Impact Markets
Can we live with “growth” if we re-align money as value for society, and not only to consumer?
Continued economic growth, as we know it, is not sustainable. You might have heard of this before: The simple notion that having wealth generates more wealth is very central to capitalism, as it is the expectation that every investment needs a return, hence the in-born feature of growth of the system. Yet, wealth creation system we created does not attach any value to resources of the planet, which are obviously finite, nor does it assign value to the value of well-being of humans. As a result, we have pushed the planetary boundaries in many fronts to unsustainable levels, and our mental health is suffering.
The system we have created, in the words of Nate Hagens and Daniel Schmachtenberger is a superorganism, or a Moloch, that now brought us to the edge of extinction. Oxford economist Kate Raworth, who coined the term of Doughnut Economics, which the SDGs are modelled after, agrees with them. It is hard to argue against, as we have not figured how to grow economy without making the planet increasingly inhabitable, no matter how each of us do not want that outcome. The system needs the growth.
Well, we are increasingly putting money behind impact companies, one might say. Unfortunately, impact companies cannot create the impact we need, at the level of our need, without getting paid to generate that impact. Today, creating impact does not get paid, except for the rather new and still fragile CO2 markets. Further, they need to create the positive impacts we need in one area, without worsening the other areas of pressure. If you manufacture electric cars, you may be reducing particles in the air and CO2 emissions, yet creating other kinds of problems with for example extraction of raw materials, or also, increased road maintenance due to increased weight of the cars thanks to the batteries.
We have many organisations who are trying to solve one problem at a time. Yet, the world we live in is deeply inter-connected. We might set money and organisation to fix the issue of crime, for example, yet not understand the role of inequality, click-bait media or social networks with regards to creating islands of hopelessness and desparation. Instead of trying to deal with one issue at a time, through singled out institutions, we need a holistic approach that changes the fundamentals of this machine of capitalism operates, connecting the different social goals all at ones.
I believe there a way of continuing growth by changing our system dynamics, so growth, instead of harming, improves the condition of the planet and society. And it requires one drastic change..
Money — Value Alignment
The solution is one that must align “money” with “value”. There has been much talk about aligning a potential superintelligent AI with human interest. It’s ironic that despite all the fear from a superintelligent AI, we don’t talk about aligning the economic system we have with our interest. So what needs to be in the definition of value? Money can no longer represent only consumer value, but also value for society and environment. It needs to be done globally for public goods that are naturally global — like theCO2 emissions, and it also can and must be done locally for public goods that are local, such as air quality, and traffic congestion.
So long we (only) measure “value” by what each of us want, individually, we cannot focus on delivering impacts that we want collectively. That individual thinking reduces us to consumers, and deprives us off our citizen economic hat. And for all the talk about sustainability and impact investing, we must recognise, companies are constructed, governed and funded to provide with highest possible return on investors. Thus, sustainability and impact aims are strategies for companies to attract more customers and profit, but not their ultimate aim. Also notably, as long as the impacts are de-coupled from very definition of money, there are no ways of comparing or measuring how much impact is good enough vis-a-vis focus on accumulating more money.
The answer is simply, none. As long as our interests are expressed through organisations that we can opt-in as individuals (as an investor, laborer or consumer), we will not pay a social or environmental premium, because in all these cases, we are faced with free-rider problem: “why should I bear the cost of getting less (salary, return on investment, product or service) while others get more for theirs?”. Our system kills any incentives to create any public value that doesn’t benefit us individually. It’s not just a matter of us not being nice; it’s a matter of survival, because those that don’t exploit (planet, society) for their private gain will be erased by others in competition for more growth and power. That is design of our system.
Having said that, we can change things in the context of us acting together, where we are bound together, where private participation is not a choice. That is the definition of public space, and our public governance system. It can mandate across the nation, and acfoss the EU; everyone who is here has to abide by it. This is where we create a social contract. When we make such collective decisions, we can overcome the free-rider problem. This is true, so long we have trust in the collective system and have agency in it. And this is why we must move our focus away from companies, consumers or investors driving the change we need, and to public organisations to become relevant in an increasingly world.
Look at how CO2 markets actually are creating change. Carbon prices are making solar panels a competitive investment destination. It is changing practices across industries, be it chemicals, or agriculture, and creating more sustainable practices in terms of CO2 emissions. That simple tool, pricing the CO2 through cap and trade in Europe, has resulted in faster adoption of emission reduction technologies, making Europe a competitive region in green economy. However, those more sustainable practices ignore other impacts other than CO2 emissions. Just like we experience with the transition from ICE cars to EV cars.
