The existing social contract has expired: we need to draw up a new one. Following the summer G20 summit in Hamburg, it is worth asking again how to address our most pressing global challenges.
Racked by rising inequality and human and environmental crises, capitalism as it exists today isn’t delivering on its promises to increase prosperity and social progress for all. The gap between rich and poor grows every day. Meanwhile, the toll on our environment continues to rise — from climate change to deforestation and the pollution of our oceans.
The dominant model of capitalism practised today is more than two centuries old. Our problems have changed and so too must our response.
This moment calls for nothing short of a revolution, for a new approach that asks the question: how can we reach our financial goals while also doing measurable good?
Cue the impact revolution.
Capitalism as we practise it is deeply flawed but not hopeless. When it comes to how we invest there is an exciting shift under way, one that takes current thinking about financial risk and return and adds a third dimension, impact, that measures positive outcomes for society and the environment.
Using this new financial model, social impact matters just as much as a company’s earnings. This inspires us to maximise both profit and impact at normal levels of risk, to create the kind of world that everyone wants to live in. Together, we are reinventing modern finance and reshaping modern business.
The private sector is the cause of any number of social and environmental ills but it is also fundamental to solving them.
Innovation, risk-taking, achieving scale and the dogged pursuit of measurable results — these are hallmarks of entrepreneurs and the private sector. They are also key to solving complex problems and enacting changes quickly and efficiently.
The tech revolution showed us what happens when private capital meets scrappy and disruptive entrepreneurs. It is time we took a page out of its book. By introducing impact, the risk-return-impact model brings out the best in entrepreneurs and the private sector in addressing our urgent social and environmental problems, which governments and philanthropists are unable to handle by themselves.
Valuing impact does not have to mean sacrificing profit. On the contrary, we can deliver high rates of return because of impact, rather than in spite of it.
The millennial generation is different from its forebears. Millennials want to do more than collect their pay — they genuinely care about doing good. They want to shop, work, launch companies and invest in ways that express their values. And investors, including large asset managers and pension funds, are moving in the same direction. Businesses are taking note. There isn’t a boardroom on the planet where the subject of social impact hasn’t come up.
If impact investing is our rocket-ship to social change, impact measurement is our navigation system. We need to rethink it. For too long we have measured social impact in ways that are imprecise, inconsistent and incomparable.
Many people dismiss impact measurement as impossible. The truth is, we can measure social impact with greater accuracy and rigour than we do financial risk. We just need to be serious about doing it. The absence of measurement leads to a huge failure of our system to deliver social and environmental improvement, at great cost to the world.
Over the past 20 years, we have seen numerous initiatives to establish a standard for impact measurement. One of the most promising, advanced by the Global Steering Group for Impact Investment and the Impact Management Project, is to weight conventional financial accounts for impact. It involves applying coefficients to sales, employment costs, cost of goods sold — all the way down to the profit line — and doing the same for the balance sheet.
Impact-weighted financial accounts will allow for reliable measurement and comparison by investors. When every company publishes impact-weighted accounts alongside financial ones, impact will have assumed its place in investment and business decision-making.
We are seeing promising changes. Investors and businesses are becoming socially and environmentally conscious; impact entrepreneurs are gaining access to the capital they need to bring brilliant, life-improving ideas to scale; governments are seeing the value in harnessing the innovation of the private sector, channelling its talent and capital to find better solutions to society’s challenges; philanthropists are beginning to fund the delivery of measured outcomes.
It is time to accelerate these changes, and demand more.
The G20 leaders committed in their declaration to “endeavour to further create enabling conditions for resource mobilisation from public, private and multilateral resources, including innovative financial mechanisms and partnerships, such as impact investment.”
Impact investing means evolving capitalist systems to build a better world, one that values social impact just as highly as profits. It means exposing the myth that social good comes at the expense of profit. And the accompanying myth that impact cannot be reliably measured and compared.
Ending the plight of billions of lives and the decline of our planet depends on our urgent, collective action. There is a way. There has never been a greater need or a better time than now.
Sir Ronald Cohen is the author of On Impact: A Guide to the Impact Revolution, onimpactnow.org