THE IMPACT REVOLUTION

“Impact measurement is the key to achieving positive impact through business, but it is also the key to unlocking the full potential of philanthropy.”

The rise in social and environmental challenges, together with the growing importance of sustainability, presents major challenges for the current economic system and third-sector organizations. In his book Impact: Reshaping Capitalism to Drive Real Change (Ebury Press, 2020), Sir Ronald Cohen examines and analyzes the main problems arising from social inequality and environmental challenges, and proposes a new system as an alternative to traditional capitalism that seeks to address these issues.

This system places impact at the heart of investment decisions and proposes that, just as risk was incorporated into investment valuation half a century ago, impact should also be introduced as an essential component of investment, creating a three-dimensional framework based on return, risk, and impact. In order to incorporate this element and develop a new model of impact investing, Sir Ronald Cohen emphasizes the need not only to formalize the necessary investment tools, but above all to establish a methodology capable of measuring impact in order to demonstrate the value generated by an investment.

Accordingly, the book identifies Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs) as two of the main mechanisms of impact investing. The former enable entrepreneurs to generate social impact through private investment. SIBs do not function like conventional bonds; instead, they connect three main actors: an outcome payer, a social service provider—usually a civil society organization, although it may also be a private company—and the initial investors. This exchange-based relationship reduces investor risk and makes it possible to transform social initiatives from mere donations into financially sustainable ventures that also generate impact.

“SIBs and DIBs are powerful tools because they reframe social and environmental challenges as investment opportunities. SIBs and DIBs are the purest expression of risk-return-impact in action. Furthermore, they help us understand that impact can be measured and compared across companies, transforming all the decisions related to them.”

For this approach to be effective, it is necessary to shift the focus of philanthropic investment assessment tools away from short-term activities and toward long-term indirect results, or “outcomes.” Impact measurement therefore plays an essential role in this transformation, making clear the need to formalize “impact-weighted accounts” as a single, cross-cutting measurement tool applicable to businesses and investments.

Once this transformation has begun—as is already becoming evident in the current landscape—the growing importance of impact and sustainability will affect all companies and businesses, to the point that those without impact measurement tools will risk losing customers, investors, and even employees.

However, impact measurement will have an especially significant effect on civil society organizations and the way they secure funding. Cohen argues that without measuring impact—without knowing the direct results generated by an organization’s actions and financial resources—it is extremely difficult to obtain the funding necessary to sustain organizations over the long term. As a result, many organizations currently depend on small donations and grants, which limits their ability to take the risks required to develop genuine solutions.

If impact measurement becomes formalized, organizations will be able to use their resources more effectively, attract private-sector investment through SIBs and DIBs, and take the necessary risks to develop truly innovative mechanisms capable of addressing today’s challenges.

In conclusion, the future lies in impact investing. This model depends on effective impact measurement and is driven by new forms of investment such as SIBs and DIBs, which have the potential to transform society and provide solutions to some of the most pressing challenges of our time.