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Impact investment


Impact investment is a force for good, but a better way is needed to assess its value

Published 24 September 2021 in Magazine • 11 min read

Negative screening is well established among ESG and other impact investors, involving the avoidance of downside exposures, but the next generation will demand far more positive results. 


The dawn of the much-heralded 2020s have seen many business-as-usual assumptions overturned. Among them are the notions that globalization would continue on a predicable course, that the United States would remain a stable and unchallenged regulator of global markets, and that the climate and biodiversity emergencies would continue to lurk in the footnotes of corporate annual accounts.  

And then there were the assumptions about pandemics — a set of manageable risks, dealt with by experts. The global and continuing impact of COVID-19 and its variants signal the increasing risks from systemic challenges that were once seen as the preserve of governments. 

Now that governments, to whatever effect, have been forced to find and spend trillions of dollars, there has been a growing concern that if one virus can wreak such havoc on the global economy, the bill in terms of our destabilized climate and ecosystems will be off the currently imaginable scale. 

Such concerns were fueled further by the “Code Red” warnings of the latest report from the International Panel of Climate Change, published in August. It cautions that global warming is dangerously close to spinning out of control, guaranteeing climate disruptions for decades, if not centuries, to come. 

Despite the recent explosion of interest in “impact”, as in impact investment, and ESG flagging the environmental, social and governance aspects of markets, there is a factor that is often overlooked: impact valuation. 

To give some sense of how this field of economic and financial valuation of environmental and social impacts is evolving, we will focus on recent work at Novartis, the Swiss health care company. One author of this article has led the impact valuation (IV) work there for several years, while the other chairs the Novartis Impact Valuation Advisory Council (IVAC), first formed in 2018. 

Here are a number of questions that we have frequently had to answer along the way.

“There is no point investing in carbon-offset schemes based on forests that then succumb to climate-driven forest fires ”

Why is impact valuation in the news? 

Strictly speaking, the term itself is not much in the news, but the issue is, as our systemic crises are increasingly expressed in terms of impacts valued in hundreds of millions, billions and now even trillions of dollars. Indeed, books are being published tackling the thorny question of how to spend a trillion dollars to the best effect — including one with more or less exactly that title by Rowan Hooper, editor of New Scientist. 

As the failure of the ESG and wider sustainability movements to drive truly systemic change has demonstrated, the relevant considerations are not yet built into most people’s economics — and certainly not into the strategies and business models of most major companies. If that is to happen, then we must come up the learning curve at an almost unparalleled speed. It is no longer enough for business leaders to talk in terms of “stakeholder capitalism” if the net effect of their decisions and activities involves undermining the livelihoods of billions of people, now and in the future. 

Another book that has been attracting growing attention in this space is by the investor Sir Ronald Cohen — and it is called The Impact Revolution. He argues that “the world must change, but we cannot change it by throwing money at old ideas that no longer work. We must adjust our approach. To change the world, we must change how we do business, starting with where and how we invest our money.” 

He shows how key elements of the private sector are now moving from being a largely unintentional driver of pollution and inequality to an increasingly intentional force for good, helping to distribute opportunity more fairly and bringing solutions to our great social and environmental challenges.  

The size of the impact investment market has boomed, with one recent survey by the Global Impact Investment Network concluding that the global impact investing market size is $715bn and is expanding rapidly. Breaking its decade long record, the 2020 impact investor survey represented the highest number of respondents in the last 10 years — 294 global impact investors with a collective $404bn worth of impact investing assets under management. 

Generation Impact, edited by Jeremy Nicholls and Adam Richards, has a more down-to-earth feel as it addresses many, if not all, facets of managing, investing, assuring, policy making and networking for impact. But one of the trickiest questions that must be answered as all of this embeds itself in business thinking, agendas, strategies and business models is how to make business sense of impact — in short, how to put a meaningful value on different forms of impact. 

For impact to drive real change, rather than new rounds of box-ticking, green washing, and now “impact washing”, we need a parallel revolution in impact valuation. This is something that Novartis has been working on for a while, and with which the authors closely involved. The first published evidence came in 2019, in the form of several pages up front in the company’s annual report. 

To change the world, we must change how we do business, starting with where and how we invest our money

How do stakeholders view IV? 

Shareholders are only just beginning to engage with this agenda, so what about the wider world of external stakeholders? 

