With more perfect information about impact, people with money or time are able to choose to spend and invest it where it will make some positive difference according to their particular values (whereas if the information isn’t available they can’t make that informed choice), so it is clear that better information about the nature of the social and environmental impact generated by organizations is valuable. I’ve grappled long and hard with the question of how impact can be measured by regular companies or by nonprofits whose funders don’t require it by fiat, and I’ve become convinced that there are a definitive set of elements that can be put together to form a system that is capable not only of measuring impact in a way the market can accept as reasonable, but of providing motivation to the various players to actually do it.

The pieces of the puzzle look something like this:

  • Leadership: Consensus among (at least) a small group of leaders in an industry that it is important not only to have a positive impact on society/the environment, alongside and in addition to financial performance, but to prove that it’s happening and manage how efficiently it happens through measurement.
  • Metrics: A trustworthy way to measure the quality and importance of the impact of the organizations in that industry. If the impact in question is objective, like how much carbon is being sequestered, scientific experts will likely be the ones who determine the best way to measure it. If it is a more subjective issue, like the alleviation of poverty, a consensus must be facilitated among a representative group of the affected stakeholders to determine what constitutes the desired change and how it may best be measured.
  • Capacity: People within the organizations with the skills and job descriptions that allow them to apply those metrics, collect and analyze data, and inform decisions with it.
  • Technology: Information systems that make the acquisition and communication of the information cheap and easy.
  • Visibility: The public must be able to see the results so that they can reward good performers with their approval, purchases, labor, investment and donations.

One of the best illustrations of this ecosystem-in-formation today is in microfinance, and the pattern is replicated in other sectors as well. In my next post, in collaboration with Steve Wright from Grameen Foundation, I’ll describe how this ecosystem is developing there and how it may help stabilize and grow investment into microfinance and beyond.

Individual organizations can always define what they see as important about their own work, and with the right information systems, audience members who care can to find and support those organizations on that basis. But for the capital markets to be engaged, and their power applied to solving big problems, a more systematic approach is required. That is beginning to mature in several sectors, with exciting implications!