Founder and CEO of ImpactableX Analytics speaks on how social entrepreneurs could scale their businesses via meaningful data and impact research
The KPMG’s latest report uncovered a monumental shift in the number of companies reporting on sustainability, particularly in recent years. This dramatic change is driven by increasing recognition of the Environmental, Social and Governance (ESG) framework as a valid measure of the long-term health of companies. Although the standards for ESG analysis need to be much more robust and consistent, a global investment push for more metric disclosures regarding climate change, diversity and justice is a positive trend.
Founder and CEO of ImpactableX Analytics, Catherine Griffin, believes incorporating impact measurement practices are beneficial not only for later-stage startups or big corporations but for early-stage startups and private companies as well. We sat down with Catherine to learn more on how to translate social and environmental impact into financial growth and engage investors to drive more conscious capital.
Catherine, what does ‘impact’ mean for you? How would you define this term?
Broadly, social impact is about how our vulnerable populations with constrained resources benefited positively, by companies’ or organizations’ work.
When it comes to measuring impact, we have a broader theory that drives our methodology and applies more specifically to the startup space. When entrepreneurs solve massive problems, they create massive value. And as entrepreneurs, their job is to capture some portion of that value and generate revenue from the value they create. But quite often, their revenue model, what they can monetize, doesn't fully capture the full value that their company creates.
For example, each Tesla car is, at least in theory, replacing another car generating carbon emission. And so by essentially preventing those emissions from being released into the atmosphere, they are generating value for the company and the rest of us. And that value is not captured in the sale of a Tesla.
So, we think about impact as unmagnetized external value, whether in terms of costs saved or new value created by a company that's not necessarily reflected in its revenue.
What are the main challenges of measuring social and environmental impact?
This space is still very much emerging. We have the United Nations Sustainable Development Goals, guidelines from the Impact Management Project for various dimensions of impact to consider, IRIS+ and their core metrics, which sort of standardized the metrics to be measured. But how to apply these various frameworks remains unclear for both investors and founders alike.
And for the early-stage space, I think there's even a degree of added uncertainty because, quite often, companies need a forward-looking projection since they have little or no sales and quite a lot of uncertainty. Even when a founder is able to do these things, there's still a lack of content to engage investors.
Which impact metrics do you use in your impact valuation analysis?
We don't have standard impact metrics that we assign. Sometimes impact funds collect certain metrics across all of their portfolio companies, in which case we will apply an assessment of those metrics to a particular company we're assessing. Still, in all cases, we start with a company's work on the ground and define their metrics from there.
For example, I've just finished working with a company that provides access to clean water in India's urban slums. They essentially have a water ATM, so when we work with them, we first look at a number of people who can access clean water who wouldn't otherwise in the absence of this company's water ATMs. So in all cases, we talk about change to a baseline: what the current situation is, how many people currently have access to clean water or had access to clean water prior to a company's intervention. And then, we quantify the change that a company can create to that baseline.
We looked at the reduced waterborne diseases that are a consequence of now having access to clean water. We also looked at things like the number of women entrepreneurs. This company essentially licenses out ownership of their water ATMs, enabling entrepreneurship and reduced unemployment, which is a huge issue in India's areas.
How do you translate this impact into financial metrics; in other words, money?
There are three components to our methodology. And valuation is the third of the three components. First, we start with a definition, which is where we define a company's key impact metrics. Then, we break down a company's business model and identify a company's core unit of growth and quantify the impact on a unit level. Once we have that, we extrapolate this based on the number of units a company expects to sell over a given term, typically, five years.
And then, in the third and final component, we assign an economic value to impact. This is where we look at that external value creation, at costs avoided in terms of environmental costs, healthcare costs or labor costs, all kinds of different ways of evaluating impact value. And we look at new, added value created. So this might be an increase in wages or results from reduced inefficiency, for example.
In the world of startups, incorporating policies and practices for environmental, social, and governance issues is often seen as something for later-stage startups or big corporations. You challenge that notion. Why is it crucial to integrate ESG from the beginning?
In order to engage stakeholders and investors, you need to be able to point to something, you need to be able to say ‘this is how much carbon we're able to abate,’ or ‘as a result of delivering this telemedicine in rural areas in the US, these many new women are able to access ultrasound specialists, and this is the number of diseases or congenital disabilities that we can potentially prevent.’
Impact data speaks directly to their core value proposition. The impact is not a sort of extracurricular activity after the fact; it's often baked into companies' products and services. And so, by having those data and analytics, even when just driven by initial assumptions at an early stage, you're able to articulate that value proposition so much more clearly.
The companies that are able to pitch investors with really rigorously developed impact data are the ones that are going to be able to differentiate and really enroll investors and stakeholders much more powerfully.
I think aligning with the SDGs is a perfect place to start. It's really easy to pull up the SDGs, pull up the targets and indicators, and identify which ones your innovation can contribute to. But the SDGs don't necessarily provide practical guidance for founders; it's really about alignment with your specific company metrics, and how much of each can you generate. It's really putting yourself in general buckets, which is absolutely meaningful as a starting point.
2020 has seen extraordinary volatility and uncertainty – from COVID-19 to social justice protests. Do you see any positive changes in the investor community toward getting more insights on the companies' true impact in which they place their trust and their money?
I think with everything going on in the world, the importance of impact has really become clear. I've been contacted by several new funds to help them really think through their change and impact mandate theory. It's really fascinating. And I've also seen more high net worth individuals allocating their wealth for impact and demanding more transparency around the impact creation of that wealth. So it's been quite a catalytic year for the impact space.
I think it's actually accelerated the space quite a bit, from my perspective, and unlocked more capital. We've seen funds expand by up to 400% to meet the economic needs of people who have been impacted by COVID-19, or to accelerate the development of solutions to address COVID-19.
I have seen several companies pivot to apply their innovations to meet the needs of the moment, which affects their impact analytics, making them prioritize their impact data collection and measurement and modeling practices to really focus on execution.
So I've had quite a few different experiences this year. It's certainly been tumultuous, but I think, generally, the space is trending in the right direction.
Suppose I’ve just launched my social enterprise. Could you recommend some free tools for the measurement of social impact? Where would a founder start?
I think the first step is to define your key metrics as best as you can, which SDGs you align with, which targets and indicators you align with. You can reference IRIS+ and their core metric base. You can look at the five dimensions of impact provided by the Impact Management Project. And from there, start to think about who you're impacting and how many people you're impacting, and in what ways. And if you can think through to what degree you’ll make an impact, at least initially, that is really fantastic as well.
I would also suggest doing some baseline research. So, if you're talking about reducing plastics in the ocean, you should know how many plastics are currently in the ocean. Just really understanding your problem from an impact perspective is a great place to start. It's like a map, how to set up business operations, basically, answer specific questions. It's beneficial and free. If you start something from scratch here, it could work.