For anyone with a reasonably long memory, impact used to be a bad thing, something to be avoided. One of us (John) began his working life developing environmental and social impact assessments for development banks, designed to identify risks to – not opportunities for – people, planet and prosperity. Indeed, those projects were part of the genesis of his triple bottom line concept, which has spread around the world, even if in 2018 he did the first-ever “product recall” of a management concept, this one via Harvard Business Review. 

Most stakeholders are still happy to accept broad, generalized valuations and commitments from companies, assuming good will. But those who understand the challenges tend to be more skeptical and ask for what has actually improved for key stakeholders. Then there is the question of the comparability of different forms of impact. Can there ever be a single currency that applies to all impacts? Despite this and other criticism, stakeholders react positively when companies attempt to express their impact on them – instead of merely reciting sales and employee numbers.  

More thoughtful commentators acknowledge that if commitments like the UN Sustainable Development Goals are going to attract real, sustained investment, our ability to attach numbers, both hard and soft, will be make-or-break. Unlike many traditional philanthropists, leading impact investors want to see real ESG bangs for their bucks. 

The financial markets are increasingly interested in new funding instruments, for example bonds that are variously tagged with the words such as: climate, green, impact, social or sustainability. This is a trend that is increasingly impacting the banking sector and also surfacing in the world of big-spending sovereign wealth funds.  

As far as governments are concerned, related issues are now beginning to push on the agendas of major global events like those of the G7, G20 and COP26 climate summits. But this is an area where, paradoxically, the financial markets seem to be somewhat ahead of governments. This must change — and no doubt will. 

UN sustainable goals

What are some key challenges for reporting? 

Several trends are affecting corporate accounting and reporting at the same time. The amount of energy invested by organizations such as the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Standards Accounting Board (SASB, now the Value Reporting Foundation) has certainly moved the needle — but we are nowhere near the level of precision with ESG and wider sustainability that we see in relation to the standard single-bottom line financial reporting favored by economists like Milton Friedman.  

It is telling that his name is still more widely known than that of the more recent economists who have been attracting growing attention, among them Kate Raworth and Mariana Mazzucato. While it is encouraging that the International Accounting Standards Board launched a working group on sustainability standards in March this year, much work still needs to be done to ensure that economics, the master discipline of capitalism, is genuinely fit for the future.  

Market expectations are now shifting. Negative screening is well established among ESG and other impact investors, involving the avoidance of downside exposures. But the next generation of people investing their money will likely ask more of their asset managers. They will want their money to be a force for good, for progress in terms of the UN’s SDG targets. In a nutshell, they will want to make a positive impact. 

Key questions will include the following: how to measure both negative and positive impact; how to work out where the half-way point is, often expressed in terms of net positive or net zero; and how to put a valuation both on the components of such balancing acts and on the overall outcome. Another issue, and one that can only become more pressing over time, is to decide on the relevant timescales. There is no point, for example, investing in carbon-offset schemes based on forests that then succumb to climate-driven forest fires, as happened on a considerable scale in the US and Europe this year. 

Corporate reporting will also have to lean into the future, something that has often been actively discouraged in the past. Rather than providing retrospective, after-the-fact information, we need to work out how to provide forward-looking reporting. 

Nor is this the end of the story. Rather than simply accounting, valuing and reporting on the net value created, companies will need to evolve the business models needed to create increasing volumes of positive impact. Making public commitments to reduce climate-related emissions over timescales that guarantee that those promising will be retired or even dead is no solution.  

And where the markets are not ready for change in the necessary scale and at the necessary pace, business leaders will need to join lobbying groups pushing for the relevant changes in market rules and incentives, again both positive (and in subsidies) and negative (as in fines and other penalties). 

Between 2018 and 2020, European asset managers were forced to strip the ESG label off an astounding $2 trillion in allocations, as stricter rules were introduced

How urgent is the need for standardization? 

It’s critical, a make-or-break issue. The mainstreaming of concepts like sustainability and ESG have stretched definitions to the limit. Between 2018 and 2020, for example, European asset managers were forced to strip the ESG label off an astounding $2 trillion in allocations, as stricter rules were introduced. And one reason for the recall of the triple bottom line was the clear lack of binding, market-determined standards. 

We warmly welcome the work of business coalitions like the World Business Council for Sustainable Development and the World Economic Forum, initiatives like the Impact Management Project and Value Balancing Alliance, and investor platforms like the GIIN and Toniic in this space. And it is also good to see some of the major rating agencies and consultancy firms moving strongly into this area. 

What’s the Value Balancing Alliance? 

