What is impact monetisation? Why is it important? What are the challenges?
An ‘impact’ is the net effect of a business on all of its stakeholders. It’s the difference between an outcome when a company exists and an outcome when it doesn’t exist. For example, let’s consider an enterprise which provides educational software to schools in Tanzania. This enterprise’s impact on a student could be measured as the difference between the test score of that student without the educational software versus when the software is available. As shown in the example, impact can be measured in many ways such as difference in test score. However, specific metrics like this are not very useful when we are trying to compare the impact of companies in different sectors. For instance, using the metric ‘improved test score’ to compare impact with another company, like one that recycles plastic, is not going to produce any meaningful results. This is one of the principle problems that impact monetisation aims to solve.
Impact monetisation involves transforming social or environmental impact into monetary terms. This leads to the creation of a standardised metric that we can use to easily draw comparisons between impacts in different sectors. In addition, monetary values for impact are financially compatible with business accounting methods. This enables the positive and negative externalities of businesses to be factored into various valuation techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR). Not only is this useful for the companies themselves to understand how their firm contributes in the social and environmental realm, but it is also an extremely important factor for investors to consider when making decisions. Moreover, the inclusion of a monetary impact value in well-established business accounting methods is hugely convenient, allowing for widespread adoption. Overall, impact monetisation is a highly valuable tool that we can use to allocate capital more efficiently.
Despite its obvious benefits, impact monetisation has a few understated challenges that threaten its potential. The first is linked to incentives. ‘Impact enterprises’, and other companies who truly care about making their operations sustainable, do have an inventive to create a monetary value for impact in order to better achieve their goals. However, there are a significant number of firms who do not have this incentive. In fact, their incentive may be to discourage the creation of this metric as it could benefit them to disregard social and environmental factors. Furthermore, although money is a very easy comparison measure that most people find intuitive, it’s not necessarily the best form of comparison for impact. It may not even be the most intuitive either. For example, as an investor it’s difficult to judge whether a project providing £10 million of social value to school children in India is better/worse than a project creating a social value of £15 by reducing carbon emissions in the USA. In these kinds of comparisons, it may be more useful to look at the actual quantitative data for each of these projects to make a more meaningful judgement because the use of the monetary impact value alone seems to oversimplify the outcomes. Moreover, the marginal utility of money varies significantly across countries (marginal utility is the benefit gained from receiving an additional dollar). For instance, the marginal utility from a £1000 benefit to a poor farmer in Mozambique is certainly going to be much larger than a £1000 benefit to a middle class homeowner in the UK. Many impact monetisation techniques don’t seem to capture this difference, but it’s an important consideration to make. Lastly, creating monetary values for impact is a highly subjective process than can significantly vary from person to person. If two different analysts calculate two very different values for impact for the same company, then how reliable and accurate is that value? Translating quantitative impact measurements into a financial term is currently an imperfect process that yields questionable results and due to the incentives mentioned earlier, these results can easily easily be skewed.
As a whole, impact monetisation has the potential to simplify the way in which businesses can insert social and environmental effects into their calculations. These calculations will better inform investors and consumers about the true value of the business to all of its stakeholders, not just those that benefit the firm. Although the advantages are very intuitive and easy to understand, it’s important to consider the drawbacks as they are often overlooked and they provide essential considerations we must make when interpreting monetary impact terms.
https://yanalytics.org/research-insights/evidence-based-impact https://idealab.hbr.org/groups/managing-impact/forum/topic/impact-monetization-1- introduction/ https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wpcontent/uploads/IMP_Impact-monetisation-discussion-document.pdf https://www.youtube.com/watch?v=EcXMzkRLB3M