Environmental and social impact can be measured and should be accounted for in corporate financial statements. Here’s why.
In a previous blog post (Why Capitalism Needs a Reset Now), we talked about the need to reset capitalism, to ensure it becomes more just and equitable for all members of society and less damaging to the planet. Today we’ll get into the details of how we can start the reset process through impact-weighted accounts.
We have always known that companies have both negative and positive impacts on their employees, communities they do business in, and the planet. It’s only been more recently, however, that we’ve begun to understand that impact and social value (ESG) can be measured and should be accounted for in corporate financial statements. Impact-weighted accounts (IWAs) are a way to convey the dollar value of changes in outcomes to employees, communities and the planet. They are displayed as supplementary documentation within financial statements. By monetizing impact, managers and investors are given a better idea of the changes they are creating on people and the planet. Economists believe a shift to IWAs could signify a major change in all areas of the capital markets and the structures that sustain them, hence, resetting capitalism.
In July of 2020, impact accounting took a major step forward when the Harvard Business School (HBS) Impact-Weighted Accounts Initiative (IWAI) published the cost of environmental impact of 1,800 companies. Shockingly, when looking at data for corporations dating back to 2018, it was revealed that several companies are creating environmental costs that exceed their total profit. When accounting for environmental damage, 252 companies would have been wiped totally clean of all profits when the cost of the damage was taken into consideration. The IWAI plans to publish the cost of employee and product impacts next year. These findings are likely to have tremendous implications for governments, investors, and consumers in the years to come as we see more of a shift towards impact weighted accounts.
According to Ronald Cohen and George Serafeim (Harvard Business Review), impact transparency is going to have a few major consequences. First, instead of taxing the general population to rectify the negative impacts of corporations for things like pollution, pay below minimum wage, and products that can lead to poor health and obesity, governments will be able to tax the corporations responsible for harm caused. They’ll also be able to provide incentives to the companies that deliver positive impact for people, profit, and planet, in the form of subsidies, reduced taxes, or preferential procurement.
Second, investors will take greater consideration of social and environmental impact into their investment analysis. Currently about a third of the world’s investment assets are ESG investment. This, despite the fact that ESG standards are still in the early stages of development. Firms who have a negative impact on the planet will see a decreased stock market valuation.
And finally, consumers will play a large role in the growth of impact-weighted accounts. Increased impact transparency and buying power are closely intertwined. Consumers are more likely to buy from companies whose values align with theirs, and with social media, are more vocal about their buying decisions than ever before.
It’s apparent that the era of business transparency and accountability has begun, so it’s vital that companies get ready for these changes now. As all of this is still quite new, many companies hoping to determine their social and environmental impact may not know where to start. Fortunately, Riddl can help. We can get your business in touch with a consultant, who can help you on your path towards determining the impact of your business. Following that, the Riddl workspace has all the tools you need to keep track of your progress towards positive impact, generating easy to understand progress reports when they are needed. And best of all, Riddl has a built-in social return on investment (SROI) calculator to help you determine the dollar value of your societal and planetary impact.
Gone are the days when impact was relegated to a company’s volunteer initiative or a side foundation that did ‘good deeds’ for the community. All of your activities — from the boardroom to production, and consumer interactions — matter and can have long lasting change, both positive and negative. Make sure you are accounting for your impact today.
To get help measuring and reporting on your company’s impact, contact us.
Written for Riddl by Jill Mersereau