Commerciality and Impact: Unveiling the Similarities Between Two Markets Divided by Language
In today's dynamic financial landscape, the intersection of capital markets and impact markets represents a pivotal frontier. As businesses and investors increasingly focus on environmental, social, and governance (ESG) factors, the need for clear and consistent language becomes paramount.
Frustratingly, despite the growing convergence, a significant challenge persists: the use of inconsistent language causes a disconnect between these two domains. This article delves into the challenges posed by this divide, highlighted through our recent experience at both the Social Impact Summit and the CeMAT Conference, and explores potential pathways to greater clarity and collaboration.
As the saying goes, there is more that unites us than divides us.
Understanding the Two Worlds
Capital Markets: The Traditional Stalwart
Capital markets, encompassing stock exchanges, bond markets, and other financial instruments, have long operated with a lexicon rooted in profitability, risk management, and shareholder value. Terms like ROI (Return on Investment), EPS (Earnings Per Share), yield, and growth dominate the discourse, reflecting a focus on financial returns and quantitative metrics.
Impact Markets: The Emerging Frontier
In contrast, impact markets emphasize the creation of positive societal and environmental outcomes alongside financial returns. Here, the language revolves around concepts such as greenwashing, materiality assessment, triple bottom line, and impact metrics. The lexicon is infused with qualitative dimensions, capturing the broader value generated for communities and ecosystems.
The Linguistic Divide: Challenges and Implications
Illustrative Case: Social Impact Summit vs. CeMAT Conference
Social Impact Summit
The Social Impact Summit is an annual gathering of leaders, activists, and investors focused on creating meaningful change. The language at this summit is rich with terms like "community engagement," "sustainable development goals (SDGs)," and "social entrepreneurship." Discussions center around qualitative impacts, storytelling, and the holistic value of initiatives. Conversations prioritised the importance of driving change and improving outcomes regarding to social and environmental issues.
CeMAT Conference
CeMAT, a premier event for the materials handling and logistics industry, speaks the language of efficiency, optimization, and technological innovation. Here, the focus is on "supply chain management," "automation," and "logistics performance." Metrics are quantitative, with a strong emphasis on cost savings, productivity, and competitive advantage. Conversations prioritised commercial outcomes, and discussions regarding ESG, sustainability and impact were largely driven by impending regulatory pressure.
The linguistic divide between capital markets and impact markets, where the former is data-driven and efficiency-oriented, and the latter is values-driven and impact-oriented, creates confusion, uncertainty and tension. This will continue to grow as an issue as co-existence morphs into a singular approach that unites both markets.
Misalignment of Objectives and Metrics
The primary challenge lies in the fundamental difference in objectives and metrics. While capital markets prioritize financial performance, impact markets seek a balance between financial and non-financial outcomes. An over-rotation on qualitative and non-financial metrics leads to misunderstandings and skepticism, isolating traditional investors who question the rigor and validity of impact metrics, and impact investors lamenting the narrow focus of conventional financial analysis that hampers perceived commitment and investment.
Inconsistent Terminology and Definitions
A significant barrier is the lack of standardized terminology. Terms like "impact," "sustainability" and "ESG" are used interchangeably, yet they carry different connotations and implications in different contexts. This inconsistency causes ineffective communication, making it difficult for stakeholders to align their goals and collaborate effectively. To translate these terms they are respectively speaking to “strategy,” “operations” and “risk.”
Regulatory and Reporting Challenges
Regulatory frameworks and reporting standards vary widely between capital and impact markets. While capital markets benefit from well-established financial reporting standards (e.g., GAAP, IASB), impact markets have lacked universally accepted guidelines for measuring and reporting social and environmental impact. This disparity complicates the evaluation and comparison of impact investments, impeding the flow of capital into impactful projects. With the AASB translating the SASB standards into the Australian context, this will change over time. That will, however, be after an initial period of heightened confusion and frustration.
Bridging the Gap: Pathways to Convergence
Developing Common Standards
To foster better communication and collaboration, the development of common standards and frameworks is essential. Initiatives like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) are making strides in this direction, providing standardized metrics for ESG reporting that can be integrated into traditional financial analysis.
Fostering Cross-Sector Dialogue
Encouraging dialogue between stakeholders in capital and impact markets can bridge the linguistic divide. Forums, conferences, and collaborative platforms can facilitate the exchange of ideas, fostering a mutual understanding of each sector's priorities and challenges. It is however paramount that these opportunities don’t overflow with jargon, and wherever possible known language and terms that resonate with both financial and impact-oriented audiences should be adopted.
Education and Capacity Building
Building capacity within both markets through education and training is crucial. Financial professionals need to be versed in impact metrics and the broader value propositions of impact investments. Similarly, impact investors must understand the intricacies of traditional financial analysis. Integrating these perspectives into educational curricula and professional development programs can cultivate a new generation of leaders adept at navigating both worlds.
Commerciality is Key
Business can only succeed in delivering environmental and social outcomes when business is resilient and can remain viable to see the outcomes of their commitment. Whether it be through a strategic, operational or risk management approach, any commitments must be balanced in concert with key commercial drivers. The binary (and often adversarial) view of “one or the other” or “all or nothing” regarding environmental or social programs needs to be replaced with a balanced approach incorporating a holistic understanding of business goals.
Conclusion
The convergence of capital and impact markets holds immense potential for driving sustainable and inclusive growth. However, the linguistic divide between these domains presents a significant challenge. By developing common standards, fostering dialogue, building capacity, and ensuring commerciality, we can bridge this gap and unlock the full potential of the emerging impact marketplace.
The contrasting focuses of the Social Impact Summit and the CeMAT Conference serve as a microcosm of this broader challenge, underscoring the need for a coherent and integrated approach. As we move towards a more integrated financial ecosystem, the onus is on all stakeholders to engage in this critical conversation, ensuring that the language of capital evolves to reflect the values and aspirations of a sustainable future.