Impact Assessment: The Innovation Paradigm Shift that is Coming

By: Dariusz Sikora / David Cembrero / Lidia Gryszkiewicz

In the context of business management and economics, innovation has mainly been considered as a source of profit and growth. But innovation can also have a transformative role and recently more and more innovators and entrepreneurs are not only considering the financial returns of their projects, but also the societal impacts that they might bring with them.

The Stanford Graduate School of Business defines social innovation as “a novel solution to a social problem that is more effective, efficient, or sustainable than existing solutions and for which the value created accrues primarily to society as a whole rather than private individuals”(1). Social innovation is more than just new solutions that meet social needs. It is a new paradigm that drives societal transformation and systemic change and this revolution is getting traction worldwide.

Governments around the world are adopting measures that foster social innovation and social entrepreneurship. UK has been one of the forerunners in this respect with some pioneering initiatives such as funding social projects through social impact bonds or with dormant money (from inactive accounts). The European Commission is putting social innovation at the core of its political agenda and countries such as France or Luxembourg are creating frameworks with favourable financial and fiscal conditions for social impact companies. Portugal has recently put in place a €150 million programme, from structural funds, to support initiatives of social innovation and entrepreneurship. But this is not only a European trend, Canada is also working on a Social Innovation and Social Finance Strategy that will develop policy measures to advance social innovation, and many Latin-American countries see great potential in social innovation as a source of growth while reducing social inequality.

International organisations such as the UN and the World Trade Organization, the International Labour Organisation (ILO) or the Inter-American Development Bank (IDB) are carrying out different initiatives to promote practices that support sustainable development.

Corporations such as Unilever, Allianz, or Lafarge are already moving from a traditional corporate social responsibility (CSR) strategy to a more comprehensive approach, integrating social impact in their business models. They have understood that social innovation is an attractive way to drive growth and get financial profits while also generating social returns. To include the social perspective in their general business strategy enables these companies to gain access to new customer segments, improve their brand reputation, and attract and retain top talent. They are not alone: the Social Innovation Summit 2017 in Chicago gathered more than 1,000 professionals from the corporate world looking for new ways of doing good while doing business.

A similar evolution can be seen in the investment community. Although still somewhat marginal today compared to the classical investment industry size (leading impact investing organisations manage nearly USD 114 billion in impact assets(2)), the influence of impact investing is starting to reach mainstream investors and the capital available for impact investments keeps growing exponentially year over year. In that sense, BlackRock (world’s largest investment firm) has recently announced that they will no longer support companies with no social purpose and focused exclusively on obtaining financial profits. Even the companies whose main activity is not related to investment (such as Adidas or Danone) are showing interest in developing social impact funding initiatives, along with other unexpected stakeholders such as the Catholic church.

Another flourishing source of funding for impactful social innovators is the growing trend to reward the most promising ideas to tackle world’s most demanding challenges through attractive prizes’ competitions. The European Investment Bank’s Social Innovation Tournament recognises and supports the best European social entrepreneurs and the European Commission has also adopted this approach, for instance by offering a 1 million reward for the best solution to improve the mobility of older people and a 5 million prize for the best blockchain solution for social good. Xprize is another prominent leader in this type of challenges. Still, philanthropic institutions such as MacArthur Foundation, Bill & Melinda Gates Foundation or Blue Meridian Partners are the ones offering the highest rewards for those who promise real and measurable progress in solving a critical problem of our time (up to $200 million per project).

Even though social innovation is booming, one obstacle is slowing down the effects of this unstoppable wave. The unsolved challenge remains how to know if we are being successful delivering social innovation.

Innovation results have been traditionally measured mainly through financial indicators (ROI, number of new products/services launched, number of new patents, profit growth, costs reduction, etc.) But these metrics fall short when dealing with social innovation. The benefits of breathing cleaner air, of improving social inclusion, or reducing crime rates go far beyond purely monetary estimates. It is time to consider the impact of innovations in their full extent. This does not mean to forget about financial measures, but to expand the variables considered in the analysis, taking into account that economic metrics may not be the most relevant items when measuring social impact.  Improving people’s lives is the ultimate goal of social innovation and capturing that positive effect requires a much more comprehensive approach. Measuring impact involves a change of the mindset. It entails going one step further to identify and measure the real results (effects on society) and not only the innovation activity (input and output indicators). But this is easier said than done, and although everybody is talking about generating impact, the challenge of defining and measuring it remains.

Social Impact Assessment (SIA) constitutes the process of: “analysing, monitoring and managing the economic, social and environmental consequences of business activity, both positive and negative, independently of the intentionality of the activity”(3). It has its roots in the analysis of the consequences on indigenous populations of major infrastructure projects in the USA during the early 70’s and has evolved since then (4).

Some methods try to monetise the consequences of social innovation activities – Social Return on Investment is the most widely spread. Others attempt to assess organisations’ social impact with a standardised approach – B Corp is the most prominent example. The European Commission has issued some Impact Assessment Guidelines based on OECD´s  results chain and the Global Impact Investing Network (GIIN) is trying to standardise impact metrics for investors. But there is still a great deal of debate about impact assessment and how to implement it as none of these approaches will completely cover the needs of every organisation with a social objective.

When conducted adequately, social impact assessment can be a useful tool for:

• External stakeholders’ accountability: policymakers must account for their spending decisions, social-purpose organisations need to demonstrate their achievements to investors and/or funders and funding institutions must be held accountable for allocating resources wisely.

• Internal decision making: having data can help organisations make informed and evidence-based decisions to achieve the desired outcomes.

• Performance evaluation: there is no better way of managing the impact of an organisation than actually measuring that impact. It is a tool that enables one to identify success and to learn from failure. It also is an effective way to refine a business model and an opportunity to approach the stakeholders. Social impact assessment is not only necessary but critical to identify what works and what doesn’t and to improve the process of scaling-up social innovations.

Despite the general consensus on the importance of assessing impact, many social innovators do not analyse their impact regularly. It is mainly because of these reasons:

• Some organisations are simply still not requested to do it by their funders and supporters.

• Others would like to evaluate their impact but lack the resources to do so. Social impact assessment is a time-consuming and labour-intensive task that can be difficult to assume by smaller organisations.

• For others still, the challenge may lie in how to do it. The breadth of existing methods and tools to measure impact presents a confusing panorama, and the diversity of organisations pursuing a social mission makes it impossible to have a one-size-fits-all solution.

Even for organisations with the necessary capacity and the will, measuring social impact effectively but efficiently remains a complex issue. A recent survey in the non-profit sector showed that 50% of organisations are struggling with impact evaluation, which was considered as the top challenge that the non-profit sector faces today by the nearly 3,000 respondents of the survey (5).

Source: Meehan and Jonker (2017) Stanford Survey on Leadership and Management in the Nonprofit Sector

It is time to take social impact assessment very seriously, no matter the sector. In the near future, those who are not able to demonstrate tangible social benefits of their activities will find it difficult to convince their supporters (from funders to clients) to continue believing and investing them.