A New Marketplace for the Common Good
— by J. Greg Spencer & Gregory Spencer
Unrecognized Value
Most social impacts, even when quantified, remain significantly undervalued by investors and, at times, are completely unrecognized by the market. While impact investments and the emphasis on Socially Responsible Investing have increased significantly since 2000, the value of such investments are often either evaluated using traditional financial metrics or insufficiently considered in non-financial performance. Therefore, non-financial performance, or “positive externalities” remain external to the transaction.
We have evidence that this market failure exists from our own experience. After launching and operating several for-profit social ventures in East Africa over the last decade, we routinely sold the environmental benefits produced by our clean burning cookstoves into reasonably sophisticated carbon offset markets. However, we consistently received only a modest - if any - premium from also enabling families to save (and implicitly reinvest) more than twenty-two million dollars of income, thirty-one million hours of time, two and a half million trees, and arguably even more significant (but unquantified) improvements in health. We have also observed the inefficacy of development work and outdated models of donors and corporates paying for inputs hoping to achieve unverified impacts.
These unrecognized externalities mimic the conditions surrounding the emergence of the carbon markets in North America in the late 1990s. Working with large emitters who anticipated upcoming climate change regulations, we developed diverse sources and types of emission reduction projects to deliver newly created environmental assets. Ultimately, many of these project methodologies evolved into standards adopted by both commercial and regulatory bodies and became part of what is now a thriving industry.
A New Marketplace for Good
We believe the solution to capturing unrecognized social value is the development of a “Common Good Marketplace” – a place to value and exchange independently verified social impacts categorized within the UN’s 17 Sustainable Development Goals (SDGs). This Common Good Marketplace might well emerge following a development process similar to that in the carbon markets.
There are strong, but early indicators that this marketplace is already evolving. A handful of carbon registries, nonprofits, foundations, social enterprises and project developers are already creating new SDG-specific impact standards and methodologies with the goal of measuring social impacts. What we have not yet seen are any attempts to independently certify and then exchange these assets for value once created.
A marketplace will likely only grow when there is reasonably consistent supply and demand for the products and services provided. Therefore, the first step toward creation of such a market must be a much broader awareness that SDG impacts can be quantified for the purpose of being converted into assets. Once this awareness is combined with verifiable quantification methodologies, it seems only a modest step to then economically value and transfer them for the benefit of corporate buyers, foundations and donors, who could then better assess the “social ROI” of their investments.
The Relevance of Resiliency
The recent energy, airline and hospitality industry shocks, stock market volatility and higher long-term unemployment resulting from the COVID-19 pandemic demonstrates that corporate resiliency is more important than ever. “Resilience” can be difficult to monitor, quantify and develop, but through the lens of Environmental, Social and Governance (ESG) performance, it can more easily be identified and improved. According to Oxford University’s Robert Eccles, “Firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt”. He was specifically citing the Bank of America Merrill Lynch ESG study completed in 2018.
We know that investing in environmental performance and the purchase of environmental assets increases performance of the environmental component of ESG. We believe a similar thesis exists for using social assets: companies will increasingly invest in internal, supply-chain, and external (third-party verified) social impacts to improve their ESG performance and long-term resiliency.
Limitless Opportunity?
In any market, suppliers, buyers, technical experts, capital, and infrastructure are needed. This Common Good Marketplace would serve non-profits, social enterprises, development organizations, foundations, and corporates. Impact measurement experts, auditors, economists and registries (certifiers of and repositories for impact) would make up the technical expertise required to quantify and qualify impact standards and methodologies; developers would create new business models that investors would finance; and, finally, foundations and corporates would create demand by purchasing quantified, verified outcomes, thereby demonstrably improving their ESG performance. The opportunities seem limitless. Could this new marketplace match the $215 billion in transaction value last year for the carbon markets, and attract investments as significant as Jeff Bezo’s recent $10 billion commitment to climate change (SDG 13)?
We know this market will require diverse expertise, actors and capital to work. We also know that faith like a mustard seed can move a mountain. Many of the faith-driven investors we have spoken to believe it is time for the faith community to demonstrate greater leadership in identifying and developing mechanisms and opportunities to enhance human flourishing.While we wait to see what roles are adopted by the faith community in this emerging impact marketplace, you may wish to consider how the organization's you manage or support might benefit from developing quantitative, verified "pay-for-performance" funding mechanisms for their social and environmental impacts.
This is one of the 2020 CEF Whitepapers. For more information on the Christian Economic Forum, please visit their website here.