bar chart and line graphs showing shifting market gains (Illustration by Hugo Herrera)

Thirty years ago, people were calling environmentalists “tree huggers.” Today, there is rarely a conversation on Wall Street that doesn’t mention sustainability or climate. If environmental outcomes can become assets, why can’t social outcomes?

Social impact, totaling $72.05 trillion in terms of government social spend, philanthropy, and S-themed ESG assets under management could be considered the world’s largest financial market today. By one estimate, the worldwide impact investing market alone is $1.164 trillion. Yet social impact could be seen among the most inefficient markets, guessing what works versus seeing clear outcomes.

Introducing the Field of Impact Sciences
Introducing the Field of Impact Sciences
This series, sponsored by the Center for Impact Sciences at the University of Chicago, is an exploration of the cutting edge of data and measurement: how new tools, systems, and technologies are making it possible to look forward and predict impact.

The environmentalist movement transitioned to a market where outcomes are traded. Given the sheer scale of the social impact market, the time to establish this marketplace to trade social change is now.

The Nascent Social Impact Marketplace

What do we mean by a social impact market?

In more established markets, stakeholders are independent and collaborative. There are independent networks of standards and frameworks that are easy to measure. Metrics are evaluated using standardized methodologies and means of verification that ensure consistent reportability. Importantly, standardization has been a critical factor in driving success in these markets.

Instead, in the social impact space, stakeholder roles are malleable. There are inconsistent, often qualitative standards that are difficult to measure and drive a range of reported impacts. Examples include price per outcome, program reach, and social return on investment. These metrics are measured through various frameworks, including outcome tracking and monitoring and valuation, which create challenges for a standard method to verify outcomes. For example, due to lack of standardization, there are various tools by which health care professionals screen for social determinants of health, leading to variability in how these metrics are measured and ultimately verified.

These factors are leading to mistrust in measuring and evaluating impact in the social sector, which is affecting the social impact market at large. Namely, the lack of standardization and regulation, as well as data transparency, are preventing this market from growing. There is also a growing need for more robust infrastructure for buyers and sellers of social outcomes as organizations demand more tangible ways to measure and report their social impact. Underpinning these elements is innovation: Stakeholders must be willing to change from the status quo and innovate to bring this market to fruition.

Despite these challenges, there is an opportunity to innovate social impact through a more established marketplace, fueled by market forces currently at play. 

Market Forces to Accelerate a Social Impact Marketplace

Several market forces are driving a more established social impact market, and the growing regulatory environment is an incentive for further accountability and regulation in this space.

Growing demand for social impact and the S in ESG: The social pillar of ESG has become more relevant to organizations in recent years, driven by consumer trends, regulatory intervention, and economic events. 

For example, 90 percent of surveyed consumers say they will switch brands to support a good social cause and boycott a brand due to irresponsible practices. Public sentiment has also tilted towards more socially conscious companies; according to Verdantix, 37 percent of corporations surveyed view improving social impact performance to be a high priority. Investors may face increasing pressures as corporate social responsibility—or lack thereof—could drive significant reputational risk or translate to market performance. Increasingly, firms are wanting to track and measure their social performance in relation to the UN Sustainable Development Goals and evaluate their impact in communities. 

New regulatory requirements: While current and proposed ESG regulations focus largely on the “E” and reporting on financially material subjects, new requirements are poised to broaden expectations of organizations’ reporting on their role in driving social good.

Europe is currently driving the world toward this ESG regulation. For example, the Corporate Sustainability Reporting Directive (CSRD), which is applicable to almost 50,000 companies trading on European markets, is the first widespread legislation to consider both financial and impact materiality. Mandatory ESG disclosures are just the tip of the iceberg—voluntary ESG disclosures and ad-hoc CSR reporting are also on the rise, and organizations must be ready to respond. A lack of standardization and reporting consistency across initiatives, such as the UN Sustainable Development Goals, could encourage public skepticism, mismanaged priorities, and an inability to distinguish efforts from impact.

While major ratings bodies such as Moody’s and S&P have all created their own methodology for scoring a firm’s ESG impact, a gap remains in delivering stronger, standardized data to validate social impact. The evolution of reporting standards, such as SASB and ISSB, suggests the expanded role that a standardized social outcomes taxonomy or measurement standard may have in this landscape.

The market is also beginning to require assurance that related disclosures or claims are accurate and credible. Organizations will likely rely on assurance to verify that standards are being adhered to, gain credibility and trust through external proof of compliance, and mitigate risk through objective, unbiased, independent reviews.

Efforts to measure and share an organization’s ESG impact—currently primarily around “E” claims—have coalesced into several key solutions ranging from more individualized entity solutions to ecosystem-level standards. These solutions, from tracking platforms to ratings agencies, have varying maturity levels. There is a need to combine and collaborate across these entities to produce more robust marketplace solutions. 

The growth of parallel markets: As the ESG disclosure landscape matures towards measuring social impact, market expectations for social impact measurement will likely fall along the same fault lines as in carbon and other parallel markets.

