Tackling climate change, eradication of poverty, fighting inequality… politicians and leaders of big corporations compete in making headlines in International media around what they are doing and promising to do to fight the major problems that societies are facing in the 21st century.
Judging from the headlines, we might conclude that:
Sustainable development has become the main topic and driving force for most of organizations and institutions around the world.
Is it really like that?
As with any other hot topic, given the positive association that working on sustainable development brings, companies around the world want to get recognized as such, however this is not always the case. We all have heard of recent cases of greenwashing, exposing companies’ bad practises in exaggerating their positive impact on the environment.
Most of us are well familiar with Corporate Social Responsibility (CSR) programs, however, building the entire company around Impact is a relatively new concept.
This comes as a response to the major challenges that humanity is facing in present day, lead by the younger generations – Millenials and Generation Z, the driving force behind this growing trend – with the purpose of building the future they envision for themselves and the communities they serve.
What counts as an Impact Business?
Just as with sustainability, Impact has become a buzzword and given its overuse, it doesn’t always benefit from positive connotation.
In order to shed some light on the subject, let’s explore a bit more in depth what being an impact business really means.
To put it in simple words,
Impact businesses are those built with the purpose of contributing to a positive change in the social or environmental terrain.
At its inception, Impact businesses are founded with the mission of solving major societal problems. What defines their founders is their motivation to work on creating impactful solutions, the achievement of measurable and lasting results and commitment to an ongoing practice of impact, which is deeply embedded in the core of their operations.
Impact startups are a major source for innovation in fundamental areas concerning people, planet and the society at large and are characterized by their ambition and commitment to the problem with sufficient scale, depth and duration.
A commonly accepted framework for identifying what qualifies as social or environmental impact are the United Nations’ 17 Sustainable Development Goals (SDGs).
Among the popular industries, which have lead to meaningful impact worldwide, it is worth highlighting renewable energy, e-mobility, sustainable agriculture, food security, healthcare or education. Impact-driven companies build solutions that help us reduce our carbon footprint, implement circular economy, help us recycle, reuse and reduce our waste, improve people’s health, bring sanitation and improve hygiene standards, help the most vulnerable thrive, reducing poverty and bringing more children to schools.
It would not be appropriate to associate impact with any sectors in particular. It is rather the commitment to solving a major societal or environmental problem, that is the distinctive attribute for impact-driven businesses.
Having said all the above, it is important to mention that in the same way as their more traditional peers, impact businesses are made for generating profit.
Impact and Business hand-in-hand
Contrary to the popular belief of many traditional businessmen,
doing Business while doing Good is not only possible, but is the natural way forward.
Impact and Business are certainly not mutually exclusive concepts, but they rather reinforce each other. In the same way that it is important for founders to demonstrate real and measurable impact, it is equally essential to build a sustainable business model for growth and revenue.
In broad terms, there are three common models adopted by founders of impact ventures:
For-Profit Business:
Business with purpose, created with the mission to generate both, social/environmental value (measurable impact) and economic value (revenue).
Cooperative (COOP):
Adopted by more and more impact entrepreneurs, it is about building an autonomous organization of people united by common economic needs and social/environmental values through a co-owned and co-managed enterprise.
Non-Profit (ONG):
There are problems, the solution of which does not present market incentive. There are niches that lack the market rationale, being very hard to build a business model around. In the case of lack of Government action, it is often up to ONGs to fill this existing gap, playing a fundamental role in building safer, healthier and more equitable societies.
How to measure Impact?
Not all impact can be measurable, but it is important to make it as tangible as possible, not only in order to proof it to customers and all stakeholders, but also for internal accountability and goal setting.
Lives saved, diseases cured, CO2 reduced, trees planted… there are many meaningful impact-related metrics. Their proper measurement and tracking is however no easy task. To solve this and with the aim of building common standards, there are several frameworks for impact measurement, being following two the most popular:
- UN Sustainable Development Goals (SDGs) – internationally recognized standards for measuring impact and the most commonly referenced by business organizations,
- IRIS by Global Impact Investment Network (GIIN) – a complete impact measurement and management system, a collection of performance indicators used by impact investors to measure social, environmental, and financial change.
Another methodologies for impact measurement gaining in popularity are:
- Impact Management Project – it helps founders define impact risk and impact baselines and thresholds,
- Social Value International – specially for social enterprises, it helps defining business’ Social ROI (return on investment),
- The Impact Beacon – in a simple and more straightforward approach, this is an insights platform that allows entrepreneurs to use facts and figures to identify, evaluate and articulate their impact.
Advantages of running an Impact Business
Given their strong purpose and solid vision, Impact-driven founders are often stigmatized as idealists. They think big and dream with positively impacting thousands or millions of lives.
This bold vision is contagious and brings multiple benefits to impact businesses, being among others the following:
- Mission-driven founders, given their strong motivation, they are better equipped to overcome adversity and to persevere.
- They attract the best talent, enjoying higher rates of loyalty and retention. According to a recent study by GetSmarter carried out in 65 countries, 56% of individuals say they are more likely to remain with employers that contribute to sustainability.
- Consumer behaviour is shifting: as consequence, adoption of sustainable lifestyles is on the rise. According to a recent study by Deloitte, consumers are increasingly making conscious decisions with sustainability and the environment in mind.
- Investors want to support purpose-driven businesses: in fact VCs are specially welcoming to resilient and mission-driven founders.
Impact investment is on the rise.
Attracting funds for your impact business
As we already illustrated in the special series of articles dedicated to funding of impact startups during their different stages of development (Seed, Start-up, Growth), it is fundamental for founders to attract capital that would help them grow. At the same time, however,
it is equally important – and this is especially valid for impact-driven founders – that this funding should not be accepted if at the expense of a deviation from their mission.
Fortunately, investors are becoming more and more familiar with this concept and alongside with their motivation to back businesses that are aligned with their values, they are also changing their approach to investment, looking for returns beyond their financial dimension. This is what gave rise to Impact Investment.
As it is well defined by Global Impact Investing Network (GIIN), leading organization in the promulgation of this concept,
“Impact investments are investments made into startups with the intention to generate social and environmental impact alongside a financial return.”
In broader terms, It consists of the deployment of capital to address some of the world’s major challenges, as set out by the UN Sustainable Development Goals (SDGs).
Contrary to the popular belief, Impact Investing does not necessarily mean a lower performance of the invested funds. In fact, sometimes it even outperforms the average returns from investments in conventional, traditional industries. According to a study by the International Finance Corp,
ethical private equity and impact investors can deliver high returns, outperforming the S&P 500 index by 15%.
When it comes to businesses in their early stage, impact investors are even more crucial for the ecosystem. Fortunately, there is a growing amount of risk capital that is provided to impact ventures, as there are some VCs and Angel Investment Networks, that are specialized in impact investing.
