Impact Voices | May 30, 2024

Impact accounting standards advance as investors demand interoperability

Daniel Osusky

Get a weekly pulse on news and trends in impact investing with our free newsletter.

*I agree to receive marketing emails from ImpactAlpha, its affiliates, and accept our terms of use and privacy policy.
By signing up you agree to receive marketing emails from ImpactAlpha Inc. and accept our Terms of Service and Privacy Policy.
Guest Author

Daniel Osusky

There are two different worlds in the news. One is the news of headlines – of the qualitative experience of the world, seemingly growing more and more dire over time. The other is the news of finance – it’s quantitative, in currency, and while there are ups and downs, the historical trend is up. 

In my experience there doesn’t seem to be much of a correlation between the two. The world can be on fire, literally, and the stock market proceeds to change in whatever direction it will, subject to a set of drivers that are largely independent of the experiences of people affected by the events that show up in the rest of the headlines.  

How is it that markets can operate so independently from the experience of the people in the world? And what would it look like if this dissonance didn’t exist?  

The measurement system for financial markets, financial accounting, is by definition incomplete. It measures only financial performance, and in doing so, has allowed for a system of decision-making that focuses on financial impact at the cost of, and without factoring in, the impact of business on society and the environment. 

It has also enabled the belief that what it measures is the only thing that matters. Boardrooms, investors, and accounting professionals across the world increasingly recognize this, as decisions that are made regarding profits are far simpler to track and act upon than decisions regarding people and planet.  

Addressing the gap between the usefulness of financial and impact information is necessary if we are to substantially address the issues our world is facing. Therein lies the aspiration of impact accounting, a system designed to match the concepts and power of financial accounting but adjusted to look not at the financial performance of a company and the value created for its shareholders, but to account for the value created for all stakeholders.  

Impact accounting takes the data about a company’s social and environmental performance, aligned with sustainability disclosures to the extent appropriate, and converts that data into quantitative results – a monetary value – that represent the broader environmental and social value created or destroyed by that entity. 

It does this conversion through robust research and methodologies, being as science-based and objective as possible, to identify the ‘true’ impact created – in a unit that decision-makers, in fact all people –  already understand: currency. Rather than making sense of a company’s metric tons of CO2 equivalent emitted, impact accounting lets us talk about the dollars of damage a company’s greenhouse gas emissions has caused society and the environment. In doing so, impact accounting goes beyond traditional sustainability disclosures and ESG, and can also rise above their shortcomings and challenges, both real and political. 

Impact metrics

With this system, decision-making can shift so that the dissonance between the qualitative experience of people and financial performance can be bridged. Decisions can be made that align incentives so the two can work in coordination with one another and not be completely separated. With more complete information, more alignment can occur, and both sides of the equation can be optimized in a way that is simply impossible now without any such bridge.  

For example, with a science-based and standardized social cost of carbon – my organization, the International Foundation for Valuing Impacts, or IFVI, proposes $236 per ton in its most recent methodology – a company can project different scenarios of impact for their business and compare the actual impact created and destroyed to the financial cost to make climate-forward decisions. Investors  can compare performance across entities. 

A true carbon accounting can also be used to better anticipate financial risks from regulatory changes or reputational damages as a result of their emissions in the future. 

The same concepts can be applied across other topics. Local economic development, for example, is often plagued by competition for low wage jobs and extractive industries. The Fresno County Economic Development Corporation (EDC) has leveraged impact accounting to combat this race to the bottom by integrating impact accounting into its evaluation of companies. 

Fresno was able to compare business performance in its region across metrics important for its residents, such as healthcare and hiring practices, and is currently exploring tax incentives for companies based on their performance across these metrics. It also found that companies were able to use their performance to secure mission-aligned investments. For example, sustainable juice company Sierra Agra USA secured over $1.1 million in private impact investments dependent on the company’s impact accounting performance. 

Investor demand

Impact accounting has been in development for more than a decade, with significant acceleration over the last several years. In 2011, the athletic company Puma became the first global organization to produce an environmental profit and loss statement. Since then, organizations across sectors and around the world have used impact accounting concepts to report to stakeholders and to inform their internal decisions, from large publicly traded companies, including cosmetics company Natura and member companies of the Value Balancing Alliance, to smaller companies, like Satya Microfinance in India, with the support of their investor Gojo.  

Private equity investors like Summa Equity and Astanor Ventures have used impact accounting to assess and compare the impacts of their portfolio companies. “We see impact accounting as a foundational tool for advancing a more stakeholder-centered economy,” wrote Summa in a recent update on its experience as an early adopter of impact accounting. “Year-over-year analysis can enable GPs to understand how the impact of their portfolio has changed over time or highlight strategic opportunities to increase impact.” Industry-level analysis, when available, can help GPs understand how their portfolio companies compare against those within the same industry. 

More investors are recognizing the need for impact accounting. Two-thirds of global investors surveyed by PwC want sustainability reporting to focus on impacts, and 66% of those investors prefer that information in the form of a monetary value.   

Impact accounting ecosystem

While innovative companies and investors continue to lead, the infrastructure around them continues to grow as well — both informed by and resulting from the 2021 report from the Impact Taskforce of the G7, which called for “mandatory accounting for impact” as an end destination for policy makers. 

The loosely connected network of individual companies, investors, consultants, academics, and non-profits promoting the underlying ideas behind impact accounting, frequently with distinct and proprietary approaches, is evolving along the lines of developments that have fostered interoperability of sustainability disclosures.  

As the next iteration of the Impact-Weighted Accounts Project incubated at Harvard University, IFVI was founded in 2022 to independently continue building and scaling the practice of impact accounting. As part of its mission, IFVI in partnership with the Value Balancing Alliance, aims to produce a comprehensive, standardized, and publicly available impact accounting methodology in order to ensure accessibility, consistency, and quality of impact accounting practices moving forward. 

With the oversight of its independent governing body featuring a global group of expert stakeholders and peer organizations, IFVI and VBA published the conceptual framework for impact accounting, analogous to the conceptual framework for financial accounting, earlier this year, and is currently developing methodologies for GHG emissions (including scope 1, 2 and 3 emissions), wages, water consumption, and occupational health and safety, with more to come. 

The GHG emissions methodology is based on leading models produced by the Climate Impact Lab and Resources for the Future, DSCIM and GIVE, covering impacts including reduced health and well-being of individuals, damage to the built environment decreased ecosystem services, and other harms. Similarly, the proposed Adequate Wages Methodology covered two distinct elements of impact – remuneration and living wage deficit – linking the value of wages to the well-being of workers by building off the research of the Sustainable Development Solutions Network.

The vision and opportunity to create a more just and sustainable world, while supporting the role of business and markets as a key driver of it, lies at the heart of impact accounting. And with that vision and opportunity also comes a promise – that impact accounting can improve on what currently exists, to be more comprehensive and inclusive. 

Financial accounting has developed over hundreds of years. It is still evolving – and still flawed. It faced questions of feasibility at its outset. Yet here it is, a necessary linchpin to our economy and society. 

Impact accounting can develop over the same path, but ideally in an accelerated fashion with the lessons learned both from financial accounting and the broader world of impact management. It isn’t the only solution to the world’s challenges but it just might be a necessary one. 

Dan Osusky is Chief Research Officer at the International Foundation for Valuing Impacts.