Managing social and Environmental Impact: A New Discipline for a New Economy
The global recession is a stark reminder that a healthy economy cannot be maintained without responsibility for the inputs that support economic growth, social development, and environmental sustainability. During these troubled economic times, social entrepreneurship is proving to be a strong alternative to business models that are motivated solely by financial returns. Not just a business with a benevolent intent or a charity with a product for sale, social entrepreneurship is evolving into a hybrid that promotes real accountability for social and environmental outcomes while achieving profitable returns in many forms for a broader range of stakeholders, including customers, employers, suppliers, communities, and taxpayers. One of the best examples of this is E + Co, a nonprofit fund that invests in for-profit renewable energy companies in the developing world. This fund not only accounts for and reports its financial results, but also measures and values its social and environmental results to gauge its total impact. To measure this impact accurately and comprehensively, enterprises like E+Co use impact analysis tools to quantify the tons of carbon emissions offset and trees replanted; others, like Peru’s Ciudad Saludable and Mexico’s Grupo Ecologico Sierra Gorda, even quantify results that seem immeasurable, such as biodiversity preservation through waste management. By actively managing their impact, these impact-oriented enterprises achieve financial profits, while sustaining businesses that create social and environmental benefits. Social entrepreneurial leadership lives in existing companies as well as new ventures, for-profit organizations and even government. WalMart, once the poster child of corporate exploitation, is now attempting a leadership position in this movement, pursuing the following goals: “To be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain our natural resources and the environment." The US Secretary of Education, Arnie Duncan, has a mandate to ensure that the American educational system holds teachers, unions, school districts, and states accountable for poor performance and rewards not activities but outcomes. Duncan asserts that “we have an economic imperative and a moral imperative” to get dramatically better, and measurements are required to assess performance to promote and replicate what works. Responsible leaders like Duncan will create a system that values progress and legitimacy for a wider range of beneficiaries. New management metrics can be applied to ensure effective public policies, make organizations more efficient, produce wealth for the shareholders, improve wasteful consumption, and preserve critical resources. This new focus has profound implications for the management of philanthropy, business, and the economy as a whole. No Time Like the Present Impact management, as this emerging discipline is called, is new territory and a strategic direction that organizations must embrace to begin to pave the way to an economic system that recognizes the inherent value of human development and environmental preservation as drivers of revenue and performance. It is imperative that nonprofits, corporations, and foundations alike equip themselves with the tools to measure, manage, and communicate their net environmental and social impact, not just as secondary considerations but as part of managing their bottom line. In an April 1, 2009 New York Times op-ed piece entitled “The Price is Not Right”, Thomas Friedman articulates the need for incorporating externalities into actual costs, and by extension, value. Top economists and financial engineers are expected to solve the global financial crisis. Yet without the accounting systems or knowledge to manage an economy that grows financial, environmental, and social returns simultaneously, there is no way for them to resolve key structural problems like resource management that cannibalizes the sources of value. Lacking the needed tools, these experts have no choice but to incrementally tweak existing systems which must prove to be as effective as using duct tape to patch a sinking ship. Still, there is hope. Though the path ahead appears arduous, the relatively young disciplines of development economics, environmental management, and social marketing have made inroads into the academic foundations upon which government officials and policy makers ultimately base their strategies. And perhaps more significantly, a growing group of experienced social entrepreneurs and impact investors are evaluating portfolios and managing enterprises that pursue social and environmental value along with financial return. Because understanding impact has evolved from an academic inquiry into a practical entrepreneurial necessity, tools such as Social Return on Investment (SROI) analysis have emerged. These tools allow managers or investors in the course of regular business to understand the net environmental and social benefits (or costs) relative to investment. Like computing financial return on investment (ROI), SROI strives to comprehensively assess value generated per dollar; however SROI focuses on non-financial value—the net environmental and human benefits—and includes not only monetary representations of value (such as taxpayer costs saved), but also quantitative, qualitative, and even narrative information to capture the fuller spectrum of value. SROI analysis in turn describes the consistent process an investor or manager goes through to measure this impact. In brief, SROI analysis begins with an understanding of the scope of operations and key stakeholders in order to define the scope of work. Defining a control is important to determine what would have happened without the organization’s influence, as is choosing meaningful indicators for measurement and tying these to results using primary and secondary research. Finally, information gathered is analyzed relative to the amount of resources invested, and reported to appropriate audiences. SROI is just one of a myriad of innovative tools through which managers can track performance and have the greatest impact. Restoring the Connection The market’s recent collapse happened because companies, investors, and even philanthropists disregarded the root source of the value they traded (that is, home owners’ ability to purchase and continue to own their homes). In the housing market example, once the debt being traded was repackaged and disassociated from the people taking out the loans, those trading the debt stopped concerning themselves with anonymous and faceless homeowners’ ability to pay their mortgages. As such, homeowners were not supported as an entity necessary to keep the market afloat, and when they crashed, so did the market that depended on them. It is therefore critical that enterprises of all kinds employ new metrics and tools to assure the health of underlying assets such as natural resources, people and communities, to ensure continuing and sustainable generation of capital. When they begin to view the social and environmental impact of their work as being on equal footing with the financial impact, then they will begin to find new products, ventures, and markets to solve the problems we face. As an economy and a society, we may not yet have the answers to the crisis, but we do know what to ask: “What is our social, environmental, and financial return on investment?”
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"During these troubled economic times, social entrepreneurship is proving to be a strong alternative to business models that are motivated solely by financial returns."
"Social Return on Investment Analysis...
allow[s] managers and investors in the course of regular business to understand the net environmental and social benefits (or costs) relative to investment."
