Week 5 - Social impact reporting Flashcards
ESG investing vs Impact investing
ESG investing
- focuses on MITIGATION of ESG-RELATED RISKS (eg. carbon-related, human rights, board effectiveness)…
- …for the benefit of INVESTORS (through reporting items which might generate harm & reduce company’s sustainability)
» screening out negative impact
Impact investing
- prioritises PRO-ENVIRONMENTAL or PRO-SOCIAL ACTIVITIES (eg. investments in clean energy or education)…
- …while still aiming to EARN “BLENDED RETURNS”
» screening in positive impact
Impact investing continuum (from focus on Financial return -> focus on Social return)
Financial return
1. Impact investing, eg. ESG funds
-
Private impact investing (eg. Bridges),
» like VCs that scope out and target certain org.s that generate specific positive impacts, eg. employment
Outcomes contracts, Social impact bonds -
Venture philanthropy
» an org. that acts as an investment fund and pools money from diff. orgs, then DONATES TO MANY ORGS. but not expecting financial returns
» making RIGOROUS MOTIVATED DECISIONS rather than ad hoc
» require lots of data to DEMONSTRATE that they get their money’s worth for the impact generated (not just saying they’re doing charity) - Philanthropy/foundations & Public sector/nonprofits
Social return
What is the role of business (rather than charities and government) in prioritising positive impact?
- WIN-WIN by going one step from mitigating bad events happening (ie. not being a bad actor), but by doing good things/looking for org.s that are doing good that will BENEFIT THE CO. IN THE LONGER TERM
- if co.s do bad things, they cannot continue in the long term if get found out by consumers and ppl stop buying their products / regulated / fined by regulators
-> solving social problems generates value of all kinds
What does Ronald Cohen argue in “Impact”?
Why is accounting central to the positive impact programme?
*Also, Ronald Cohen thinks we can develop useful STANDARDISED REPORTING of Impact - he thinks there will be pressure for impact transparency and integrity
- Externalities are not really financialised & are difficult to be done so b/c they are outside of the MARKET
- Ronald Cohen argues that externalities must be FINANCIALISED or else no one will TAKE ACTION!
eg. GHG emissions need to be measured; but no established ways to measure positive social impact
How does positive impact differ from a traditional ESG focus? (eg. IKEA, McDonald’s, Tesla)
- IKEA aims to serve EMPLOYEES and customers well
- Tesla is a for-profit company but generating positive social impact through EVs
- McD tends to EMPLOY ppl who live LOCALLY, social impact through DONATING to charities, provide positive environment to families and diners, provide CHEAP FOOD for those who might not be able to afford
George Serafeim’s HBS proposed Impact-weighted accounts approach
(Scope, stakeholders, specificity of metrics/rules, unit of account)
eg. accounting for product impact in the consumer-packaged foods industry (see slides) like affordability, recyclability…
Scope
- limited to small set of “uncontroversial” metrics, eg. issues that most ppl will agree upon like waste, health consequences of product/service offered (eg. gambling is addictive)
Stakeholders
- narrow; small subset of “directly impacted” stakeholders
High specificity of metrics/rules, using existing STANDARDISED METRICS & acknowledging variation across industries (eg. SASB)
FINANCIAL unit of account, good b/c can compare like for like
According to the Impact Weighted Accounts Initiative, it is better to be roughly right rather than precisely wrong (i.e., you may have an inaccurate measure of social or environmental impact, but that is better than omitting it altogether).
What is your view?
eg. Banks - economic activity for which it is better to provide accounting info that is “roughly right” rather than “precisely wrong”
- TRANSPARENCY to pressurise companies, regulators want to name and shame companies so that they will consequentially change their BEHAVIOUR
- social impacts are likely to be inaccurate anyhow
- it would be even more inaccurate to completely ignore, as it means that investors and regulators will not even think about it
» and starting to disclose leads to STANDARDISATION
eg. banks have to disclose Scope 3 Financed emissions <- far from accurate but disclosing them highlights the RISKINESS of oil and gas projects
- thus, many banks are refusing to finance oil and gas companies
3 “entities” that report impact
- Social investment funds (investors seeking BLENDED RETURNS for pro E&S activities) & foundations
eg. Bridges, Snowball {impact investing fund of funds} - Venture philanthropists (nonprofit investors)
eg. Impetus - Nonprofits/social enterprises
- eg. Emmaus, social benefit created at a ratio of £11 for every £1 invested
» this is definitely roughly right instead of precise wrong but used to demonstrate impact rather than “just” telling ppl they’re a charity
- Wellsprings Women’s Support Programme, center for vulnerable women & their children and provides nutritious breakfast and light lunch, provides assistance and compassion in a stable environment, reduce isolation and loneliness
What is social impact reporting?
