Every business in the world has an impact. Every human decision has an impact. Measuring and managing impact shouldn’t just be a question of auditing but a strategic approach to analyzing risk and exploiting returns in a world shifting from moderation to volatility. Outdated approaches to measuring risk (fear) and returns (greed) need to be challenged. In order to solve endemic problems across complex markets like agriculture, oceans and energy, we must move away from siloed approaches and towards a model that considers the interconnected, global nature of these systems.
We believe our strategy, our portfolio, and our stakeholders need to be in the vanguard of shifting Impact Measurement and Management from a lagging indicator of performance or compliance to a critical driver of competitive advantage and increased market share. This shift will take new thinking and potentially new innovation.
Imagine Net Promoter Scores that measure not just customer delight but capture the impact and risks of your products and services on a broader stakeholder base or your firm’s ability to survive the next inevitable black swan event. We are aiming to be more holistic in our ability to underwrite and deliver value as markets continue to evolve and as volatility is the new normal. Our approach is rooted in pragmatism and not ideology. To that end, our first step is to regularly measure and assess the positive and negative impacts of our portfolio to better understand how we can unlock greater returns and systemic change.
We are excited to share our progress on Impact Measurement and Management with you, and look forward to partnering and learning from you as we work to strengthen it over time.
-- Sanjeev Krishnan, Chief Investment Officer, S2G Ventures
Using Impact Data to Create Business Value
At S2G, our aim is to provide capital and value-add resources to companies that are addressing some of the world’s most pressing environmental and climate-related problems.
We’ve read the research establishing that claims around social and environmental impact increasingly influence customer and investor choice. We’ve also seen customers, investors, and regulatory bodies become more discerning in their evaluation of those claims. They’ve become wise to intentional or unintentional efforts to “greenwash,” and are looking for companies to be transparent about their impact goals and substantiate their claims with credible evidence.
However, we also know that identifying a company’s intended impact, measuring progress toward that impact with integrity, and reporting on it with clarity is a difficult and sometimes intimidating endeavor. Like many companies and investors, we’re working to make sense and stay on top of the seemingly endless proliferation of frameworks and standards cropping up around these issues.
As S2G onboards new companies and works with our existing portfolio, we are being more intentional about the ways that we can help companies in our portfolio navigate these murky waters. Underlying this commitment is the premise that measuring and managing a company’s impact on people and planet will enhance its success in the market and deepen its long-term social and environmental outcomes.
This requires a focus on understanding the impact of what a company delivers to customers in the form of their products and services. It also means understanding the impact of how companies deliver those products and services through ongoing business operations.
Before we go any further, we want to take a moment to level-set around some of the concepts mentioned above, as we know that there are different and sometimes competing definitions for how to define them. One visualization that we’ve found especially helpful for clarifying these topics is shown in Figure 1.
Starting from the right, when S2G thinks about measuring and managing the impact of a company’s business operations, we’re considering the specific environmental, social, and governance-related (ESG) factors that are most relevant to its bottom line. That information is most often used to avoid or manage risk to a company’s financial performance, future scalability, and its enterprise value.
The left side of the diagram outlines our additional attention to measuring and managing the impact of a company’s products or services once they’re launched in the market and in the hands of customers. This involves identifying who or what will be affected by the product and service, in which ways, and by how much.
The overlap in the Venn diagram shows that, in both cases, efforts to generate the positive impact of products and services AND efforts to minimize financial risk associated with ESG factors have a shared effect of benefiting people and the planet.
Once companies have data from this dual focus, they can use it to mitigate financially material risks, improve product/market fit, deepen positive impact for target stakeholders, and ultimately win business by validating impact claims with customers, employees, and investors.
This practice of generating information about the impact of a company’s products and services, as well as its business operations, and then using that information to inform management decisions is what a growing number of impact-oriented companies and investors call impact measurement & management, or IMM for short.
At S2G, we’ve been steadily building our approach to IMM over the past two years, starting with an acknowledgment that we see it as much more than just a box-checking exercise. Rather, we see it as core to generating value for our portfolio companies. We also recognize that there’s no one-size-fits-all approach to IMM for growing companies, and that it will happen over time depending on a number of company-specific factors, including sector exposure, ease of access to impact data, and availability of human and financial capital among other things. As a value-add investor, S2G is committed to continually strengthening and refining our internal IMM capabilities in service of supporting our portfolio and pursuing our vision for a humane and healthy planet. We’re excited to share more about our process and progress to date below.