Understanding this, we can now think about how to apply this in other areas of public goods. As it is hard to align global interests, we can start provide the concept at a local level, f.x. in a city. From my experience of running impact companies, we can create the changes we want in the market if we express the public goods we want in specific metrics, price them, and measure all companies’ products and services’ impact on those metrics.
Imagine that we managed to measure the impact of products and services, on the several dozens or hundreds of metrics we value as a collective: We would see a great change in how business is conducted. We would start to measure how a computer game, or a social media platform affects our mental health as well as our creativity and self-worth. We would measure the impact of cars in cities not only in terms of emissions but also the space they take, impact on health, safety, and on congestion. We would look at media outlets’ and aggregators’ impact on how much they help informed citizenship and critical thinking. We would look at the price of groceries counting in the effects of not only emissions but also biodiversity, and nitrogen and phosphor release in the soil. We would be able to reward the contributions of associations, culture and entertainment, and the kind of housing that creates more social interactions, acknowledging the cost of loneliness.
Imagine that the business profit and loss is not only reflecting the reality of business’ relationship with its customers and production, but it includes also its social and environmental impacts. Companies are where value is created, so we shall alter the definition of value already where it is first claimed, inside the P&L statement of a company. Next to EBITDA, we start hearing EBESI (Earnings Before Environmental and Social Impacts), as a well-established financial term making its way to the P&L.. That way, impact would make its way to finance desk, where decisions are taken, and away from marketing desk, where ESG usually belongs as a feel good report with no financial teeth.
This comes in the acknowledgement of the finance-driven organisations and economies we created. If we want change, the language we use must change where power lies. Sustainability and impact must become concepts in that language, a direct and core part of value generation, money and profits.
How can this be done?
I would like discuss a method I call Impact Exchange Markets. These markets would bring together buyers and suppliers of the impacts. On the buyers side, we will have public institutions, representing our collective demand. It may be a city government, together with a region, or other public institutions, that are willing to pay for certain public goods, creating a market for suppliers. They would want to buy these impacts because long term, these impacts make us better off in terms of sustainability and survival. Also, because “they” is “us”, we can democratically decide that the impacts are worth that much to us collectively. And us expressing the demand as citizens, we avoid the above mentioned free-rider problem.
We could ask our politicians to help identify metrics and set prices for them reflecting our collective interest. For many of the effects, we will have some studies pointing out that the impactshave large long term financial gains for society. For example, making citizens physically more active, or eat healthier, makes sense for our healthcare system. But essentially, the metrics and prices are an expression of a social goal or norm, not confined to the long term economic benefit one can model. If we deem gender equality in salaries is an important social benefit, we can include it and price it highly. We could at some point create a direct democratic process, where every citizen can express for improving which metrics their citizen-wallet should be spent.
Arguably, cities can and should create demand for these impacts, by assigning budgets for them, because it will make them more liveable, and more attractive, in the future. If they currently don’t have the money for it, they can borrow from financial markets, by issuing, for example, bonds. After all, most public goods have a high return on investment, in terms of social and environmental returns.
We need to acknowledge that the demand for public goods occur at the scale of the impacted geography: traffic congestion is a city-wide problem, its levels and value is city-specific. Thus, a traffic congestion must be priced for that city or region. Similar can be said about air quality, or safety. In contrast, public health and informed citizenship are regional or national goods.
Impact Exchange Markets can start at a new location with one metric, and grow from there to more metrics, and more locations. The beauty of such impact exchange market is that multiple organisations with the desired outcomes, who have a long-term economic interest in making them happen, can co-invest into the market. In Denmark, cities stand for about 80% of the public spending budgets, with Regions just below 10% and the rest being the central government. So obviously cities would be the largest buyers of public impacts. But it’s not only also regions and central government, it’s also pension funds, real estate companies and similar that has an interest from the long term provision of public goods, hence the willingness to pay for them.
Companies impacts would be subject to additionality and attribution. That is, they would trigger payments for how they contribute compared to the baseline — which is absence of the markets. They would trigger payments based on their part in the change they helped make happen. These are obviously not trivial in terms of measurements.
Public authorities don’t necessarily have to be the ones financing the contributors. What they can also do, is to mandate that all companies report their impacts, and they can set prices for what it will cost for detracting from public goods, and what will be earned by the providers of them. Just like the cap and trade of CO2 markets. When all companies are a part of these markets, and are sharing their operational data, our understanding of the data and impact will also improve substantially. When the impact markets are ensuring that companies are paying and receiving for their externalities, the role of public governance increasingly becomes ensuring we express the metrics that matter, and continue improving our measurement accuracy. And let the markets work not only for consumers, but for the citizens.
