compare our bulbs.  And we need some kind of calibration for that gauge. In the case of light bulbs, this metric, which actually measures the energy required or expended per unit of time, is called a “watt” (after James Watt who helped develop the steam engine). An example of a standard unit of measurement that has emerged in recent years for an environmental impact is “carbon dioxide equivalent” or “CO2e,” which is a way of normalizing carbon (C) emissions associated with different types of emissions. If the world could ever agree on what constitutes poverty alleviation, then we may see a unit of measure emerge for amounts of poverty reduced per time (“poveradicons"? or “wealths”? help me out here!).
 
A performance standard is quite a bit different. It means that we have agreed the light bulb will have a certain quality.  We might decide that all light bulbs have to be at least 20 watts and not more than 1000 watts, because if they’re more than that the wires could blow out, and less than that we can’t see anything.  But someone else might say, wait a minute, I really LIKE having incredibly subtle lighting and I need a bulb that’s only 10 watts! But you would be out of luck at that point, and you would have to invent a rheostat.

Frequently, when the word “standard” or “standardization” is used, people immediately assume that means a performance standard. This usually raises peoples' hair, since most people don’t like the idea of someone else dictating to them how much or how well something should be done. When you use these terms, it's a good idea to be clear whether you mean a performance standard, or some other kind of standard.

With these distinctions between the types of standards in mind, it’s clear that there are some minimum criteria that need to be met to make impact measurement standards, of whatever kind, functional:

1.    more than one party must need to make use of the standard

2.    the benefits of both developing and adhering to the standard must outweigh the hassles

3.    in the case of performance standards, various points of view must be taken into account when defining them, or else the standard risks creating more harm than good.

We're beginning to see more and more instances where the social capital marketplace's seemingly innate resistance to standards is being overcome.  This is happening because more and more there is sufficient consensus in certain pockets of the market about the frame of reference, the value of a specific impact, or both, to ensure that a standard will add value. ANDE and B Lab, for example, have convened leading practitioners in their respective sectors of sustainable development and "for-benefit" SMEs to define sets of measures all their members agree to use. Another factor is technology, which makes the standard design process more inclusive-- in some instances, it's even enabling users to retain power over the standards they want to apply for their own decisionmaking: Good Guide and Social Markets are two cases of platforms that let their users participate on an ongoing basis in defining the metrics and performance standards they feel are most appropriate. 

One thing is clear: to move the field forward we're all going to have to come up with some shared language aroudn impact and tools to gauge it.  A lot more standards of all kinds are on the horizon.


 

As this blog posting will go live on election day in the US, I wanted to take a moment to preflect, to look ahead at a plausible future, rather than to dwell on the short-comings of the recent past. We have a real opportunity to reposition the United States as a global leader once more, though as the Economist put it a while back, with brains not bullets.

I have just returned from a three week road trip with stops as wide-ranging as New Jersey and Amsterdam. A little bit of Maine, Pennsylvania and throw in some New York City and DC, add in conference attendees from all over the planet and two things are very clear: EVERYONE is watching the US election, and everyone has an opinion about America. Well, maybe not everyone- I know there are pressing issues around the world that do not involve the US today. But being an American abroad... it sure feels like all eyes are upon us.

Perhaps what struck me more than anything is this—people around the world actually care about America. We are quite unpopular globally; we are seen as invasive, destructive and hypocritical. As we face what is by far the most important election in a generation if not more, it would not have surprised me if citizens of the world wanted to see us fail once and for all... to finally add that last nail in our geopolitical coffin. But they don’t. They want to see us get it right. They would rather see a United States that rebuilds its power and uses it for good, with respect, intelligence and a sophisticated world view, rather than us fade into darkness. 

So what is the America that could be? If I were to preflect on a vision, it would be—at least in part—one in which we rebuild our economy by investing heavily in the resources of the future. Renewable energy of course, but also innovators and entrepreneurs who are willing and able to provide a new means of making investment decisions and addressing the challenges the world community faces. One in which due-diligence includes understanding how any investment might perform not only in a financial sense, but also the impacts for people, communities and the environment. In the last few months we’ve learned critical lessons about investments in companies that grow by feeding on their own foundations. We now have an opportunity to start again, to take a new approach that insists we ask questions about the impact, and sustainability, of our investments.

A new view of investment need not necessarily mean a tradeoff in financial return, though it might and that can be good as well. Many of us believe that the investments that will produce the highest financial returns, at least in the long run, will be those that are not only sustainable in that they don’t consume more than they produce, but that are actually regenerative. We now have a ‘do-over,’ a chance to try a new approach that might allow this country to stand as an example of investment that brings returns on all fronts.   

Though I put forth this entry on election day, make no mistake this is not a partisan issue. Democrat and Republican alike, regardless of campaign trail rhetoric, must craft a new vision for America. One in which personal aspirations are not necessarily pushed aside, but one in which people achieve their own success directly by helping the planet and all its inhabitants—human, animal, plant or otherwise. This is no easy task, and may require incentives and education, but if as a country we demand this new direction, we can much more effectively direct the resources we have—natural, financial and human. We have the opportunity to be proactive, not reactive. The world is with us. We can do this. 


 

 

to investors. 

At this point you may be thinking, "That’s a lot of technical stuff and a lot of work.  What do I get out of all this?"