There are several key elements that have been instrumental in the formation and development of ESG market ecosystems driven by parallel markets. These include:

However, social impact should be cautious of not repeating the same potential mistakes from parallel markets, specifically the carbon market. These potential mistakes include issues related to accountability, capacity, heterogeneity, undue thresholds, and ineffective incentives. Importantly, a more established social impact outcomes market should avoid drawing too close of a comparison to the carbon market’s offsets. An offset refers to a unit that neutralizes a negative action or outcome—this immediately causes scrutiny and expectations of marketplace misuse, where bad actors “offset” bad social outcomes with good. 

Instead of producing “offsets” to a company’s social ills, the social impact market should instead consider focusing on “onsets” where companies purchase units as a net positive onset. The idea of onsets is already in action. The W+ Standard is an independent international standard that quantifies women’s empowerment. Empower Co. is an example of an organization that partners with the W+ Standard to exclusively deliver their units to the market with guidance on how to assign value to such an asset in the global voluntary market. In this model, companies purchase units as a net positive “onset,” verifiably contributing towards their gender goals outside of their operations in a transparent, low-risk, and quantifiable manner. As Empower Co. founder and CEO Rachel Vestergaard states: “Offsets are a neutralization tool. They don’t take away the negative impact of what an organization has already done. An onset is an entirely positive contribution to community and climate.”

While demand and regulatory requirements suggest a growing desire to form a more established social impact marketplace, there are several steps that could help this marketplace better prevent misuse and add value for key organizations. 

Next Steps to Take Social Impact Forward

Establishing a marketplace can be highly beneficial to the social impact space at large. It could enable companies to better track their impact through standardization and promote transparency for funders and producers. There is clearly demand across important stakeholders, as well as market forces that are propelling this forward.

There are three main aspects to consider in terms of advancing and establishing the social impact marketplace. 

1. Build a two-sided marketplace and create value for both sides of the market.

Measuring social impact outcomes creates a two-sided marketplace that evolves around two definitions of value that require varying activities.

This marketplace consists of impact producers and impact funders. For impact funders, it is critical to demonstrate business value: Ensuring investments in purpose-driven activities and social enterprises produce a positive return on their investment. For impact producers, most important is social value: ensuring activities produce a positive effect on society or the world. Creating value for both sides is not a simple task because these incentives are not always aligned. Further, the social impact landscape must differentiate itself from other markets, such as carbon, to promote “onsets” and establish ways to protect from bad actors.

To begin, the marketplace should create value for impact funders because these organizations have financial resources and are typically more outcomes-focused and data driven. 

On the flip side, capacity-building efforts to align impact producers to a more outcomes-driven approach will drive progress. Impact producers must also be able to trust that their interests and efforts are being fairly evaluated—the outcomes marketplace will fall apart without this trust and buy-in.

Further, there needs to also be trust that the marketplace won’t become a punitive instrument. In other words, this marketplace should not discourage investments from:

  • Smaller organizations with less efficient economies of scale,
  • Organizations that do work in more expensive places, such as urban areas with higher costs of living but more inequality, or
  • Organizations doing the hardest and most innovative work, which is potentially more costly per program

There must be plans in place for stakeholder entrants to rebalance and reshape the double-sided market, while communicating how to drive value for both funders and producers.

Importantly, in order to focus on “onsets” in the social impact market, there must be rules and regulations in place to protect from bad actors who attempt to offset social harms. Parallels can be drawn from financial markets, where governing bodies provide regulatory oversight to prevent fraud and abuse. Organizations such as the SEC prevent abuse through strict licensing and registration requirements that include reviews of a firm’s previous regulatory history. Continuous and transparent monitoring and examination of “onset” claims could also help ensure that the market is functioning as intended. Regulations that are context-specific should be considered to prevent misuse in the social impact space. 

2. Promote equity through data for stakeholder needs.

Stakeholder data needs vary greatly. There is a spectrum that varies between the funder’s priorities and the producer’s priorities. On the funder’s side, the most critical data needs include access to impact certifications that help legitimize credits as tradeable on an exchange, public scorecards that evaluate program performance, and benchmarking data to identify a baseline of acceptable ranges.  

Impact producers require data to help identify opportunities to enhance performance against metrics, expand awareness of organizations’ social missions, prove success to external stakeholders, and track progress through Key Performance Indicators. However, not all organizations have the same quality of data—for example, smaller organizations with less technical support may not be able to produce the same quality of performance data. As described in the above section, there must be capacity-building programs in place to handle this discrepancy from an equity perspective so as not to discourage less data-savvy organizations from joining the marketplace. 

3. Build systems to verify social impact efforts.

Efforts to measure, evaluate, and ultimately verify social impact efforts and outcomes exist in a crowded, yet often confusing marketplace. Stakeholders in this marketplace, such as consulting firms, tracking platforms, and data registries, vary in their level of maturity. Gaps in services, blurred lines between offering type, and lack of coordination between organizations highlight the limitations and opportunities in this sector. To build a more robust and established outcomes marketplace, we must build systems to verify social impact efforts across all types of organizations.

Overall, while challenges exist in terms of creating standards and policies, equity, and establishing methods for verification, there are clear steps that the industry can take to establish a more robust social impact marketplace.

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Read more stories by Jason Saul, David Rabinowitz, Isra Hussain & Drew Gannon Singh.