Novartis participates in a number of these initiatives and platforms, but lays particular store by its involvement in the Value Balancing Alliance. Alongside companies like BASF, Bosch, Deutsche Bank, LafargeHolcim, SAP and SK Group, Novartis was one of the founders of the VBA, a non-profit organization rethinking the value contribution of business to society, the economy and the environment — and developing a standard for impact measurement and valuation.   

The VBA is supported by Deloitte, EY, KPMG, PwC, surrounded by the Organization for Economic Co-operation and Development, European Union commission, leading universities and key stakeholders from government, civil society and standard-setting organizations. It is committed to creating a standard for measuring, valuing and disclosing the environmental, human, social and economic value companies provide to society. More specifically, it aims to: 

  • Standardize calculations, ensure comparability of methods, pilot in management accounting, and make outcomes publicly available. 
  • Increase transparency about business decisions, creation and loss of value. 
  • Work with external bodies to develop and extend accounting frameworks. 
  • Shift the priority from profit maximization to optimizing value creation. 

The value of the Alliance was well summed up by Patrice Matchaba, now Head of US Corporate Responsibility at Novartis, President of the Novartis US Foundation and, initially, co-chair of the Value Balancing Alliance. “The Value Balancing Alliance aims to standardize impact valuation,” he said. “We believe standardization is required in order to drive broader adoption and will ultimately serve stakeholders – including shareholders and governments – helping to effectively compare non-financial performance among companies.” 

Novartis, the Swiss health care company
Positive impact: Novartis, the Swiss health care company

Where is Novartis headed? 

Intriguingly, the impact valuation change agenda in Novartis started under the CFO umbrella. The aim is three-fold. First, to engage differently and more deeply with a broad range of stakeholders. Secondly, to enhance decision-making with additional impact-relevant quantitative insights and forward-looking impact statements. And thirdly, to significantly increase the transparency of the company’s non-financial disclosures, to build trust across all societies it operates in.  

One small — but significant step — has been in the terms Novartis itself uses in this area. Originally, its version of the triple bottom line involved talking about Financial, Environmental and Social (or FES) impact valuation. Now the company talks in terms of SEE, or Social, Environmental and Economic impact valuation. The reason: the evidence now shows that the strongest impact Novartis has — and can have — is in the “S” dimension of the value equation.  

Its Impact Valuation Advisory Council was founded in 2018. One key role has been to convene and input to three annual IVAC meetings to date. The first was internal, involving some 30 Novartis people. The second attracted more than 100 participants, including a growing number of speakers from outside. And the third event attracted more than 1,000 participants, this time with a very considerable number of external participants. 

If the first event asked whether the impact valuation team was onto something significant (the conclusion being yes), the second aimed to present and test an impact roadmap — drawing on a wide range of functions across the company and pulling in a range of external speakers, including professor Robert G. Eccles on the subject of his recent Harvard Business Review article on “the Investor Revolution”. The third summit included a virtual exhibition for the first time, featured speakers from academia, governments, investors, institutions, and the private sector, and was open to the wider world. 

The 2021 Co-Creating Impact Summit will focus on the growing use of impact valuation methods and intelligence by investors and by governments — including the role of the recently launched G7 Impact Taskforce. Our assumption is that the global impact will have further sensitized key plays to the growing importance both of impact in general and of impact valuation in particular. 

The one-day virtual event will explore ways of reimagining and resetting capitalism, including impact-based decision-making, impact investing, the social impact of access to health care, the integration of financial and sustainability reporting, and the crucial role of leadership in making all of this happen.  

Among others, we will hear from Sir Ronald Cohen, Chair of the Global Steering Group for Impact Investment, and Colin Mayer, Peter Moores Professor of Management Studies, Saïd Business School, University of Oxford.  


John Elkington

John Elkington has been described as “the godfather of sustainability”. He has co-founded four companies, including Volans, where he is described as Chairman and Chief Pollinator. He is the author of 20 books including Green Swans: The Coming Boom in Regenerative Capitalism. He has served as a member of more than 70 boards and advisory boards.


Sonja Haut

Sonja Haut has worked on impact valuation for Novartis since October 2015. Since May 2019 she has headed the Strategic Measurement and Materiality team in Global Health and Corporate Responsibility, now in Group Financial Reporting and Accounting. She is the driving force behind Novartis’s engagement in the Value Balancing Alliance and represents Novartis in the Impact Valuation Roundtable. She holds an MBA degree from IMD.


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