Is impact as ‘material’ as financials in decision-making?

Organizations are increasingly recognizing that the non-financial value of their activities must be identified, understood and measured. Measuring the genuine change brought about by the actions of an organization is becoming a strategic goal in its own right, and impact measurement (IM) is now much more than a simple reporting tool for investors. 

IM is an arena involving many stakeholders, multiple tensions, and varying priorities. But despite the complexities involved, there is scant research dedicated exclusively to this nuanced area, particularly concerning the link between IM and materiality decisions. While the need to move beyond single materiality to embrace a double materiality mindset has been addressed in sustainable accounting literature, this exploration has not extended to understanding the drivers of tensions related to impact materiality within the context of IM.  

To identify and clarify the issues involved, Esade researchers Lisa Hehenberger and Chiara Andreoli have conducted a comprehensive literature review that provides valuable insight into the complexities of the link between impact measurement and materiality decisions. Their research, published in Current Opinion in Environmental Sustainability, advances academic and practice knowledge in this field and proposes research directions to help understand and alleviate ongoing tensions.  

The cloudy landscape of impact measurement

While sustainability goals and corporate social responsibility have long been accepted by organizations as an essential element of operations and reporting, the concept of IM has received less attention. It is only within the last decade that the area has begun to diverge beyond the social sector. 

There remains a lack of consistent IM laws and globally accepted accounting standards

Foundations, social enterprises and non-profits have traditionally assessed the impact of their operations within a varied range of their own frameworks and principles. Measurement tools have often been operated at an organizational level and, while this is not to say that they are ineffective, there remains a lack of consistent IM laws and globally accepted accounting standards. 

However, investors and financial institutions have begun to recognize and seriously embrace the importance of IM and examine its role in maximizing and optimizing outcomes on stakeholders’ lives, thereby extending the discourse to impact management. There is a range of tools and indicators available for the purpose of measuring and managing impact (IMM), including the Social Value International, the Impact Reporting & Investment Standards (IRIS+), the Operating Principles for Impact Measurement and the Impact Management Project. 

Clearing the path: engaging in dialogue with stakeholders

For impact to be measured and managed, it must be clear what is considered a desirable outcome. And, with such a wide range of stakeholders involved in the quest for sustainability, each with their own unique perspectives and priorities, there must be a clear effort to engage in dialogue to identify those favorable outcomes. 

Within this context, the question of materiality takes on increasing significance. Materiality ensures that the decisions an organization makes, and the impact of those decisions, align with the perspectives of its stakeholders. However, like the guidelines that surround IM, those stakeholder needs are often competing or conflicting.  

While previous research has acknowledged this conundrum, there remains a lack of insight into the complexities at play between IM, materiality, and stakeholder engagement. By critically examining academic literature in the IM field published between 2020 and 2023, Hehenberger and Andreoli have identified the research topics that will help to clear the path to resolving the tensions between materiality and IM. 

Embrace all opinions

It is a basic premise of IM that the value of an organization’s impact must be measured beyond simple financial terms. A positive number on the balance sheet may result in a negative impact on an external stakeholder – just like financial measurement entails subjective judgments and assumptions, so does impact measurement. 

To adopt an inclusive attitude towards IM, it should be explored from the perspective of every stakeholder – including those experiencing any negative impact. Only by understanding this impact can organizational activities and strategic goals be geared toward achieving meaningful and positive change for all. Yet, it is not straightforward.  

Just like financial measurement entails subjective judgments and assumptions, so does impact measurement

This involves a systematic evaluation of multiple opinions from all stakeholders and effective measurement of the impact of each action. Qualified impact evaluators who can engage meaningfully with a diverse range of stakeholders play a growing role in the assessment and measurement of impact, and their role is increasingly important in guiding strategy and operations. 

Research examined by Hehenberger and Andreoli demonstrates how engaging traditionally marginalized groups in the decision-making process has a positive impact on both the development of organizational strategy and achieving positive societal change. Further empirical studies that focus on how this can be embedded into the organizational decision-making process will advance stakeholder theory. 

Steering standards

In an area where no one set of standards exists, the onus is on the organization to navigate conflicting demands. This can create tensions between the pressure to appease investors and the requirement to create innovative solutions that meet societal and external stakeholder needs. 

The research examined by Hehenberger and Andreoli highlights that the processes for overcoming these conundrums are often inadequate. However, it is crucial for organizations to approach the concept of materiality in IM from the perspective of the stakeholders who are impacted by the issues. Without such an approach, meaningful change cannot be achieved. 

It is crucial to approach the concept of materiality in IM from the perspective of the stakeholders who are impacted

For investors, research exploring how adopting different standards affects material outcomes will help to influence their investment strategies and the ultimate outcome of their investments. Assessing the impact on all relevant stakeholders, not just the financial outcomes, can help to steer investment strategies towards a more equitable outcome. 

In the absence of regulations and standards, particularly for smaller ventures, research that assesses the novel approaches that have been successfully adopted by organizations will be welcome. 

Future research that examines the origins of the tensions that arise, while embracing and accommodating the diverse range of perspectives at play, can offer further benefits in analyzing an area that is ripe for further study.