Capitalism must be transformed: Here’s why we need principles for measuring and managing impact
“As it is now, companies are only legally responsible for the financial performance towards investors […] Regulation and legislation should make it mandatory to collect information on impact and finance in one unified report.”
This article was written by journalist Malene Nørby Pedersen for the magazine Impact Insider. It has been adapted for the SVI blog and is republished here with permission.
Social Value International want to transform capitalism to a system where investors and businesses make decisions that optimise the wellbeing of people and planet. The solution, according to CEO Ben Carpenter, is to change the way we account for value. Since 2007 our global network have been developing principles and standards for measuring and managing social value that will lay the ground for better decision-making.
“The way capitalism has developed means that we put profit above everything else and don’t consider the impact we have on people and the environment,” says Ben Carpenter from Social Value International (SVI).
“Costs, price and profit is ultimately what drives our decision making. Impacts on people and environment are secondary and not accounted for in the same way. SVI develops standards together with our members that help transform accounting and therefore decision making, so that social and environmental impacts are recognised, accounted for and where possible integrated with financial value,” says the CEO.
We’ve come a long way according to Ben Carpenter. But to boost the impact revolution, more regulation and a change in mindset are needed, he tells Impact Insider.
Profit thinking must be challenged
Perhaps the impact revolution sounds familiar to you. Earlier, Impact Insider spoke with the Godfather of Impact Investing, Sir Ronald Cohen, who wrote about it in his book Impact – Reshaping Capitalism to Drive Real Change:
“I’m talking about overthrowing the tyranny of profit – a tyranny that has driven us into economies that do more social and environmental damage than even governments are capable of dealing with. By equating impact with the other management mechanisms in investment – risk and return – we overthrow tyranny and ensure that profit thinking does not lead us to extremes,” says Sir Ronald Cohen.
Like Sir Ronald Cohen, CEO Ben Carpenter also believes that capitalism's profit thinking must be challenged.
“We can change the way capitalism exists and how it determines what success looks like. If we don't do that, we will continue to damage the environment and create more social divisions and inequalities," he says.
The key to avoiding just that, according to Ben Carpenter, is the standards and principles that Social Value International is working to spread globally. There are 8 principles with associated standards for social impact measurement and management – with the purpose of giving private and public organisations and companies the framework to make better decisions. Decisions that ultimately have a positive effect on people and the environment.
The principles can be understood as a guide to accountability and decision-making, explains Ben Carpenter. He believes that companies’ and organisations’ decisions about social impact too often are made based on gut feeling and a lack of data. Therefore, SVI's principles are formed to ensure that one's measurement captures all kinds of impact. Not just the positive.
“The principles are about understanding what is changing in people's lives and assessing it from their perspective. You have to be responsive and use that information to drive your decisions," he explains and continues:
“We need to see impact management as an investment instead of a burden and start small. Over time you will collect data, use it for decision-making and see that there are gaps in the data and weaknesses in your approach. That’s where you should look at the SVI standards, as a guide to best practice and improve your measurement and decision-making along the way.”
A small step in the right direction
Ben Carpenter believes that the world is moving in the right direction towards the impact revolution, but he questions if things are moving quickly enough.
He recognizes the rising attention on ‘ESG’ as a good sign as well as the developments by the IFRS - the International Financial Reporting Standards Foundation – to create the International Sustainability Standards Board (ISSB). He also points to the EU's upcoming directive on corporate sustainability reporting (CSRD), which means that several thousand companies will be legally bound to produce sustainability reports. However, more transformation is needed.
"I think these developments do show that societal attitudes are changing. Evidently, investors and regulators are starting to ask for non-financial information. But, it is not enough if we are serious about achieving the sustainable development goals (SDGs). The IFRS creation of the ISSB and the EU’s CSRD will not transform decision-making at the scale and pace that is required to achieve sustainable development,” says Ben Carpenter.
More regulation and a shift in mindset
If we are to reach the point where all organisations are making decisions that optimize impacts for people and planet, there needs to be more regulation and a bigger shift in mindset, believes the CEO.
There is a long way to go, he predicts. Therefore, he sees a necessity for both carrot and stick.
"There are a lot of powers that need to be disrupted in order to transform capitalist structures and make standards for impact measurement and management a norm. We must address power structures and recognize the trade-offs we are making between financial growth and impacts on people and the planet,” says Ben Carpenter.
The result of that change in mindset is a carrot, says Ben Carpenter. Because in the long run, organisations and companies will become more successful if they integrate better measurement of impact, which will lead to better decisions and more value for stakeholders.
Yet the stick of regulation and legislation is also needed to ensure that all organisations and companies adopt social value measurement and optimize impact management.
“To raise the bar for everyone, we need governments to step in and change the rules of the game. Much is currently voluntary, and the legislation must make that mandatory," he says.
Concretely, Ben wants to see that information about impact is fully integrated and equated with the financial information of organisations and companies, such that an assessment of a company's overall success includes its impact on people and the environment.
As it is now, companies are only legally responsible for the financial performance towards investors, he points out. At the same time, they keep the financial performance and impact reports (if they have one) in two separate reports. That makes it difficult to see that companies will consider the information on impact equally with the financial information when making decisions. And therefore, regulation and legislation should make it mandatory to collect information on impact and finance in one unified report.
“Until we have it all integrated and until it has the same level of assurance and audit that financial reports have, I don't think decisions are going to change as much as we would like,” concludes Ben Carpenter.