For the past five months, I’ve been helping Third Sector research the nascent field of social impact accounting – the practice of measuring and quantifying the social impact of organizations and investments. Third Sector was interested in exploring the demand for social impact accounting among investors and philanthropic organizations, as well as investigating opportunities to apply the lessons the firm has learned from its Pay for Success work more broadly.
While generalized social impact accounting principles are accepted and widely used today, they are a relatively recent development: The Financial Accounting Standards Board was only formed in 1973, and the organization is still working with its international counterparts to harmonize standards to develop a fully accepted worldwide accounting system. This differs significantly from financial accounting; the most commonly used disclosure for public organizations, the SEC’s 10-K, was first required by the SEC in 1934.
Unlike financial accounting, the widely diffuse field of social impact accounting is only in its initial stages of development, with many competing metrics and methods of calculating “social value” and “social impact.” There are many organizations that have developed standards targeted at specific categories of organizations involved in impact investing and measurement. For example, the Global Impact Investing Rating System (GIIRS) is targeted specifically at impact investors, while the Sustainability Accounting Standards Board (SASB) is focusing on developing standards to help public companies disclose their social impact to investors and stakeholders.
Part of the reason for the development of so many standards and organizations seeking to measure social impact is that there seems to be a thirst for social impact metrics in the field. A recent survey by impact investors by TONIIC, a community of impact investors, found that only 62% of investors were currently measuring social impact in their portfolios. Of those, 87% intended to start measuring impact in the next three years. Moreover, of those firms currently using impact data and metrics, many noted difficulties in collecting and aggregating these data and metrics into a succinct and useful impact report.
These efforts in measuring social impact are especially important to Third Sector and its clients and stakeholders as they work to understand the true social value of their impact investments. Without agreed upon metrics by which to measure social value, it is difficult for governments to decide which projects are worth investing in, or for impact investors to decide which opportunities offer a greater social return on investment.
Ultimately, developments in the field of social impact accounting could help inform a wide range of decision-making in the financial, philanthropic, and government fields. As an example, Third Sector could help investors with a social mission, such as Community Development Financial Institutions (CDFIs), develop strategies to calculate the social impact of their investments in community housing and public health facilities. They could also help impact investors develop investment strategies that balance potential return on investment with returns on social impact, enabling a more accurate and informed understanding of their portfolios. Alternatively, they could help governments quantify their programs’ benefits to constituents. More informed and accepted social impact accounting standards could also help local governments more accurately evaluate pay for success initiatives, making it easier for larger scale implementation of these promising projects.
About the author
A.J. Herrmann is a 2017 graduate of the Goldman School of Public Policy at UC Berkeley. He has 10 years of experience in public-sector consulting, venture philanthropy, and policy analysis. He worked with Third Sector as an independent consultant in the Spring of 2017.