An important distinction should be made between impact unicorns and ESG
For years, technology investors have been searching for “unicorns” – companies with a valuation of one billion dollars. These companies were dubbed unicorns because they once were as rare as the mythical beast. Today, there are over 1000 of them globally.
Now, there is a whole new breed of unicorn – impact unicorns. True impact unicorns are not only valued at one billion dollars. They also make a tangible impact on one billion lives.
This definition, however, is already being misused. Many are leaning on the old language – referring to any $1bn company creating a vaguely positive impact as an impact unicorn.
This is lazy shorthand. It devalues the work of real impact unicorns; it lauds companies that may not be making much real impact.
To go back to basics, impact companies are those that combine impact and profit. Simply, for every unit of sales that these companies make, they also create a “unit of impact” – whether that is creating cleaner energy, building more homes, or reducing hunger.
Yet often “Impact” and “ESG” are interchanged at random. Let’s be clear: they are two totally different things.
ESG investing is about responsible investing, meaning that each investment must be considered from an environmental, social and governance perspective. It is usually from a “do no harm” basis: it is risk management that helps guarantee that companies do not leave negative traces on our planet or society.
Impact investing is instead about addressing the hardest problems of our time head on.
Let me make the distinction even clearer. For example, Coca Cola has a high ESG score, which means that the company is committed to running its business in a responsible way. But do you see Coca Cola actively driving positive change with every unit that they sell? In contrast, take Stockeld Dreamery, a producer of vegan cheese. Did you know that cheese is the third largest emitter within food, after beef and lamb? The impact of the company is direct – every time someone buys Stockeld Dreamery cheese, they are substituting it for an unsustainable alternative.
To measure the impact of a company, you can take it through a “Theory of Change” framework: a means of showing how change happens over time to achieve a desired impact.
If you were to run Tesla through the framework, the immediate key performance indicator could be that every electric car it produces replaces one diesel or petrol car. Therefore, you can count how many fossil-fuel-powered cars are taken out of circulation. The longer-term impact of Tesla’s work is that every major automotive manufacturer is now producing electric cars, and this is where it reaches the one billion territory.
Tesla, then, is a perfect example of a company that drives systemic change. To date, it’s a long way from selling a billion new cars, but it’s affected the lives of more than a billion people.
Yet, we are only at the beginning of the process. If we continue to misunderstand what an impact company really is, we take away the spotlight from the true impact entrepreneurs. The technology industry has built a cult of semi-celebrity around unicorn founders. We need to do the same, if not more, for the founders of impact unicorns. If we sharpen our definition of impact, not only will we enable these companies to flourish, and signpost the way for future impact founders, but we will be doing right by the planet too.