Can We Measure It?
Can we really measure impacts of companies on social phenomenon? And should we measure it?
I have a friend, who is an economist, and believes that pricing of natural resources creates the perception that we can exploit them by simply paying the cost. She rejects the idea on that basis. Yannis Varufakis, seems to also reject the idea of pricing public goods on similar grounds. Another economist friend, and advisor, expressed her worry in a similar way: how can we measure love? The most important things in life, we cannot measure. So, we should not build our future premise on the idea of trying to measure things we value.
While I think I understand the fundamental objection, I find myself on the side of favoring measuring things that we care about. After all, what we don’t measure, we cannot focus on. Even if we d dnot want to trade them with a given price, we cannot even know they are being harmed or diminished if we don’t measure. No kind of measurement is or will ever be perfect, as that perfection is a fictive idea. However, we can build iterations of measurement by improving the metrics and measurement methods in order to better express the collective interest. So, how complex is our ability to measure?
Thanks to the advancements in big data and machine learning techniques, I believe we are at the stage where we are able to make strong data links between social and environmental phenomenon and products and services. What we need is to trust the measurement agencies with sensitive data, ensuring GDPR is respected, while at the same time, allowing baseline and general data to be crossed with individual data from recipients of services. There are techniques to help us judge the causality over correlation, especially when we are able to receive individual data.
We have given much of our data to the companies to provide us with better health, sleep, food, navigation, friends, lovers, intimacy etc etc as a consumer. We villified the state as the bad guys who might spy on us thanks to remembrance of authoritarianism. Now, we need to see that our public goods need similar data to get stronger in relating our well-being to our environment, lifestyle and consumption. Instead of one-off static studies that we see evaluating impact of a certain service (such as the 2019 study that showed Uber and Lyft are increasing congestion), we need dynamic studies that have live data feeds from services to measurement agencies, to keep measuring the impacts on an ongoing basis.
Many states already collect a great deal of data, also linked to individuals. In Denmark, individual level data is available for specific studies that links everything from car ownership to tax reports, hospital visits, kids well-being, and even clubs you are a member of. That sort of data is highly valuable, but we fall much short on putting it at use to assist us creating better public governance. Combining such general data with sector data, then also with company level operational data, we have great potential to meet the data challenge that is required to create impact exchange markets.
The truth is that measurement of externalities of sorts is complex, difficult and unfair. But necessary. It is too complex and difficult also, to leave to companies to do their self-assessment, or to foundations and think-tanks to run socially crucial studies with limited resources.
To make impact markets come true, we would have different impact validators measuring their area. We can strengthen the model by inserting impact auditors, who oversee the data analysis and qualify it. The impact models and allocated impacts would be transparent to everyone, just not the raw data. We can further move the data into a blockchain technology if we deem we need more security and co-ownership, though I don’t believe these are key features of such system.
The Legal Structure and Process
The model to make impact markets work, has been debated with lawyers. And it is doable, even within the boundaries of current public law.
The make it happen, a city or region would set out an amount of budget as its initial commitment for the fund. The city then revisits their total amount commitment on an annual basis. City’s goals with this amount would be subject to its representatives on the fund; the metrics it supports, and prices it will grant can change on a monthly, or quarterly basis.
The fund itself is established as a shel, that holds commitments, just like other financial funds. The fund can take commitments from many public institutions across all kinds of metrics. When geographies and metrics of different institutions overlap, the demand and presumably prices for certain outcomes increases.
Initially, companies’ participation to the fund would be on a voluntary basis. If they believe they are improving any metrics, they would have the incentive to join and collect the income from positive externalities. Companies impacts would be measured across all relevant metrics for which there are buyers, even if the company applies for only one. That way the company would only earn if they generate a net positive impact, across all metrics. Over time, all companies would be mandated to join the fund, where companies detracting value would be in position to pay in to the fund.
Data from the companies would be passed on to the different validators, who are established as the measurement experts on the different metrics. The fund could appoint multiple validators in order to compare and improve its measurement capabilities. Impact auditor would be in position to flag any problems with the measurement methods. Transparency by publishing of all impact models and identified and claimed impacts will assist auditing. Fund management company can be assigned the task of bringing together the buyers of impact, along with suppliers, and impact validators, and also bridge the exchange of data who finally ensures publishing of all results.
Do you like what you read here? Let’s make it happen! Contact me via: erdem (at) meritdemocracy (dot) org
