What is our shared understanding of impact?
In finance, we have developed shared fundamentals, which include risk, return, liquidity, volatility – and asset classes, which group investments with similar characteristics – to describe and manage against our respective financial goals. Financial capital flows, and the investment management ecosystem has grown, not just because we have common accounting standards but because we have evolved a shared way of communicating our financial goals and understanding of performance. It would be impossible to uphold any notion of “fiduciary duty” if we didn’t.
For impact, we now have a shared understanding that impact refers to material effects experienced by people and planet, both positive and negative – and that to understand and manage impact, we need to consider five dimensions of any effect:
- We relate the effect we experience to a certain outcome, and we judge how positive (or negative) and how important that outcome is to us, based on our own preferences, on expert opinion or public consensus.
EXAMPLE: We may relate our experience of secondary education to our ability to have financial security and we may think that financial security is a positive and important outcome. We may decide that an outcome is important based on our own opinion, or guided by professional experts, or through shared consensus like the Sustainable Development Goals or Social Progress Index.
- We assess how much of an effect occurs by considering its significance:
- How deep the effect is, based on whether the effect is a big or small driver of the outcome
- How many people the effect occurs for, based on data about the number of people experiencing the effect
- How long the effect lasts for, based on data about the time from beginning of the effect to end of the effect
- How quickly the effect occurs, based on data about the time it takes for an enterprise to generate the effect
EXAMPLE: Data may show that secondary education is a big driver of financial security or that a statistically significant number of people perceive secondary education to contribute ‘a lot’. We may receive feedback from alumni that their ability to secure a good job with the skills they gained from school has endured for many years.
We define who we are and we judge how well-served we already are based on whether we are already experiencing - or have the opportunity to experience - the outcome that the effect relates to. Since different effects can lead to the same outcome - and it’s the outcome that matters to us - this is what we focus on when thinking about whether we are well- or under-served.
EXAMPLE: We may be a farmer’s son in Nigeria and be more or less underserved when it comes to our ability to have good health; or a girl who speaks English as a second language in the United States, with more or less access to financial security. For environmental issues, we may be thinking about certain species and how near or far they are from endangerment.
We assess whether the effect is better or worse than the effect that would likely otherwise occur, based on whether the effect:
- Leads to more or less important positive or negative outcomes, and/or
- Is more or less significant (in terms of depth or the number of people it occurs for or how long it lasts for or how long it takes to occur) and/or
- Occurs for people (or planet) who are more or less underserved than those currently experiencing it
EXAMPLE: A new health service might contribute the same amount to our physical health as a service we are currently using but contribute less to negative greenhouse gas emissions for the planet. It might be likely to contribute more or less significantly to our physical health than if we continue to use our current service. It might reach other people who do not currently have access to the service at all.
We assess the likelihood that the effect is different from our expectation.
EXAMPLE: An innovative health service might make our physical health worse when we expected it would make it a little better – but it could also make our health significantly better than expected. Or, it might make our health better but lead to negative effects for other people or the planet.