Monitoring the Path to a Mainstream Impact Economy
How can we assess the current state of the emerging impact economy and keep track of its progress?
What are the key stakeholder groups that participate in building the impact economy? How might we evaluate each stakeholder’s level of engagement?
In late 2018 at the Jindal Centre for Social Innovation + Entrepreneurship, in partnership with the Global Steering Group (GSG) on Impact Investing, we started the process to understand and assess key stakeholder groups. The goal was to explore if we could measure stakeholder engagement levels and how they changed over time.
In this step, we will share an overview of our initial findings and a discussion of each key stakeholder group. If you wish to go deeper, we have provided a database with additional information in the resources below.
The first stakeholder group is institutional investors. This group is crucially important, especially when you consider that pension funds are the second largest group of investors in the world, with more than USD 41 trillion under management. Along with insurance companies, sovereign wealth funds, and banks, they are undoubtedly an important stakeholder group. However, while they have started to respond to the shift in values held by many of their clients and savers, it seems that government regulations will be required to get them fully engaged. Our research methodology here included the 100 most significant pension funds based on total assets, the 50 largest insurance companies, the 20 most significant sovereign wealth funds, and the five largest university endowments. The results highlight the high potential of this group and the apparent change in attitude towards responsible and sustainable investment allocation of portfolios. However, it is still very far from the level required to scale the impact investing industry.
The second category covers foundation and philanthropy -a sector with asset size strongly dominated by the United States of America. But how do you define a foundation? Currently, there is no globally accepted definition. Lacking a clear definition makes it difficult to understand this stakeholder group’s progress and increases the moral hazard of ‘impact washing.’ In our research methodology, we included a total of 100 large foundations from all around the world. The list consisted of the USA’s 50 most significant foundations based on total asset size, the eight largest foundations in the United Kingdom, and 42 foundations in other prominent economies. Again, the results positively show that leading foundations have started to make longer-term grants, allocate part of their endowments to impact investing, and focus on outcomes rather than activities (for example, the Ford Foundation recently decided to allocate USD 1 billion to impact investing). Foundations have the potential to lead the shift toward measuring outcomes. They are critical players in the creation and development of outcome funds and social impact bonds (SIBs, discussed during week 3). However, we need globally accepted definitions and other international standards to access this stakeholder group better.
Entrepreneurs are the third group of stakeholders that we analyzed. Millennials are one of the main reasons why social entrepreneurship and impact investing are catching fire and impact entrepreneurs are essential to the impact investing industry. They are proving how impact and financial outcomes can be achieved together. But not only. They are also the ones attracting new investors to enter the market. Due to the difficulty of defining an impact startup, this group was the most challenging group to assess. We decided to analyze the global entrepreneurship activity rather than a selection of impact startups. We used the 2015 Global Entrepreneurship Monitor (GEM) report on Social Entrepreneurship, which assessed social entrepreneur’s commitment to value creation across 24 economies. Impact entrepreneurs have a critical role to play. With business models directly linked to the creation of positive impact, the more successful the business is, the more impact it generates. To increase the adoption of such impact business models at scale, governments will have to create more incentives (such as tax reductions or supportive regulations).
The fourth group includes the world’s largest corporations. Few believe big businesses will lead the impact revolution. However, they still have an essential role to play. Big companies typically follow consumer trends and respond to stakeholders’ pressure. For this reason, we realized that consumers are a crucial stakeholder as well, as they have a significant role to play as they purchase products and services from brands that align with their social and environmental values. Some prominent corporations have started integrating impact and believe it can create a compelling and sustainable competitive advantage. For our research, we scrutinized the top 100 largest companies globally (from the Fortune Global 500 Corporations list). The results seem to repeat themselves. Most corporations do provide recent sustainability reports and measure their social and/or environmental impact. However, the current lack of robust impact measurement standards cannot prevent ‘impact washing’. It is easy for companies to highlight only what they do and not what they could do. A clear example is that only 2.4% of the Fortune Global 500 Corporations have a women CEO. Hence, there is still a large room for improvement.
The fifth and last stakeholder group covers governments. Governments play a crucial role in accelerating the growth of the impact investing industry. Governments have the power to create new regulations and to change the existing system. They help to incentivize the supply of impact capital and to enhance the demand for it. In our study, we have had a look at the 30 GSG partner countries. The results show that governments have started to use outcome-based approaches, adopt specific legal forms for social enterprises, and deploy professionally run outcome funds. However, systemic changes take time, and governments move slowly.
In summary, all the stakeholder groups have started to shift towards the new impact economy. However, the lack of globally accepted definitions and standards greatly slows down the transition.
How would you track the progress of this market? What do you think we missed in our approach?
© Jindal Centre for Social Innovation + Entrepreneurship