*slide has ref. to effective altruism & link to consequentialism again…
*OUTCOMES REPORTING by social investors & venture philanthropists
= Measures LONG-TERM SOCIAL BENEFIT of an organisation’s SOCIAL ACTIVITIES on its STAKEHOLDERS
May be reported in various ways:
1. narrative of effects on society/community, eg. personal stories
2. quantitative, eg. lives touched
3. financialised value, eg. savings to public purse (eg. SROI £8.34 saving to the taxpayer for every £1 invested in the services), £ value of reduced negative externalities
Outcomes contracts involve Payments by Results - paid only when outcomes are generated, therefore carry FINANCIAL RISK.
What are social impact bonds?
*a misnomer as bonds are usually low risk, but not for SIBs
Outcome-based contracts that use private funding from SOCIAL INVESTORS to cover the UPFRONT CAPITAL required for a provider to set up and deliver a service.
Social impact bonds - Payment by results / Pay for success model
Note:
Govt realises they have a social problem needed to be fixed, eg. high criminal reoffending rate, & might want to experiment with an intervention. However, local authority often doesn’t have enough resources (cash-strapped) to make long-term speculative investments for interventions.
So, this solution is financially beneficial for the govt/local authority b/c they send the RISKS to the external investors and only pay when SAVINGS are generated
- INVESTORS provide money upfront to a financial INTERMEDIARY eg. for every 1% reduction compared to control group and…
- …can CONTROL which SERVICE PROVIDER is chosen to deliver the service to the Target population b/c the investors bear the FINANCIAL RISK
» the service provider is paid a contractual amount for their service - then an INDEPENDENT EVALUATOR (eg. accountant) checks effectiveness of intervention & measures the SOCIAL OUTCOME
- the GOVERNMENT/local authority can DEMONSTRATE they’ve saved money from lower reoffending…
- …so the govt pays their savings to the INVESTORS through the Financial intermediary
- prisoners are less likely to reoffend if they’re helped immediately after being released
- must be able to measure reoffending rate (the outcome) against a CONTROL GROUP
- if the reoffending rate is not reduced enough to satisfy contractual terms, investors don’t get money back, hence SIBs are risky
Why is measurement of outcomes/impact crucial for SIB contracts?
PAYOUT by the govt/local authority is determined by the impact (=money saved by local authority) and…
- is also measured by the outcomes (eg. reduction in reoffending rates)
- If the outcomes are not enough to satisfy contractual terms, investors don’t get their money back -> SIBs are RISKY
4 ethical or practical concerns about SIBs
- Can SIBs be SCALED UP and POLITICALLY sold? Can we justify giving money to offenders?
- TIMING issue - we don’t know what will happen in the future, eg. offenders might not offend for the next 4 years but reoffend later
- Privatisation of social care by stealth; investors can DIRECT social care delivery b/c they have some form of CONTROL since they bear the FINANCIAL RISK {raised a lot of criticism about SIBs}
- UNETHICAL for investors to bet on someone else’s life, unless there is INFORMED concern
Social impact reporting - challenges
Karthik Ramanna’s plea: to what extent are “prudence, dual reporting, & matching” incorporated into impact reporting?
- for investment FUND of FUNDS, there might be aggregated measurement issues when they are 2 levels from the diff. Frontline org.s
- the VALUE of funds is from PROVIDING FINANCE to the FRONTLINE ORG.s, but their value becomes unclear if they didn’t provide, ie. if some other fund provides the financing instead -> problem for investors - problems of non-standardised disclosures
- cannot COMPARE year on year results, hard to establish how good a particular year is
- MATCHING PROBLEM, although should be a characteristic of fundamental good accounting
- LIMITED BENCHMARKING
- LIMITED BAD NEWS -> can be bad for investors b/c it shows a lack of self-awareness and possible deceitfulness by the org. - FOR-PROFIT org.s like Astra Zeneca are not a charity, so have to be CAREFUL about generating social impact while not using the RESOURCES that their shareholders have entrusted them with
- they need to explain that generating social impact is a WIN-WIN - Verification issues
- issue of RELIABILITY and hence greenwashing
» high quality ASSURANCE enhances the reliability of social impact disclosures
- but social (and ESG) assurance is currently not very advanced…
4 potential externalities/problems of accounting for impact
- Gaming of results
eg. target easiest beneficiaries - “cream skimming”
eg. provision of misleading information - Contracting issues
- powerful interest groups may exert UNDUE INFLUENCE on definitions of impact measures (eg. Utah pre-school SIB), which may be viewed as OBJECTIVE b/c they are FINANCIALISED/QUANITIFIED - DENIAL OF SERVICE
eg. excluding most difficult targets - “parking”
eg. randomised control trials require non-treatment group - this is ETHICALLY problematic b/c control groups are generally vulnerable populations, so it is hard to justify giving intervention to one group but not another - MOTIVATION OF STAFF
- financialising/quantifying moral activities might undermine intrinsic motivation {ppl who do pro-social work don’t like their intrinsic values getting financialised}
eg. form-filling vs helping needy clients
