Impact at the village level
In my first ‘field posting’ as a United Nations Volunteer, I remember (as if it were yesterday) going on a journey to Farah, a province in Afghanistan, to report on an irrigation canal and its impact on the village.
This was in 1998, under the Taliban.
It was not just us, reporting officers and managers, that were interested in impact but the village elders too. They had prepared a wonderful meal on a grand Bukhara carpet outside, on the sand, on a glorious sunny day. It was one of these rare moments you may have also experienced. These few seconds of extreme consciousness about one’s existence at that particular time and space, where the mere act of breathing fully, made one feel so profoundly alive. Every inch of the perimeter was filled by villagers dressed up in their best grey silk turbans and perfectly trimmed long beards (Taliban oblige) to thank us for changing their lives.
Of course, there were no women that day joining the celebration. But the women and girls would be equal beneficiaries of the project.
The measurement of human change in development was straightforward enough: size of irrigation canal (output), hectares of land irrigated, crops cultivated, income increased (outcome) and ripple effect on nutrition, health and education (impact). Fekare, the Ethiopian regional base manager, was so excited I had made it all this way from across the Khyber Pass. He said: ‘take pictures, write a piece about this success story, so we can raise more money (input) and do more.’
For development or aid practitioners, this way of thinking is just the way we measure the ‘bottom line’ of our work. We call it a logical framework (logframe), a common management tool to design, monitor and evaluate projects. Despite this standardized tool, the gap between theory and practice was and remains a challenge. In practice, the measurement of impact, i.e. analyzing the longer-term consequences, ripple and sometimes unintended effects (e.g. cultivating opium) of the irrigation canal requires time and long-term engagement, something that did not always fit with donors’ short reporting timelines and emphasis on a simple input-output paradigm, i.e. money = canal.
This is in a nutshell the original impact measurement story that began some 70 years ago, after the creation of the United Nations, and its various family members including the World Bank, the IMF, the IFC etc. – and it remains a work in progress, not just in aid but also in philanthropy.
The purpose and/or prosperity paradigm
Fast forward to the last twenty years or so, the private equity and venture capital worlds began to approach some of their investments in a similar way, particularly when funded by large and innovative DFIs or foundations, e.g. the Omidyar Network, pioneers in understanding that solutions to global problems could also be supported through the curated allocation of private capital. The need to capture a double bottom line, sometimes also referred to as a triple bottom line – financial, social and environmental emerged.
There is now a quasi-consensus that funds, especially catalytic funds, and to a lesser extent private companies, especially those operating in emerging or frontier markets can no longer report solely on their financial performance. Servicing shareholders only is risky when other stakeholders: customers, suppliers, employees, and communities are all critical to the success of an enterprise’s bottom line.
This is, in hindsight, possibly when the paradigm of ‘good’ became more nebulous: at the nexus where financial performance meets (or not) impact performance. Hence, companies started defining themselves as ‘finance-first’ or ‘impact-first’, with variants in-between. The juxtaposition of profit and impact as two distinct performance standards, and perhaps competing goals, is problematic when the latter contributes to the former, according to some, but not all. In the private investment space, measuring impact performance is therefore also a work in progress.
The new prosperity, planet, people matrix
In the last few years, propelled by the climate emergency and the heightened consciousness or quasi-revelation around inequality and the need for greater inclusion, two new players joined the stakeholder-capitalism paradigm: planet and people, an umbrella term for stakeholders. In the greater scheme of capital flows in the world, it was only a matter of time that the world’s largest companies trading in public equity markets joined the impact revolution given that public markets are conservatively at least ten-fold those of private markets.
But transitioning an entire economic system, primarily motivated by profit (i.e. capitalism), and powered by outdated economic models dating back to the industrial revolution (read Raworth’s Doughnut Economics), with accounting systems measuring a single bottom line (see HBS’ Impact-weighted Accounts), is no small task. Certainly not a task that can be captured in a nebulous, half-regulated, complex and ever-changing set of metrics falling under the ubiquitous acronym of ESG (for Social, Environmental and Governance) which is, to boot, detached from any global goals.
