What is impact and how is it created?

A definition of impact

The Impact Management Project (IMP) (now Impact Frontiers) brought several stakeholders together to reach consensus on a definition of impact. We adopt that definition here:

Impact is a change in an outcome caused by an organisation. An impact can be positive or negative, intended or unintended. An outcome is the level of wellbeing experienced by a group of people, or the condition of the natural environment, as a result of an event or action.

There are two points worth pulling out from this definition:

Negative impact is possible

While impact-minded investors hope to create positive impact, it's possible to create negative impact both intentionally and unintentionally (eg increase emissions, erosions of user privacy). This means investors have to be mindful of their actions, and actively manage impact to reduce negative impacts and increase positive impact. This is particularly important in a venture context, where there is a lot of uncertainty about business model and product evolution over time, and how users will engage with a given product.

Focus on outcomes

Impact is about outcomes on people and/or the planet. We can only be confident that impact is occurring when we can demonstrate the outcomes that are being generated for people and/or planet eg 'we've improved X number of people's lives in Y way' (see more on how to measure and managing impact in 'managing impact investments'). This is important because the history of social policy, international development and the third sector are littered with examples of unintended consequences arising from well-intentioned actions – from insecticide-treated malaria nets being used as fishing tools inadvertently polluting the ocean, to crime prevention programmes increasing the likelihood of offending. We talk more about what it takes to create impact in the 'investing in impactful business models' section.

There are several outcomes that can be targeted by businesses looking to have an impact. Two comprehensive lists are:

  1. Big Society Capital and Good Finance's Outcome Matrix

It's important to be critical when choosing a particular framework, and ensure it is fit for purpose. For example, while many default to using the SDGs, we must be mindful that they originate from a sustainable development context and were focused on policymakers, and therefore are grounded in that reality. It might not be relevant for a fintech-focused venture fund in North America. There are many outcomes that are not captured, or insufficiently captured, by the SDGs.

Even if one does find a framework that fits, it is not necessary to use the entire framework if it is not valuable to do so. The SDG indicators and targets is another good example. Again, these were developed for the policy context, and therefore often do not translate well to early-stage companies. There is no need to use the indicators and targets if this is the case (even if the fund can be aligned with SDGs conceptually), and a more fit-for-purpose measurement framework may have to be chosen or developed.

How is impact created in a business setting?

There are three sources of impact within a company:

  1. Impactful business models – ie creating impact through selling impactful products/services

  2. Impactful operations – ie operational decisions made across the value chain that affect impact (analogous to ESG) and are applicable to any company, regardless of whether its business model is explicitly targeting impact

  3. Impactful profits – ie the traditional model of creating impact for a firm: through philanthropy, CSR or cross-subsidising models

Each of these approaches can enhance impact (ie each can create a positive and/or negative change in outcomes for people and/or planet), and so a good way for stakeholders to understand the complete impact of a business is to ask: what impact is the startup creating across these three levers?

Pathways to impact

For a startup's products or services, there are two ways that impact is created: direct or indirect impact.

Direct impact – Impact is created as a direct consequence of engaging with a product or service.  Wagestream is a good example here, engaging with its platform around financial wellbeing creates impact with each transaction. Similarly, HIVED is building a platform for emissions-free delivery. With each transaction, fewer emissions are put out into the world.

Indirect impact – impact is enabled further down the value chain, often with a time lag.SOPHiA GENETICS is one example. As a B2B model, impact isn’t created directly with each transaction, but the improved analysis and treatment-related insights the platform generates, allow medical institutions to enhance their impact. Similarly, CarbonCure manufactures a technology for the concrete industry that introduces recycled CO₂ into fresh concrete to reduce its carbon footprint, without compromising performance. Each transaction does not directly create impact, but enables others to reduce their environmental footprint. With these models, impact is sometimes harder to guarantee and/or quantify. It's important to validate whether any claims of impact here are genuine, to avoid impact washing.

Now that we understand what impact is, the next question that often comes up is: what is impact investing?

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