Five dimensions of impact | RISK
Introduction
When enterprises and investors set financial goals, they always face the risk of not achieving them. The same is true for impact.
The “Risk” dimension of impact assesses the likelihood that impact will be different than expected, and that the difference will be material from the perspective of people or aspects of the natural environment that experience impact.
While financial risk assessments may capture impact risks, this is not always the case. A simple example illustrates the point. A financial risk assessment may suggest that an enterprise increase its prices to increase profitability, with negative implications for customers living on low wages. By contrast, consideration of impact risk may suggest that the enterprise explore other alternatives (such as a cross-subsidy model) to prevent pricing out those who could experience the greatest positive change in well-being from accessing the product or service.
Enterprises and investors need to consider impact risks in addition to financial risks. The data categories under the “Risk” impact dimension provide enterprises and investors with a roadmap for assessing and mitigating impact risks.
These categories include:
- Type of impact risk: Ten types of impact risks that may undermine the delivery of the outcome
- Level of impact risk: The likelihood and severity of the impact risk
By collecting data across these categories, enterprises and investors can gain a nuanced understanding of potential risks and actively work towards decreasing their likelihood and severity.
The remaining sections provide enterprises and investors with guidance on how they can implement these categories of impact risk.
What types of impact risks do enterprises and investors face?
Impact risk is the likelihood that an enterprise’s impact on people and planet will be different than expected, and that the difference will be material from the perspective of the people experiencing impact as well as the planet.
For example, what is the likelihood that trainees will not obtain a long-term, decent employment opportunity after graduation? What are the consequences for patients if medicine is not delivered on time? What are the risks of gender-based discrimination enabled by weak organizational policies and practices, or of gender-based violence as backlash for extending opportunities to women that challenge social norms?
For each outcome they seek to deliver, enterprises and investors are exposed to one or more of the following ten types of impact risks:
Identifying – as well as assessing and mitigating – risks is not a one-time exercise but an ongoing learning process that requires re-evaluating risks as a product, service, project, or policy develops.
How can enterprises and investors assess impact risk?
To assess impact risks, enterprises and investors need to consider:
- The likelihood of the desired impact not occurring
- The severity of the consequences for people, communities, and the planet should the desired impact not occur
Enterprises and investors can classify these risks into “Low”, “Medium” or “High” relative to one another, as per the diagram below. A very likely and severe risk would be classified as “High”, whereas a very unlikely and not severe risk would be classified as “Low”.
Deciding how to rank risks – and which risks to act upon – will be organization-specific. However, the following guidelines may prove useful during the assessment process:
- Each outcome will be subject to one or more risk(s), although not all of them will be material. Enterprises and investors need to conduct a risk assessment for each outcome that they expect to deliver.
- If a risk is classified as “Low,” then the risk would not be considered material. However, it should be regularly reviewed to ensure it remains under the same classification.
- It is often practical to begin with assessing evidence risk (i.e., the probability of insufficient high-quality impact data) by considering the availability of impact data across the other dimensions (“What,” ” Who,” ” How much,” and “Contribution“).
- If evidence risk is classified as “High,” then it is likely that other data-related risks– drop-off, execution, unexpected impact, efficiency, and inequity risks – will also be classified as “High.” When this is the case, enterprises and investors may not find it useful to consider these other five risks separately, as their assessment depends on sufficient data availability (note: assessing inequity risk specifically requires impact data that is disaggregated by social identities and demographics).
- Conversely, if evidence risk is “Medium” or “Low” (i.e., there is some impact data available), then these five data-related risks will add depth to the assessment and help enterprises and investors focus resources on high-risk outcomes.
- Community participation risk, external risk, endurance risk, and alignment risk can be assessed based on the enterprise’s model and operating environment, regardless of the available evidence.
- Community participation risk and unexpected impact risk are particularly salient risk types to consider alongside inequity risk.
- If investors do not engage with a diverse and representative group of community members, and particularly if they do not seek out the perspectives of historically and / or currently marginalized communities, investors may make decisions expecting to achieve sustainable outcomes for all communities of focus and end up achieving intended outcomes for only some subgroups. This could unintentionally exacerbate existing inequities. For instance, an investment strategy to increase incomes for all enterprise employees that is primarily informed by male perspectives could end up primarily increasing incomes for men, thus widening gender income disparity.
- An intervention may result in positive outcomes for the population of focus while unintentionally causing harm to another group of which the enterprise or investor was unaware. For example, an affordable housing development that displaces existing community members would improve housing outcomes for the new development residents while harming the previous residents.
- As points 3 and 5 illustrate, risks do not exist in isolation. Assessing the relationship between risks will provide more accurate classifications (e.g., does a high drop-off risk precipitate efficiency risk?).