‘ESG-washing’, ‘greenwashing’ or ‘impact-washing’ critiques are many and their main arguments also tend to be conflicting and somewhat esoteric – quite literally if one reads the paradoxically highly publicized ‘secret’ diary of a sustainable investor. And so, a new dialectic discussion has emerged around what ESG and impact mean in the context of public equity markets, centred around the following five synthesized dilemmas.
- Purpose clarity. Are the new financial products branded as ‘ESG, sustainable or impact’ aiming to do good or simply measure what is material to shareholders? In other words, do these companies or funds measure their impact on the planet and people, or do they just measure the risk or threat posed by planet and people to their bottom line? In this context, is it ‘right’ then to just report on CO2 or GHG emissions or should we aim to de-carbonize and/or impose a carbon tax?
- Market size significance. Is the ‘good’ segment of products too small to matter or is it in fact too small to ignore? In other words, is real impact in the public markets even possible with a nascent ESG total market estimated at 2.7 Tn and projected to grow to 50 Tn by 2025 – across a wider 360 Tn global wealth market?
- Engagement conundrum: is divesting from companies the best option to move the system forward, or is engagement a better strategy to influence corporations to be more aligned with a purpose? For instance, is it not surprising that Russia’s oil and gas companies are being divested from now, as if fossil-fuel concerns, corruption, and human rights record, were not embedded in ESG metrics prior to the situation in Ukraine?
- Labelling challenges: Can Exchange-Traded Funds (ETFs) labelled as ‘ESG ETFs’ or ‘Impact ETFs’ be trusted when some of the holding companies may be engaging in activities that are detrimental to the planet (e.g. large C02 emissions) or people (e.g. unethical supply chains)? Furthermore, can ratings on these funds add any value if subjective à la carte metrics are used to provide ‘AAA’ ratings to companies potentially perpetuating the status quo?
- Data validity. Can the current lack of standardization, state of voluntary disclosures, based on evolving and multiple regulation regimes, which include ISSB-IFRS, GRI, the World Economic Forum’s Stakeholder Capitalism Metrics, TCFD’s Climate Metrics, to name a few, possibly lead to meaningful and comparable data? In practice, this means that the notion of materiality itself is evolving and debated, in an ever-changing state of knowledge and actionable awareness (e.g. harm done by methane vs. CO2).
Many of these criticisms have been brilliantly refuted as they are not dissimilar to some of the issues that have emerged with the onset of the impact revolution in other asset classes: lack of standardization, questionable relevance of indicators selected and credibility of data, need for verification, and the possible gaps between claims and actual impact. As such, the impact transition to the public equity markets is also very much a work in progress.
Lessons learnt from my impact journey
What has perhaps not been highlighted thus far are the following human constraints that possibly threaten the impact revolution, which can be summarized as follows.
Time. The patience needed for human change is often under-estimated, as well as the potential contradiction between quick financial returns and long-term term horizons needed for the multiple systemic transitions taking place. For instance, hurrying a fossil-fuel-free transition would create havoc in the world and destroy the ‘S’, societies and employment, to the detriment of ‘E’, the dream of a cleaner world.
The fallacy of a binary reality. In public markets and discourse, a dichotomous view of the world is propagated, as human beings need simple ways of making sense of our complex world. Our notion of ‘good’ and ‘bad’ applied to companies, instruments, countries, or regions seems to vary easily and usually as a result of random events. Our moral compass needs to be sense-checked, regularly, to understand how it arrives at binary classifications and conclusions.
Unintended consequences of doing ‘good’. Even ‘good’ investment decisions can lead to unintended consequences. For instance, divesting from oil and gas abruptly creates a price hike, which may ironically create new incentives for fossil fuel producers and investors – potentially setting back progress made over the last few years.
Doing ‘good’ in the world, as I have learnt through my experience across the impact spectrum, is often a decision that involves both the heart and the mind. Throughout human history, the perennial limitations to the optimization of both the heart and mind, in service of building a more inclusive and safer world, have been greed and power – the very engines that propelled us forward. How to tweak or re-balance these is possibly our greatest challenge to take up now, for a better tomorrow in our global village.
Farahnaz Karim is founder and CEO of Insaan Group, a boutique impact investment entity that allocates philanthropic capital to tackle poverty, and the Chief Impact Officer of GOODFOLIO, an impact-driven investment platform.