Unpacking Impact  
for a 360° assessment

“Impact” is a loaded term, quickly becoming a buzzword as we crack down on ESG greenwashing

How do we define impact? Furthermore, how should one think about assessing impact? At Altalurra, we asked ourselves how to deliver transparent, decision-relevant impact data and insights for our founders and investors. What are the 360° drivers of impact? How do the various concepts and measures fit together to give a holistic impact view of a company? We need to address these questions if we want to include impact within corporate decision-making processes. The key principle consists in understanding that building sustainable businesses and assessing impact requires placing monetary and non-monetary risks and opportunities on equal footing. 

A comprehensive impact assessment

In this short note, we essentially identify the different groups one should consider in a comprehensive impact assessment. The diagram below synthetizes the way we could simplify it but make no mistake, impact remains as multi-dimensional as ever!

Let's unpack

• To simplify, there are three broad impact categories: (1) environmental, (2) social, and (3) governance impact. Attentive readers recognized here the infamous ESG acronym! Indeed, ESG data and ratings rightfully break down the problem but only in a limited fashion and scope. The impact categories and related metrics above could be broken down further based on the chosen use case. What is critical is to consider them as important as the legacy financial metrics and to co-analyze them.
  
  
• A company can either sustain impact (risks, monetary and non-monetary cost perspective) or can generate impact (opportunities, non-monetary value, and revenues perspective). Of course, both ways can be positive or negative. Obvious isn't it? Well, this is where we observe a point of view rift between shareholders and stakeholders. Shareholders (investors) care about the company's decisions' impact on their portfolio while stakeholders (consumers, clients) and the general public care more and more about the impact generated by a company. What brings them together is the fact that they both view impact as a cost! In reality, the impact costs a company might incur, or the impact costs that the society or our planet might face are just one side of the coin, and as long as we will focus on this negative side only, we will not promote sustainable business models. We have to consider the positive and negative impacts.
  
  
• Relevant impact dimensions must be evaluated at the product/service level by analyzing its lifecycle, its manufacturing/creation process, the supply chain, and the resource utilization (raw, transformed, wasted) along with its associated cost and revenue profile. Drilling down to the product level is the broadest challenge we need to tackle. Companies rarely align their internal data and accounting to the actual products and services they sell. Public disclosures of financial and non-financial information are routinely highly aggregated or partial making them irrelevant from an impact assessment point of view. In addition, each product and service (physical or digital) displays a different set of dominant impact drivers and triggers.
  
  
• Impact can further be inwardly focused (i.e. analyzed from a firm, its shareholders, and employees' standpoints) or outwardly focused (i.e. analyzed considering the planet, a circular economy, and all stakeholder standpoints). This is again where many draw blindly a line in the sand as if the two camps should only have distinct concerns. We should consider monetary value creation and non-monetary value creation in both directions.

Impact drivers groups

We can define six groups:

1. Inward, risks and costs for the firm [negative impact]
   
   
2. Inward, opportunities and value creation for the firm [positive impact]
   
   
3. Outward, risks and costs increase for all stakeholders (and ultimately the planet) [negative impact]
   
   
4. Outward, risks and costs decrease for all stakeholders [positive impact]
   
   
5. Outward, diminished opportunities and value creation for all stakeholders [negative impact]
   
   
6. Outward, enhanced opportunities and value creation for all stakeholders [positive impact]

It's time to consider all of these groups. Let us be clear, this is a challenging but achievable endeavor. Several specialists are developing impact models and collecting the associated impact data for several of these groups. We need to come together and focus on solving how we will assess these impact drivers. When analyzing the impact of a company, we should consider all 360° impact drivers and understand which ones have first-order effects.

Decision-making for sustainable businesses

What's next? We do need to report on and monitor all significant impact drivers for all companies, public and private. But creating sustainable businesses implies an additional step. It is about integrating first-order effects - as a start - into the everyday decision-making processes.

At Altalurra we believe that in the pursuit of purpose and growth, first-order effects have to be embedded as cost and revenue potentials taking into account the positioning of companies in the value chain, their expected strategic evolution, their size and maturity, and ultimately transforming these effects into monetary terms. Yes, it requires several assumptions, but by being consistent, the approach captures directions and relative effects between products and companies, and as such, can be used to drive company decisions making - and in our case, to make impact-driven investment decisions.

Quiz: can you spot where existing ESG research and metrics focus?