Focus on what adds value

That’s exactly the question we all need to keep in mind when tackling impact management.  It’s not worth doing unless the enterprise gets valuable information out of it, and the undertaking has to be focused in on what is going to add value, and exclude what is optional—there’s simply not the luxury of time to do more.

Social entrepreneurs everywhere know that the point is not to make money, it’s to make the world a better place WHILE balancing the needs of the people who do the work and the needs of investors or donors. We need tools that help us reach our goals while managing and achieving that balance.  Not perfect balance, but “good enough” balance. Well-designed impact management helps managers and investors find this balance. With the right tools, we can do amazing things.

Whose value?

Think about the amazing tool of financial accounting. Financial accounting considers one stakeholder, the owner/investor, and measures one facet of the “is the world a better place?” question: Is the owner making money? In a sense financial accounting measures the “net impact” of an enterprise in terms of the impact goal of making investors better off.

Tool

    Investors               Wealth for investors     Financial accounting

Setting aside the abuses of financial accounting that have been so vividly illustrated in the news lately, financial accounting is a darn good tool for helping entrepreneurs, managers and investors organize their creative energies to create ways to reach that goal. Gross world product (all countries’ GDPs combined) was about $65 Trillion in 2007. There has never been more wealth in the world than today by a long shot. And far more people than before are far wealthier than ever before.

That means humans are really, really good at using this tool to help them create value in terms of that one goal for that one stakeholder: wealth for investors. And, some have argued that that’s the only thing we need to think about because people can find a way to make money by solving any problem, and therefore all problems will be solved.  (Can you spot the fundamental breakdown in that Logic Model?) But this past week’s historic $700Bn megabailout in the United States of investment banks with public funds may illustrate once and for all the grave error in thinking that the only tool necessary to manage an enterprise or investment is accounting for the interests of investors. 

So, impact management begins with the identification of one or two other important stakeholders in addition to investors:

Staff and managers (the people who do the work)

And a few more impact goals that concern them:

The health of the planet underpins peoples’ safety, economic security, quality of life, and, for a lot of people, the meaning in their lives.  So in a way, the planet is another stakeholder. As such, might consider another impact goal that considers the planet's interests, as it were, such as ecosystem balance.

The beauty is, this is a virtuous cycle.  If staff and managers are safe, economically stable, have good quality of life, and experience meaning through their work, this creates a kind of ‘externality derivative,’ which turns out to be that the investor is somewhat safer too, has more stable returns and better quality of life, and experiences more meaning. This seems intuitively true, but with today's information systems in fact it is turning out to be more and more true all the time. It’s a small planet.

Tool

    Investors                        Wealth for investors        Financial accounting

    Staff and managers         Safety                              Impact management

    Investors                        Economic security

    Planet                             Quality of life

                                          Meaning

                                          Ecosystem balance

Having added two more key stakeholders to investors, the next task of impact management is figuring out how to measure changes in the “assets” of safety, economic security, quality of life and meaning for those folks, given that we don’t get a receipt every time one of these things changes. 

Market Size
What is a good result? What is the proper frame of reference? To get at the answer, we’ve borrowed from the concept of an addressable market. The addressable market is the total potential market for a product or service, measured in dollars of revenue per year. If we apply this concept to impact, we can define addressable impact for any situation; in other words, the total potential social or environmental problem that could be solved by a given solution each year.  For example, an organization that helps the homeless transition to stable housing might consider its total addressable impact as the 10,000 people who are homeless each year in the city where it provides services.  An ecotourism venue might consider its addressable impact maintenance of the current level of biodiversity on its property.

The importance of the addressable impact is twofold. First, it allows for the definition of a clear goal (or set of goals) according to which an organization can manage its resources. Stay focused, don’t over-reach, and continually improve. Second, it alleviates the need to singlehandedly solve a major societal problem in total—to ‘save the world.’ No one organization can solve it all and each will invariably work with other groups to address large challenges. Thus, defining the market one can address is critical to managing and communicating the change one is most capable of making. Social and environmental change is not a zero-sum game for any organization. 

Relative Value
From a social or environmental impact perspective, the value an organization brings is, at least in part, a function of how big a slice of the addressable impact pie the work addresses. Preventing the highest number of malaria cases possible may be the obvious goal if the addressable impact is eradicating malaria in a certain population. But it is imperative to understand the way the addressable impact is also a function of the context. Saving ten hectares of old-growth redwood or endangered mahogany may be of higher value than saving 100 hectares of uncontested grassland. The “difficulty of the dive,” to quote Kim Smith of New Schools Venture Fund, must be rated, since it may be much harder, for example, to increase the graduation rate or create living wage jobs in one neighborhood than in another.  And comparing the value of a given measure can be tricky in one setting versus another without a clear frame of reference. Take for example ‘tons of carbon reduced’: preventing one million tons of emissions per year sounds impressive, but not if you are still producing another 99 million.  Defining the relative scale, relative difficulty and relative context of the addressable impact and of results achieved is necessary to measure and communicate the true value of impact.

While that’s quite a lot to think about, the good news is that it is possible to break down the steps into a manageable and consistent process.  The most important idea behind addressable impact is that, just as a single restaurant doesn’t open with a mission of feeding all the town’s people, nor should an organization try to solve everyone’s challenges at once. It is always possible to scale up over time.

To be sure, the addressable impact is not something that is set in stone. Targets and goals should always be checked and rechecked and readjusted as necessary. The ideal situation, of course, is to have improved performance while also addressing a growing market.