Throughout the course of history, no other economic system has been as effective in reducing poverty, addressing societal challenges and generating widespread prosperity than capitalism. It allowed the son of Irish immigrants to transform his bicycle delivery job in the early 1900s into a company that is today the largest courier company in the world by revenue: UPS. The ability to take advantage of economies of scale has fast-tracked innovation, quickly giving societies everything from refrigeration to electricity to radiation therapy.
However, capitalism as it stands today is by no means flawless, and the ramifications of an unchecked system bring its positive benefits into question. For example, while studies show that the advent of pesticides and fertilizers after World War II contributed to widespread reduction of poverty and preventing hunger for millions of people, the rampant use of chemical-heavy farming techniques has resulted in pervasive soil degradation across the globe.
As it currently stands, the imperfections of this system appear more prominent to many Americans than its overall positive impact and relative advantages. Between 2019 and 2022 alone, the public’s favorable perception of capitalism dropped by eight percentage points to 57 percent, according to a national survey from Pew Research Center.
Additionally, although nearly 70 percent of the Forbes 400 list of richest Americans are self-made (meaning they built their own company or established their fortune on their own), a recent YouGov poll indicated that just 43 percent of United States adult citizens believe that the American dream exists. Perhaps even more troubling, our younger generations – adults under 30 – are the age group least likely to believe in the American dream.
Reworking the system
According to Bill McGlashan, capitalism holds the key to broadening economic prosperity, but in its current state has become unbridled and resulted in a number of serious problems. Known as one of the pioneering figures in impact investing, McGlashan has headed a number of initiatives aimed at utilizing capitalism to effect change. He co-founded The Rise Fund, one of the largest and most ambitious private equity impact investing funds to ever be created, and started Y Analytics, a public benefit corporation that helps capital allocators better understand, value and manage social and environmental impact.
“You can look at any of the big issues we suffer today, any of them,” said McGlashan. “It points to the fact that you’ve got the wrong metric. Because we don’t price externalities, because they’re not factored in, you by definition end up with something that runs amok.”
Indeed, in the capitalist systems that have arisen today, the costs or negative consequences that are inflicted on society and the environment as a result of economic activities are not taken into account or factored into the prices of goods and services. “Any of the major problems we face today can be attributed to the fact that we are using the wrong measurement or metric to evaluate economic systems and their impacts,” said McGlashan. The pursuit of profit and economic growth, without proper consideration of the broader impacts and costs, have caused problems such as pollution, resource depletion and social inequality across the globe.
McGlashan argues that financial profitability and making a positive difference in society or the environment are not conflicting objectives. Instead, they are interconnected, and as a business becomes more successful in generating financial returns, it also has the potential to deliver a greater positive impact on society or the environment. “If the output of a business is that which creates impact, by definition the more successful you are, the more impact you deliver.”
Standardizing impact measurement
The co-linear relationship between impact and returns is the basis behind impact investing, an investment approach that has rapidly been picking up traction over the past few years. The goal of impact investing is to provide capital to companies that create measurable, positive change in the world while also generating a financial return. “You have to be able to measure the outcomes, declare what you’re going to deliver, bake that declaration into your key performance indicators and operating metrics, and then report on it with the kind of reporting that third parties can verify,” McGlashan said.
However, as the impact investing market grows we encounter a question: how do you define and measure impact? Although the business world has several universally accepted tools such as the internal rate of return for estimating a potential investment’s financial yields, no metric has been broadly accepted for evaluating social and environmental rewards in dollar terms.
Indeed, a study conducted by the Wharton Social Impact Initiative found that impact-focused, quantitative data were cited far more often in cases of impact success than they were in cases of impact underperformance. Specifically, 82 percent of the examples of impact success involved citing quantitative impact data, while only 24 percent of the underperformance examples involved quantitative impact-focused data. Researchers for the study concluded that often, impact metrics were being used to convey accomplishments and describe what portfolio companies were doing rather than to objectively measure or evaluate performance.
McGlashan, for his part, has worked to combat this trend. In 2019 he founded Y Analytics, a public-benefit corporation that measures social and environmental impact using the Impact Multiple of Money (IMM), and makes the methodology public to broaden the reach of impact investing. The firm uses research from academics, independent companies and institutions with the methodology pressure-tested by 80 organizations worldwide and back-tested against 100 deals to verify its validity.
“What we knew was necessary is that we created a platform that allowed a common agreed-upon framework for measurement and reporting of impact,” McGlashan says. “It’s a commitment we made. It’s a little contrarian for a private equity firm to make our IP available to the world, but it speaks to our broader goal of supporting the industry, scaling the industry and ideally attracting a lot of competitors.”
For McGlashan, his goal and the goal of others working with him were to advance the world to a place where IMM is talked about in the same way GDP and IRR are, firmly cemented as a quantifiable way to measure impact. Capitalism, like every other economic model, is inherently flawed, and it is undeniable that in its current iteration the singularity of its focus on profits has proven detrimental in a number of ways. However, McGlashan says that while the system may be currently out of sync with the needs of the globe, it remains the best driver of effective change. “The system has run amok, but if we measure externalities effectively and we’re intentional, there’s no better model to create scalability, durability, and impact than a commercial model.”