The concept of impact on social and environmental issues and its implication for companies

In a business environment, there is a lot of ambiguity and confusion about what ‘impact’ is, how it should be defined, how to measure it, and what kind of measurement is sufficient.

Despite heightened attention paid to, expectations around, and use of the term impact, the concept does not have a shared definition of what it constitutes.

Impact has been defined by various international organizations.

The most commonly used definition of Impact being the one of the Impact Management Project which uses the same definition as the OECD: positive and negative, primary and secondary long-term effects produced by an intervention, directly or indirectly, intended or unintended.

As for Global Reporting Initiative: ‘impact’ refers to the effect an organization has on the economy, the environment, and/or society, which in turn can indicate its contribution (positive or negative) to sustainable development.

The term ‘impact’ can refer to positive, negative, actual, potential, direct, indirect, short-term, long-term, intended, or unintended impacts.

Impact is a concept that is applied both prospectively and retrospectively to actions, programs, activities, and operations.

It aims to help organizations, profit and non-profit to:

Depending on their motivation on managing impact, organizations’ intentions range from broad commitments to more detailed objectives.

These intentions relate to one of three types of impact:

Impacts are related to environmental and social issues.

Organizations’ impacts will seat within one or both of those 2 categories:

When organizations’ decisions and day-to-day operations affect and influence:

Social impact regroups all issues that affect people, directly or indirectly.

A convenient way of conceptualizing social impacts is to look at whether there are effects on one or more of the following:

Organizations can conduct an Environmental Impact Assessment and/or a Social Impact Assessment, that includes the processes of analyzing, monitoring, and managing the intended and unintended environmental and/or social consequences, both positive and negative, of planned interventions (policies, programs, plans, projects).

Example of methodology to assess Environmental Impact: Carbon footprint at a company level, LCA at a product/service level, expert analysis…

Example of methodology to assess Social Impact: Surveys for all potentially affected people, case studies, expert analysis…

Today, more and more investors are talking about “impact”.

They are 3 types of investments that take sustainability and impact into account:

It focuses on companies making an active effort to either limit their negative societal impact or deliver benefits to society (or both).

The 3 criteria, E, S, and G, constitute the three pillars of a company’s extra-financial analysis. Investors use the ESG approach to evaluate investees on expected practices (existing policies and actions on dedicated topics) and metrics (whether the company reports on certain KPIs).

ESG also provides a framework to assess the exposure of a company to sustainability ESG risks (through the lens of financial or double materiality).

Companies that meet ESG criteria do not necessarily demonstrate reduced negative impacts nor positive impacts.

For example, a company can have a climate policy in place and monitor its GHG emissions (as part of its ESG strategy) but still have a significant negative impact on climate change.

Examples of ESG investment: investing in a tech company that owns data centers using renewable energy, investing in a petrochemical company that has an ambitious climate policy.

It entails screening investments to exclude businesses that conflict with the investor’s values or that focus on businesses that prove to have the best environmental and social practices.

SRI can take different forms, including: ESG screening (invest in companies with the best ESG ratings), exclusion (excluding from the portfolio companies that do not respect international conventions or that operate in controversial sectors), and thematic approach (promoting investments in companies operating in the field of sustainable development).

SRI dates back to John Wesley, the founder of the Methodist movement in the 18th century, who urged his followers to avoid investing in “sin stocks” that generated profits from alcohol, tobacco, weapons, or gambling activities.

SRI goes further than ESG. Not only is SRI an investment that takes into account ESG criteria, but it is also part of a broader sustainable finance policy. All SRI-labeled funds usually meet ESG criteria. However, a fund that meets ESG criteria is not necessarily part of an SRI approach.

Examples of SRI investment: investing in companies operating in education, water, recycling, renewable energy, etc., divesting from fossil fuel and firearms industries.

It is a relatively recent practice, first mentioned in 2007 by the Rockefeller Foundation. It is characterized by a direct connection between values-based priorities and the use of investors’ capital. Impact investing meets a dual objective: to generate a substantial financial return and to create and quantify a positive societal impact.

Examples of impact investment: investing in an organization that contributes to building schools in underdeveloped countries, investing in a company whose core products help reduce GHG emissions (e.g. plant-based food), etc.

Impact investing mostly refers to private funds, while SRI and ESG investing involve publicly traded assets.

According to US SIF (The Forum for Sustainable and Responsible Investment), socially responsible investing (SRI), environment, social and corporate governance (ESG) investing, and impact investing assets grew from $3 trillion in 2010 to $12 trillion in 2018 to $17.1 trillion in early 2020.

There is room for both ESG and impact investment strategies in the market, and investors may want to allocate funds to each in different proportions.

Both can deliver superior financial performance and make the world a better place, but they work in different ways, and there are some overlaps between the two strategies.

IFC provides a useful framework to understand the nuances between ESG and Impact Investing and compare actions taken at each stage of the typical investment process in the light of these differences:

Because the definition of impact is very broad and vast, it is almost impossible to propose a single, universal scope of application of the concept of impact.

There is currently no robust and recognized methodology for measuring net impact (positive externalities adjusted for negative externalities).

As a result, different perspectives and dimensions will affect how impact will be framed and measured by companies.

This leads to 2 points of attention when looking at Impact assessments:

Created in 2016, the Impact Management Project (IMP) is the reference organization on impact measurement.

It provides a forum for building global consensus on measuring, assessing, and reporting impacts on people and the natural environment.

IMP is part of the organization that will advise the newly created International Sustainability Standards Board (ISSB).

ISSB was launched in November 2021 by IFRS to develop a comprehensive global baseline of high-quality sustainability disclosure standards.

ISSB aims at meeting investors’ information needs and supporting companies in providing transparent, reliable, and comparable reporting on climate and other environmental, social, and governance (ESG) metrics.

The integration of IMP into ISSB’s work is good news for organizations working towards impact but it might also blur even further the lines between ESG and Impact.