We’ve been measuring and valuing negative externalities for a long time, with governments using taxes to realign incentives and costs. Now it’s time to measure and value positive externalities as well.
Charging for negative externalities is sometimes referred to as a “Pigouvian tax.” This tax is placed on the profit-making entities for ‘disrupting’ social values through their endeavors. (That’s what the Kyoto Protocol was supposed to be – an international treaty with binding targets, penalties and incentives for countries to reduce greenhouse gas emissions.)
By the same token, shouldn’t there be Pigouvian rewards for businesses that create positive externalities, such as cleaner water, reduced maternal mortality or increased graduation rates?
The problem in both cases arises from imperfect knowledge, which does not allow for us (on the whole) to set a price for the reward or tax. Regardless, if we were to strip out the externalities and label them categorically as ‘social return’, the equation boils down quite simply:
- “Dollars in” yields “Financial Return”
Adding in the social component, we get an equation like this:
- “Dollars in” yields “Financial Return + Social Return”
The key conversations in the social impact world right now regarding whether or not the ‘social return’ in the second equation causes the ‘financial return’ to be less than market returns, have no impact on returns, or even has the potential to generate above-market returns. The market calls this concessionary, non-concessionary or even “alpha” impact investing. The nuances are well explained by Paul Brest of Stanford Law School in this SSIR post. We are tracking the flow of capital to such impact ventures and fundsImpactSpace.org, the open impact database that I co-founded, is tracking .
That’s great. Now let’s put that aside.
The question still remains – what do we do with this ‘social return’ piece in equation No. 2. At social impact conferences around the world, the topic of “how do we measure social impact” always comes up in numerous forums and sessions. As an indicator, the sheer number of social impact measurement tools validates that questions are being asked and work is being done.
We might be able to get to an answer of less than, at, or above market rate returns if we could quantify what this social return piece is. Investors can feel more confident in getting less than market rate financial returns if the social return adds up. That’s exactly what interests us at ImpactSpace and at our sister site, Impact IQ, which provides original reporting and analysis for impact investors and entrepreneurs.
The Foundation Center and TRASI (Tools and Resources for Assessing Social Impact) – have put together a very good list of social impact measurement tools in the market-place for investors, philanthropists, and organizations to use.
But we still need to see financial and social return in the same frame.
That leads us to aggregation. The fragmented data points in the social impact world have started to come together (including through ImpactSpace). We’re working on a bigger project to aggregate existing social impact metrics. Our goal is to rationalize the various impact schemas into a common set of easily understood metrics that can accompany financial metrics across the reporting landscape.
If you’re interested in working with us to build a collaborative solution, we’re all for it! Contact us at [email protected]
(Ravi Kurani is the co-founder of ImpactSpace, the open impact database and a project of Impact IQ Inc. This article was originally published by Markets for Good.)