Guest Articles

Wednesday
October 27
2021

Kevin Horgan / Geoff Kendall / Joanna Robertson

Impact Reporting for All: Developing an Approach That Works for Both SMEs and Their Funders

In 2020, nearly $2.3 trillion was invested with the intention of generating positive social or environmental impact, according to the International Finance Corporation. However, of that total amount, measurement of impact was only used across $636 billion (28%). Presumably, the managers of the other 72% of would-be impact capital would also like to be able to measure and manage their investments’ impact, to ensure they are having the intended effects. So what’s stopping them? And how can we un-stop them?

The difficulty of impact reporting is at the heart of this issue. Both data-seeking investors and resource-strapped social enterprises need a meaningful way to measure and communicate their positive impacts. They often also need a way to frame those impacts in terms of how they contribute to the United Nations’ Sustainable Development Goals (SDGs). But they approach the process with very different motivations, needs and limitations.

Since 2016, the U.K. charity Shell Foundation and the non-profit Future-Fit Foundation have been working together to develop and trial a solution to this challenge, with additional support from the U.K.’s Foreign, Commonwealth and Development Office. This article outlines that work, and relays some of the insights gained to help inform others working in this space.

 

The scale of the impact reporting challenge

Impact reporting presents challenges for both investors and enterprises. For investors, it’s difficult to “price-in” impact and environmental, social and governance (ESG) performance to an investment decision. Best practice in impact reporting focuses on written descriptions of stakeholders and context, which are important to conveying the nuance of the problem being addressed and the solution being provided. But valuable as this qualitative information may be, investors also need consistent, structured quantitative information in order to make sense of the universe of investable companies and make timely, data-driven decisions. Where numeric impact data is currently available, it varies in scope and quality between reporting companies, making it difficult for investors to compare impact across a portfolio or to evaluate potential investments.

Enterprises face numerous impact reporting challenges of their own. It can be a struggle for any company to describe the environmental and social value it’s creating to investors. This is especially true for small and medium-sized enterprises (SMEs) with a social purpose, like those that Shell Foundation targets with its grant-making. Growing SMEs are perpetually resource-constrained, limiting the amount of time available to spend on impact and ESG reporting. Visionary founders shouldn’t be expected to be experts in each of the wide range of topics included in the varied impact reporting requests from funders and investors, and thriving companies often become victims of their own success when they are faced with increased data requests from impact-focused investors.

Some of these issues affect both investors and enterprises, particularly in international development settings where the SDGs are the most common language of impact and ESG topics. The SDG targets and indicators were designed by countries, for countries, making it difficult for companies to apply them to their daily activities in a meaningful way. Investors are also grappling with the challenge of how to articulate their contributions to the SDGs – though the low levels of regulation in this space mean that they are arguably facing less scrutiny than reporting companies get from the investors themselves.

 

One Solution: the Future-Fit Business Benchmark

Shell Foundation, which supports a portfolio of pioneering social enterprises and institutions at various growth stages, knows these challenges well. They saw a potential solution in the Future-Fit Business Benchmark, a methodology which helps businesses understand and communicate their impact. The Benchmark enables companies to make and measure their progress towards a clearly defined ESG “break-even” point (at which the business has successfully eliminated any negative impacts it causes to people or the environment). It also allows companies to credibly communicate the ways in which they help to move the broader society towards a sustainable future (i.e., by creating positive impacts).

Like the SDGs, the Future-Fit Business Benchmark articulates a vision of the necessary conditions for a sustainable future in which people and planet can thrive. This shared approach has allowed the Benchmark’s company-specific targets to be mapped to the corresponding SDG targets. When a company calculates their metrics using the Benchmark, they therefore get a quantification of their contribution to the related SDGs.

Based on this existing methodology, and supported by Shell Foundation and UK AID, the Future-Fit team created an online platform – known as the Impact Benchmarking Tool – to facilitate impact reporting by SMEs. The tool guides users through a series of straightforward questions about the company’s activities, only going into detail on relevant topics, as determined by the user’s response to each question. When prompted by these questions, users input detailed, quantitative impact data into the benchmarking tool, and the platform organizes that data into reports that both the company and its investors can use. This creates a streamlined approach that helps users understand what data they should be providing, then outputs detailed reporting and analysis, without relying on jargon or wasting time on unnecessary items. The tool is currently being tested with a focus group of companies within Shell Foundation’s grantmaking portfolio, and this process has revealed valuable learnings for businesses, funders – and anyone who might be interested in developing a similar approach. We’ll explore those learnings below.

 

What we learned about reporting impact

1. Don’t force companies to learn your “language” of impact: Impactful companies are experts in what they do – not in deciphering the jargon of complex ESG reporting requirements. By gathering information via simply phrased questions, we were able to make the input process simple, while acquiring the right data needed for analysis and reporting.

2. To scale the impact approach, investors need quantitative data they can manipulate, combine and compare: They say that money makes the world go round… but before any of it gets invested, most investors want to consult their Excel models first. Investors are seeking numeric data to steer financial decisions, so to create a solution that works for them, we must find credible and consistent ways to quantify the otherwise qualitative aspects of impact.

Quantifying impact allows it to be aggregated, enabling investors to track the impact performance of their funds and portfolios. However, translating qualitative descriptions of impact to a numerical data set risks losing nuanced information, which could lead to oversimplified and inaccurate interpretations. Quantified data should therefore complement qualitative descriptions, not replace them entirely. Furthermore, investors must have the ability to dig behind headline numbers or ratings to understand the methodology and interrogate the granular data.

3. Companies were reluctant to engage, but ultimately were pleased that they did: The majority of companies that trialled our Impact Benchmarking Tool reported that it provided valuable insights on how to manage their negative impacts internally, and communicate positive ones externally. However, that value only became clear after using the tool, when the analysis and visualizations of their data were available, and they could use the Future-Fit methodology to plan a path to improvement.

Before starting to use the tool, many companies were wary of taking on any new resource-requiring task, especially one that included disclosing information on their risks of negative impact – something most businesses aren’t eager to emphasize. A key motivating factor for many was that the benchmarking process improved their ability to communicate their value to investors, and to explain how they were addressing areas of risk – ultimately increasing their access to capital and lowering its cost.

4. Investors – and in particular, groups of investors – hold the keys to change: A tool like this could revolutionize the impact investment landscape, making it possible to mobilize capital to accelerate the solutions with the greatest impact, and to incentivize companies to improve their performance as a result. With companies understandably reluctant to take on a new approach to reporting, investors who will benefit from the data hold the key to persuading companies to start – and when they do, companies will reap the benefits of greater insights into managing and communicating their impact. If multiple investors are able to pool their data needs together or consolidate their data requests into a single reporting activity for companies, this would have huge benefits for fundraising companies and grant applicants.

Future-Fit and Shell Foundation plan to continue developing this approach, making the Impact Benchmarking Tool broadly available in the future. We would love to hear from readers about any interest in using the tool, or suggestions on key considerations we should consider in its rollout. Please reach out to info@futurefitbusiness.org if you’d like to learn more.

 

Kevin Horgan is the Impact Valuation Lead, Geoff Kendall is the CEO and co-founder, and Joanna Robertson worked as Communications Coordinator at Future-Fit Foundation.

 

Photo credit: RF._.studio via Pexels.

 


 

 

Categories
Entrepreneurship, Environment, Impact Assessment
Tags
environmental impact, ESG investing, Impact Assessment, impact investing, measurement, SDGs, small business, SMEs, social enterprise, social impact