- Enterprises and investors can use scenario planning to avoid a narrow assessment of risks (e.g., would the level of risk change if a certain parameter were changed?).
- Grounding expectations of impact in the perspectives of affected people and the planet can help prioritize risks. For example, if community members experiencing impact expect and value short-term impact, drop-off risk may not be a priority risk.
Assessing impact risk with a population-specific framework
As part of their Child-Lens Investing Framework, UNICEF developed a “Child-Lens Impact Risk Matrix” to support investors in assessing the risk that investments may not achieve intended impacts on children.
To demonstrate how centering children in impact risk assessments can uncover valuable insights even for investment strategies that don’t directly focus on children, the Child-Lens Investor Toolkit includes an example of an impact risk assessment using the matrix for an anonymized climate investment in an enterprise developing rooftop solar energy solutions for commercial and industrial businesses. The goal of the investment is to accelerate corporate decarbonization and mitigate climate change.
Focusing the assessment on children uncovered a number of impact risks. For example, when considering execution risk, or the likelihood that the investment would not be operationalized effectively to deliver its intended benefits for children, the assessment revealed that the investment’s indirect strategic focus on children increased the risk that intended child outcomes such as improved respiratory health from reducing air pollution would not be realized. This assessment resulted in identifying mitigation strategies such as more explicit consideration of indirect impacts on children through additional data collection, community surveys, and / or partnering with health organization to track health impacts of climate change on children longitudinally.
Source: UNICEF (2023)
Once risks have been identified, assessed, and prioritized, they need to be mitigated. The next section covers concrete steps for risk mitigation.
SPOTLIGHT ON SOCIAL EQUITY
Inequitable outcomes result not just from intentional and conscious individual behavior but also from systemic bias (e.g., customs, policies, or practices that create disadvantage on the basis of social identity) that operates without intention or awareness of the individuals implementing those policies and practices. In this context, inequities are likely to persist and / or worsen without intentional and significant action to assess and mitigate them. For example, without intentionally centering the experiences of women in workplace policies and practices, an enterprise might neglect to offer flexible work arrangements and consequently fail to attract or retain working mothers who are disproportionately expected to shoulder childcare responsibilities.
Assessing and mitigating inequity risk requires intentionally equitable impact management processes. For guidance on collecting and disaggregating demographic data to assess inequity risk, refer to the “Who” dimension. For guidance on examining the causes of inequities and integrating mitigation throughout your impact management practice, see Advancing Social Equity Through Impact Management.
How can enterprises and investors mitigate impact risk?
Mitigating risk is a two-stage, iterative process that builds on the risk assessment.
The first step requires enterprises and investors to fill in the data gaps identified in the risk assessment. As several impact risks can be mitigated with additional data, further data collection and analysis is often a useful starting point.
The second step uses the new insights to adjust the business model — for instance, tweaking prices, hiring staff, extending an initiative, or strengthening health and safety safeguards.
How the Education Outcomes Fund mitigates risks
Launched in 2019, the Education Outcomes Fund for Africa and the Middle East (EOF) aims to improve educational attainment by scaling up proven and innovative education solutions. EOF plans to partner with impact investors, philanthropic organizations, and aid agencies to fund interventions across multiple countries and at all levels of education.
EOF recognized early on the need to understand its impact risk exposure, to ensure the success of the initiative. To this end, EOF carried out a four-fold approach to identify, assess, and mitigate risks:
- Using the education evidence base and expert interviews, EOF first compiled a comprehensive list of risks that it could face at each stage of the initiative — from design to implementation to monitoring and evaluation.
- Having identified a total of 64 risks that could jeopardize the initiative’s impact, EOF ranked them according to their likelihood and severity.
- Based on these findings, EOF went back to the research to fill in the data gaps and re-assess risks more accurately.
- The team organized a list of existing and new procedures that could mitigate the risks.
Out of the 64 risks identified, EOF found that almost half fall under community participation and unexpected impact risk types. The analysis also showed that a sizable proportion could be mitigated by preventive procedures. While acknowledging the limitations in predicting risks, EOF has derived significant value from the exercise, enabling them to put in place a risk mitigation plan.
Source: Education Outcomes Fund (2018)
Mitigating one risk type can sometimes increase the likelihood of another risk type. For example, addressing inequity can require significant public and political support for change. Depending on the priorities and alliances of critical decision-making bodies such as elected officials, interest groups, and unions, mitigating inequity risk may increase external and drop-off risk due to immediate resistance and / or eventual retrenchment (whereby advancements toward social equity are initially achieved only to be undermined later). In this case, approaching risk mitigation holistically (e.g., by identifying and securing the support of key allies) can increase the likelihood of achieving impacts that are both enduring and equitable.