Building Our IMM Muscle
As noted above, we recognize the growing interest - if not demand - for companies to articulate their impact and ESG goals, to credibly measure and manage progress toward them, and to report those data to key stakeholders. S2G’s approach to IMM aims to help our companies do just that.
The purpose of IMM at S2G is to generate and use information about the impact of our work to improve decision-making and engage with others around creating long-lasting, positive, and meaningful change for people and the planet.
We use three core IMM practices that make for sound IMM regardless of sector or stage of a company (see Figure 2):
We strongly believe that IMM creates the most business value when it is embedded into the decision-making cycles of an organization. For S2G, this means integrating our IMM practices into the investment process using a cross-team approach along the way (see Figure 3). This approach promotes our commitment to being a learning organization that actively works to harness our in-house expertise and resources toward common goals.
We’ve also aligned our approach to IMM with leading principles and standards in the investment industry:
We’re still early in our journey to develop an IMM approach that brings the most value to S2G and its portfolio companies, and are regularly refining it as we collect feedback from S2G staff, portfolio companies, and peers.
What’s Getting Us Excited About IMM in 2023 and Beyond
IMM is part of S2G’s core activities: We’re making investments, supporting the success of our portfolio companies, and engaging with industry actors. Across each of these activities, we’re starting to see those efforts come to fruition in several key ways:
As part of our ongoing investment activities, we just launched S2G’s first, annual ESG & Impact survey with our portfolio companies. Responses from the survey will equip S2G and portfolio companies with data that can be used to inform growth plans and help communicate how companies are contributing solutions to some of the world’s most pressing environmental and social challenges.
We’re also developing tools and resources to help our portfolio community build and strengthen their IMM capabilities. Last year, we developed and introduced to our portfolio community an Impact Playbook to help companies think through and plan for how to measure and manage the impact of their products/services and consider ESG factors that are most relevant to their operations.
This year, we’re very excited to make our Impact Playbook accessible to others. It’s a living document that we’ll be updating as we learn more about ways to help this community. In the meantime, we are choosing to share an early version now so that - if helpful - companies and investors outside of the S2G community can benefit, too. To this end, please send us your feedback! The only way we’ll be able to improve it is if we know what works and what doesn’t, and we thank you in advance for your partnership on this front.
As part of industry engagement, we aim to connect to resources and experts who can share their expertise and experiences on these topics. We also want to contribute to emerging and evolving standards in the IMM space, especially as it relates to the sectors in which S2G is active (Food & Ag, Oceans, and Clean Energy). A few important and exciting highlights are:
We are honored to have recently been accepted to join Impact Capital Managers (ICM), which brings together investors who have a clear commitment to driving impact, seeking superior returns, and meeting ICM standards on IMM. As an ICM member, we are engaging in efforts to scale the private capital impact investing marketplace with integrity and authenticity, in part by ensuring the useful, practical, and meaningful application of IMM.
In addition to ICM, S2G team members are active in other industry-leading membership organizations that are working to bring more integrity to IMM in the investment activities, including the Global Impact Investing Network (GIIN), Impact Frontiers, 1000 Ocean Startups, and the Food, Nutrition and Health Investor Coalition. Just last year, our IMM Team helped develop and publish a first-of-its kind IMM resource for entrepreneurs and investors working to promote sustainable and healthy oceans. This Oceans Impact Navigator was introduced at UN Oceans week in 2022 and is an open-source impact KPI framework, designed to simplify, harmonize and strengthen impact measurement and reporting for the ocean impact innovation ecosystem.
Most recently, S2G joined other climate-focused investors to launch the Venture Climate Alliance (VCA), a group of leading investment firms committed to achieving a rapid, global transition to net zero or negative greenhouse emissions by 2050 or earlier, consistent with the scientific consensus on climate change. Our IMM Team is actively contributing to VCA’s Methodology Working Group to develop a rigorous, consensus-based framework and toolkit for use by member firms and others in tracking and reporting on progress towards fulfilling the commitments made as part of membership. This methodology will leverage and align with existing methodologies and guidance such as those of the Glasgow Financial Alliance for Net Zero (GFANZ), the UNFCCC Race to Zero Campaign and other sector-specific net zero alliances.
S2G is committed to being a value-add investor that helps support strong businesses creating positive impacts for people and the planet. But we don’t stand alone. We are supported, inspired, and made better by our work with the companies, like-minded investors, and other partners comprising our ecosystem. This is a community that we’d like to grow. We welcome and appreciate your feedback and partnership as the journey continues.