ImpactAlpha, Sept. 7 – CEO members of the Business Roundtable recently got on board the stakeholder revolution, but the folks in accounting have not yet got the memo. Company performance is still measured by shareholder value alone.
Harvard Business School’s George Serafeim, along with the Global Steering Group for Impact Investment and the Impact Management Project, is seeking to quantify in monetary terms a company’s social and environmental value. “Impact-weighted accounts” would serve as a sort of impact P&L statement and offer a more holistic assessment of corporate performance.
“The truth is, we can measure social impact with a greater degree of accuracy and rigor than we use to measure financial risk,” Sir Ronald Cohen, chair of the GSG, wrote in ImpactAlpha last year.
The Impact-weighted accounts initiative is part of Harvard’s broader effort to “reimagine capitalism,” Serafeim, who teaches a popular class on the topic, told ImpactAlpha.
Three months before the Business Roundtable’s new statement, Serafeim presented evidence to the group showing “firms with strong purpose and strategic clarity about that purpose and firms with strong material ESG performance create more value.”
Impact-weighted accounts are “line items on a financial statement” that reflect “a company’s positive and negative impacts on employees, customers, the environment and the broader society,” Serafeim and coauthors T. Robert Zochowski and Jen Downing explain in a recent report.
Inputs might include the raw materials, water and electricity used by a company; outputs could include the amount of greenhouse gasses emitted. It’s tougher to measure actual impacts. The authors identify 56 companies, mostly European, that have experimented with monetary impact valuation, producing environmental or total profit and loss accounts. At least 86% measure environmental impacts, half estimate employment or social impacts, and one in five estimate product impacts.
The researchers are working through the complexities of creating a unified accounting system for impact that could guide investor and corporate decision-making. “Once you develop structure you start to change norms, values, beliefs and incentives,” says Serafeim, an influential voice in the shift to stakeholder capitalism (see, “Q&A with Harvard’s George Serafeim: The link between corporate governance and environmental and social impact”).