Archive for the ‘impact investing’ Category

On social impact bonds and critical reflections

May 5, 2018

A new article (Roy, McHugh, & Sinclair, 2018) out this week in the Stanford Social Innovation Review echoes Gleeson-White (2015) in pointing out a disconnect between financial bottom lines and the social missions of companies whose primary objectives concern broader social and environmental impacts. The article also notes the expense of measurement, increased administrative burdens, high transaction costs, technical issues in achieving fair measures, the trend toward the negative implications of managing what is measured instead of advancing the mission, and the potential impacts of external policy environments and political climates.

The authors contend that social impact bonds are popular and proliferating for ideological reasons, not because of any evidence concerning their effectiveness in making the realization of social objectives profitable. Some of the several comments posted online in response to the article take issue with that claim, and point toward evidence of effectiveness. But the general point still stands: more must be done to systematically align investors’ financial interests with the citizens’ interest in advancing their financial, social, and environmental quality of life, and not just with the social service providers’ interest in funding and advancing their mission.

Roy et al. are correct to say that to do otherwise is to turn the people served into commodities. This happens because governance of, accountability for, and reporting of social impacts are shifted away from elected officials to the needs of private funders, with far less in the way of satisfactory recourse for citizens when programs go awry. The problem lies in the failure to create any capacity for individuals themselves to represent, invest in, manage, and profit from their skills, health, trust, and environmental service outcomes. Putting all the relevant information into the hands of service providers and investors, and making that information as low quality as it is, can only ever result in one-sided effects on people themselves. With no idea of the technologies, models, decades of results, and ready examples to draw from in the published research, the authors conclude with a recommendation to leave well enough alone and to pursue more traditional avenues of policy formation, instead of allowing the “cultural supremacy of market principles” to continue advancing into every area of life.

But as is so commonly the case when it comes to technical issues of quantification, the authors’ conclusions and criticisms skip over the essential role that high quality measurement plays in reducing transaction costs and supporting property rights. In general, measurement standards inform easily communicated and transferable information about the quantity and quality of products in markets, thereby lowering transaction costs and enabling rights to the ownership of specific amounts of things. The question that goes unasked in this article, and in virtually every other article in the area of ESG, social impact investing, etc., is this: What kind of measurement technologies and systems would we need to be able to replicate existing market efficiencies in new markets for human, social, and natural capital?

That question and other related ones are, of course, the theme of this blog and of many of my publications. Further exploration here and in the references to other posts (such as Fisher, 2011, 2012a, 2012b) may prove fruitful to others seriously interested in finding a way out of the unexamined assumptions stifling creativity in this area.

In short, instead of turning people into commodities, why should we not turn skills, health, trust, and environmental services into commodities? Why should not every person have legal title to scientifically and uniformly measured numbers of shares of each essential form of human, social, and natural capital? Why should individuals not be able to profit in both monetary and personal terms from their investments in education, health care, community, and the environment? Why should we allow corporations to continue externalizing the costs of social and environmental investments, at the expense of individual citizens and communities? Why is there so much disparity and inequality in the opportunities for skill development and healthy lives available across social sectors?

Might not our inability to obtain good information about processes and outcomes in the domains of educational, health care, social service, and environmental management have a lot to do with it? Why don’t we have the information infrastructure we need, when the technology for creating it has been in development for over 90 years? Why are there so many academics, researchers, philanthropic organizations, and government agencies that are content with the status quo when these longstanding technologies are available, and people, communities, and the environment are suffering from the lack of the information they ought to have?

During the French revolution, one of the primary motivations for devising the metric system was to extend the concept of universal rights to individual commercial exchanges. The confusing proliferation of metrics in Europe at the time made it possible for merchants and the nobility to sell in one unit and buy with another. Universal rights plainly implied universal measures. Alder (2002, p. 2) explains that:

“To do their job, standards must operate as a set of shared assumptions, the unexamined background against which we strike agreements and make distinctions. So it is not surprising that we take measurement for granted and consider it banal. Yet the use a society makes of its measures expresses its sense of fair dealing. That is why the balance scale is a widespread symbol of justice. .. Our methods of measurement define who we are and what we value.”

Getting back to the article by Roy, McHugh, and Sinclair, yes, it is true that the measures in use in today’s social impact bonds are woefully inadequate. Far from living up to the kind of justice symbolized by the balance scale, today’s social impact measures define who we are in terms of units of measurement that differ and change in unknown ways across individuals, over time, and across instruments. This is the reason for many, if not all, of the problems Roy et al. find with social impact bonds: their measures are not up to the task.

But instead of taking that as an unchangeable given, should not we do more to ask what kinds of measures could do the job that needs to be done? Should not we look around and see if in fact there might be available technologies able to advance the cause?

Theory and evidence have, in fact, been brought to bear in formulating approaches to instrument calibration that reproduce the balance scale’s fair and just comparisons of weight from data like that from tests and surveys (Choi, 1998; Massof, 2011; Rasch, 1960, pp. 110-115). The same thing has been done in reproducing measures of length (Stephanou & Fisher, 2013), distance (Moulton, 1993), and density (Pelton & Bunderson, 2003).

These are not isolated and special results. The methods involved have been in use for decades and in dozens of fields (Wright, 1968, 1977, 1999; Wright & Masters, 1982; Wright & Stone, 1979, 1999; Andrich, 1978, 1988, 1989, 2010; Bond & Fox, 2015; Engelhard, 2012; Wilson, 2005; Wilson & Fisher, 2017). Metric system engineers and physicists are in accord with psychometricians as to the validity of these claims (Pendrill & Fisher, 2015) and are on the record with positive statements of support:

“Rasch models belong to the same class that metrologists consider paradigmatic of measurement” (Mari and Wilson, 2014, p. 326).

“The Rasch approach…is not simply a mathematical or statistical approach, but instead [is] a specifically metrological approach to human-based measurement” (Pendrill, 2014, p. 26).

These statements represent the attitude toward measurement possibilities being applied by at least one effort in the area of social impact investing ( Hopefully, there will be many more projects of this kind emerging in the near future.

The challenges are huge, of course. This is especially the case when considering the discontinuous levels of complexity that have to be negotiated in making information flow across locally situated individual niches, group-level organizations and communities, and global accountability applications (Fisher, 2017; Fisher, Oon, & Benson, 2018; Fisher & Stenner, 2018). But taking on these challenges makes far more sense than remaining complicitly settled in a comfortable rut, throwing up our hands at how unfair life is.

There’s a basic question that needs to be asked. If what is presented as measurement raises transaction costs and does not support ownership rights to what is measured, is it really measurement? How can the measurement of kilowatts, liters, and grams lower transaction costs and support property rights at the same time that other so-called measurements raise transaction costs and do not support property rights? Does not this inconsistency suggest something might be amiss in the way measurement is conceived in some areas?

For more info, check out these other posts here:


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