How to keep track of impact
The 5 dimensions of impact explained
These days, it seems as though everyone is claiming that they’re making a positive impact on the planet. In fact, it’s become such a buzzword that it’s often hard to know what to believe. To make sure that you’re investing in companies that are truly doing their bit for the planet and its people, you’ll need to be wary of impact washing.
Fortunately, you can measure the true value of a fund by using the IMP’s ‘five dimensions’ framework. Read on to find out what this is and how you can use it to spot instances of impact washing.
What is impact washing?
To start, let’s define what impact washing actually is. Impact washing is specific to the investment world: it’s when fund managers or bond issuers claim that an investment’s impact on the environment or on society is better than it is. Unlike greenwashing, whereby a business claims that its practices or products are more sustainable than they are, impact washing is done to entice people into making specific investment decisions. It’s usually more difficult to notice than greenwashing, so it can be a real issue for socially and environmentally conscious investors.
When you’re looking at a company’s impact, it’s worth remaining sceptical. Many companies have a financial incentive to appear better than they truly are, so it pays to take note of the five dimensions, which we’ll look at in more detail below.
Impact management and the 5 dimensions
The Impact Management Project (IMP), an industry thought leader in impact investing, has developed the five dimensions of impact: a common framework for impact investors to adopt.
Within each dimension, there are a multitude of measures that can be used and questions that need answering – all of which help to paint a complete picture of a company’s impact on people and on the planet.
Here are the five questions impact companies should be able to answer:
The ‘what’ aspect of the framework seeks to answer the following:
- What is the outcome that the company is contributing to?
- Is it positive or negative (does it pass a nationally or internationally recognised threshold, for example)?
- How important is the outcome to the stakeholders?
Under this framework, an outcome refers to the degree of positive social, environmental or economic change resulting from an action or event. These outcomes can be intentional or unintentional, although investors are usually more interested in assessing intended outcomes. However, businesses should monitor all of the outcomes they’re responsible for – whether intentional or not – so that they can better communicate their impact (in more realistic terms) to investors.
When looking at ‘who,’ the five dimensions framework asks:
- Who is experiencing the outcome?
- How undeserved are they in relation to the outcome?
This dimension helps businesses and investors to ascertain how stakeholders are affected, and how undeserved they are in relation to the social or environmental outcomes of the business.
This means that resources can be allocated to stakeholders who have the biggest needs or who are likely to experience more change as a result of the outcomes. The ‘who’ dimension essentially asks where resources are spent: on the underserved stakeholders or on well-served stakeholders? Investors can get a sense of a company’s impact if they’re sending resources to needier stakeholders.
Stakeholders can include:
- Local communities that are directly or indirectly impacted by a company’s activities
- Suppliers and distributors
- The planet.
‘How much?’ asks: what degree of change has been experienced by those affected? This can refer to people or the planet – or both.
This dimension looks at the scale, depth and duration of the impact, allowing companies and investors to fully understand the extent of the impact experienced by any of the stakeholders listed above. These three elements are defined in the following ways:
- Scale: the number of people experiencing the outcome
- Depth: the degree of change experienced by the stakeholders
- Duration: the time period for which stakeholders experience this.
In an ideal world, businesses would generate positive outcomes that affect huge swathes of people, in deep and meaningful ways, for a long time. But some businesses may prioritise one of these elements over another, while others may see scale, depth and duration as equally important.
The ‘contribution’ pillar of the framework scrutinises a business’ activities in relation to the outcome achieved. It addresses the following questions:
- Did the company’s activities contribute to the overall outcome?
- Without the company’s involvement, would the impact have been better or worse?
This allows businesses and investors to better understand the business’ social or environmental contribution. It encourages stakeholders to assess the real impact and asks them to consider what might have happened without the company’s involvement.
If a business finds that its contribution to the outcome is in fact minimal, it may choose to allocate resources elsewhere; alternatively, it may choose to increase its commitment to an intended outcome.
This dimension also enables businesses to better understand the industries and systems in which they operate, so that they can work towards improving existing systems, rather than tackling isolated aspects of the business that may not have the biggest impact.
‘Risk,’ the final dimension, focuses on whether or not the impact will be different than expected. It asks:
- What risks are businesses and investors likely to face when creating impact?
- How can these risks be evaluated and, where possible, mitigated?
In the same way that risks are incurred when setting financial goals, impact goals come with risks. The ‘risk’ element of the five dimensions addresses this issue, and asks businesses and investors to think about these risks.
There are nine types of impact risks that the IMP outlines:
- Evidence risk: insufficient data exists to know what impact is happening
- External risk: external factors may stop the impact from happening
- Stakeholder participation risk: the expectations or experiences of the stakeholders are misunderstood or not considered
- Drop-off risk: the impact does not endure or the negative impact is not mitigated in the long-term
- Efficiency risk: the impact may have been achievable with fewer resources or at a lower cost
- Execution risk: the impact does not achieve the desired outcome(s) or is not delivered as planned
- Alignment risk: the impact does not fit into the enterprise model
- Endurance risk: the planned activities are not delivered for as long as is required
- Unexpected impact risk: significant positive or negative impacts may be experienced by people or the planet.
The severity of these impact risks is also considered under this dimension. By carrying out a risk assessment in this way, businesses can work towards lessening the likelihood that these things will happen.
Scrutinise the investments closely for impact washing to see whether it’s really as impactful as the marketing suggests. Some companies will do a little in one area without looking at their overall impact. They may slightly improve working conditions for female garment workers while continuing to pollute the planet with toxic water and off-cuts, for example. Think carefully about whether you would consider something ‘impact’ or not. And, if an impact company can’t answer the five questions above, it’s a major red flag.
At CIRCA5000, we complete an in-depth investment process before adding companies to our portfolio. The companies you’ll be invested in as an impact investor are actively contributing to solve at least one of the seventeen Sustainable Development Goals, as outlined by the UN. You can find out more about our portfolio in our fund guide.
The information provided above does not constitute financial advice. You should fully understand the products you intend to invest in before making an investment decision. As with all investing your capital is at risk.