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.”


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*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. 


 

 

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.