Large companies around the world disclose sustainability information in their ESG reports. Much of the content is climate-related, but many companies also report on social impacts — the “S” in ESG. The measurement of social impact, however, is not as simple as in financial accounting where currency serves as the basic unit of measure, or in environmental accounting, where objective, physical measures, such as kg of CO2, emissions, can capture and quantify a company’s environmental impact.

Meaningful social impact reporting requires measuring many different type of impacts, both positive and negative, on a company’s customers, employees, suppliers, and communities. The challenge is to obtain a complete and comprehensive representation of these impacts.

Consider the example of microfinance, which was widely celebrated for its perceived ability to lift people out of poverty by providing access to credit. Its initial success in this goal was measured by the financial returns earned by the institutions that loaned to what had previously been perceived as high-risk and not creditworthy, low-income individuals. Studies showed that microfinance did indeed deliver positive performance for many low-income entrepreneurs and their lenders.

But other studies revealed that, in some sites and with some lenders, microfinance’s high interest rates imposed high costs on borrowers. Many women had to sell their homes to repay loans, and many others felt great stress because of the fear of default and loss of face in their villages. The microfinance metrics quantified the financial outcomes experienced by the lenders and those starting new businesses, but not the nonfinancial outcomes experienced by many low-income borrowers.  In other words, the performance metrics adopted by microfinance institutions did not capture the full social impact of their products.

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