When a top corporate executive, Paul H. O’Neill, took the reins at industrial giant Alcoa in 1987, he inherited a company in a tough spot encountering several operational and financial challenges. Common sense suggested that cutting costs and making the company more efficient were logical routes to take, considering the company’s poor financial position.
Instead, as his top priority, O’Neill prioritized workers’ safety and invested in reducing work-related injuries.
Although it was initially an unpopular decision with shareholders that led to the stock tanking, O’Neill’s move to focus on worker health and safety led to astonishingly impressive downstream results: a maniacal focus on employee safety resulted in streamlined manufacturing processes, more well-maintained equipment, and increased employee productivity. All of these things ultimately reduced the cost base and made the company run more efficiently. Then the stock price soared. Prior to O’Neill taking over in 1986, Alcoa was worth $3 billion. By the end of O’Neill’s term in 2000, the aluminum producer was valued at $28 billion and branded as among the world’s safest companies despite the inherent risks in the aluminum industry.
“Our safety record is better than the general American workforce. But it’s not good enough. I intend to make Alcoa the safest company in America.”
– Paul O’Neill
Social impact investing follows a similar template within the software world. For software businesses, measuring social impact creates a more profound commitment to customer value. Customer value, in turn, leads to a stronger product. A stronger product leads to happier customers and ultimately more revenue growth! In addition, a compelling social impact story rallies a company’s culture. Recruiting also gets a boost by broadening the gateway to a talent pool motivated by social impact. This becomes important during tight labor markets like we’re experiencing today; knowing how to measure social impact of a business has become more crucial.
Within Norwest’s growth equity business, we often hear companies talk about their positive social impact, but their discussions can be vague. We take the position that to experience the entire customer, product, employee, and ultimately, financial benefits of social impact, companies must begin tracking and measuring social impact and make it one of their most crucial KPIs.
So what is the broader picture of social impact investing today? And how can companies move toward better social impact measurement?
Social Impact Investing: A Growing Trend
Social impact investing is often confused with ESG (environmental, social, and governance) investing. However, they are two different things. ESG investing supports the tracking and measurement of environmental, social, and governance factors relevant to a particular investment, many of which are not core elements of a company’s operations.
Since starting Norwest’s growth equity business over a decade ago, we’ve seen social impact investing grow in popularity. As a result, the number of investors looking for portfolio companies that create social impact in addition to investment returns has dramatically increased. Some investors are doing this as part of a distinct social impact fund, while others are making it a core thesis within their traditional funds.
Younger investors are often at the vanguard of social impact investing as they are the most keen to bring about positive societal change. According to a recent study, 62 percent of millennial investors believe that impact investing has greater potential versus traditional philanthropy. The same research also found that two-thirds of young investors think impact investing is a smart strategy in terms of financial viability.
Despite social impact investing gaining substantial traction, there are roadblocks hampering its maturity, especially in businesses that operate on traditional ESG models. About 78 percent of investors want organizations to home in on environmental, social and governance (ESG) initiatives, even if it impacts short-term profits. However, only half of enterprises agree. In addition, 76 percent of investors believe businesses “cherry pick” information they share on sustainability activity.
The Secret Sauce: Measuring Social Impact
One of the biggest challenges of measuring social impact is selecting and implementing a standardized framework. Measuring social impact is indeed a difficult endeavor. A global survey by BNP Paribas has found that 51 percent of investors across 356 institutions say that “social impact” is the most demanding aspect of ESG to analyze. Without a standard, industry-wide accepted framework for analyzing social impact investment performance, investors and organizations struggle to integrate it into their investment strategies.
While various organizations have great frameworks, we’ve found a more bespoke approach to work better than something force-fitted.
As part of our process, we endeavor to align with management around the fundamental social impact measurement framework they’re looking to create. For example, is management decreasing carbon emissions, lowering job site injuries, or improving access to online learning for underprivileged students? We can then create a longitudinal model pre and post-investment to measure social impact improvement. For example, in the instance of software that mitigates the risk of job site injuries, we can track injuries or near-misses by customers over time. The company can then work back up the funnel to see which variables and tools actually influence the ultimate social impact. Is it more investment in product, subject matter expertise, an acquisition that enhances the overall solution, or better customer training through professional services? The company then sets up processes and priorities that drive the social impact.
The flywheel shows how the process, product, and service improvements that drive social impact leads to happy customers and great case studies to support even more new business. The strategies, investments, and priorities that drive social impact eventually become central to the company’s mission, culture and evolve into a rallying cry for all stakeholders in the business. Measuring it all is the secret sauce to social impact because, as the adage goes, “if you can’t measure it, you can’t improve it.”
The BNP Paribas report concludes that the lack of initiatives on measuring social impact has led to an “acute lack of standardization around social metrics.” This then impedes investors from understanding the social performance of the companies they invest in.
There is no doubt that measuring social impact has become vital today. Fortunately, we have some great social impact-oriented companies in the Norwest growth equity portfolio. We asked the founders and CEOs of a few of these companies how they think about social impact and measurement within their respective businesses.
Cority is the global enterprise EHS (environmental, health, safety, and sustainability) software provider that empowers those who transform the way the world works. For over 35 years, Cority has been powered by a spirit of innovation, deep domain expertise, and a commitment to integrity that enables our customers to achieve higher operational and sustainable performance levels.
“We have a customer that had multiple deaths on the job from one incident,” said Cority CEO Mark Wallace. “The employees and community were devastated. As a result, the company redoubled its use of the Cority system and is singularly focused on avoiding such tragedies in the future. We also recently got the world’s largest retailer to use Cority’s Waste Management Solution, which has enabled them to divert ~82% of its waste from landfills through recycling, donating to charities, creating animal feed, composting, reselling or reusing, and converting waste to energy. Cority employees and customers can all feel proud that we are making a positive impact on the planet.”
Envisage Technologies is the world’s leader in unified public safety training, compliance, and performance software solutions. Our Acadis Readiness Suite is the only comprehensive solution built exclusively for public safety leaders that ensures first responders are trained, equipped, and ready. The software enables streamlined personnel training, compliance, internal affairs case management, professional development, legal defensibility, and public accountability. Customers include federal agencies, law enforcement organizations, military commands, and state and local public safety organizations.
“Readiness saves lives, and saving lives is what our first responders do every day,” said Ari Vidali, Envisage Technologies Founder and CEO. “For us, the mission is simple; ensuring that our firefighters, police officers, and emergency medical personnel are fully trained and equipped to provide the critical services our communities need to be safe and citizens need when their lives hang in the balance. It is our primary goal that every first responder come home alive and uninjured from their shift.”
Avetta offers a configurable SaaS-based solution that assists organizations – both large and small – in managing supply chain risk across a variety of disciplines. Avetta is building the world’s most intelligent supply chain risk management network to advance clients’ safety, resilience and sustainability programs. Less than two weeks ago, Avetta announced that a growing number of executives in all industries recognize the importance of social and environmental efforts. The findings are in a technical whitepaper here.
We’re inspired by the remarkable social impact software tools that many of our portfolio companies deliver. These companies have proven that a heightened measurement on the underpinnings that create positive social impact results in a positive flywheel of great products, happy customers, motivated employee culture, and strong financial returns. So whether it’s Cority helping its customers to thrive as a result of sustainable operations, Envisage transforming law enforcement training, Avetta creating safe and sustainable supply chains, or our other portfolio companies creating substantial social impact in their own endeavors, we thank all these companies for their commitment to social impact.