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People and Planet in the Accounts: impact-weighted accounts – facilitating a race to the top

19 November 2020: George Serafeim is the Charles M. Williams Professor of Business Administration and the Faculty Chair of the Impact-Weighted Accounts Project at Harvard Business School. He talks us through the thinking behind the Impact-Weighted Accounts Project.

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The mission of the Impact-Weighted Accounts Project is clearly stated. It is to drive the creation of financial accounts that reflect a company’s financial, social and environmental performance. The idea is to create accounting statements that capture external impacts such that they drive investor and managerial decision-making.

It is all about measuring and comparing impact, and about reimagining capitalism. This is a tall order, and work has been going on in this area for many years – not just off the coattails of recent crises.

“We have been working in the field of sustainability and ESG metrics for a long time,” says Serafeim. “Organisations such as the Sustainability Accounting Standards Board, the Global Reporting Initiative and the Carbon Disclosure Project have made a big difference. We have seen that those metrics are becoming financially material, so they are important for the value-creation process. Which of those metrics are material depends upon the operating context of the industry that you are in and its geography. We have seen that disclosure and transparency actually makes a difference in terms of changing organisational behaviour and markets.”

Investors are very much creating the impetus for advancement in this area. “There has been an incredible amount of investor demand for this information as investors themselves are realising the financial materiality of those metrics,” says Serafeim. “It can strengthen the system and the market by helping companies make progress towards, for example, decarbonisation, towards building a culture of diversity and inclusion, and improving the impact of products that organisations create and customers consume.”

Redefining success

The work being undertaken at the Impact-Weighted Accounts Project seeks to redefine what success means for corporations. “The way we do that is to redefine what profit means inside the company. If the purpose of the corporation extends beyond shareholder maximisation to something broader like providing profitable solutions to the world’s challenges, many of the challenges we are facing will be addressed,” he says.

Serafeim talks about taking non-financial metrics and converting them to financial metrics. “Why do we do that?” he says. “Because we want those impacts to be reflected in financial statements.”

The way that is done is to take non-financial metrics and then focus on outcome-based metrics. “We don’t concentrate on inputs into a process but on outcomes, meaning whether an organisation is able to be more environmentally friendly or more inclusive as an outcome. We then translate those outcomes so that they can be reflected in the financial statements,” he says.

This project translates outputs into the kinds of numbers companies understand – like dollar values – and concentrates on three main areas: environmental impact, employment impact and product impact.

“We do a lot of research, trying to understand how organisations are able to improve the impact they have on society and the implications of any change in impact on their financial position,” says Serafeim. “This also enables management to make better decisions.”

He says this framework is a tool that can be used both for the management accounts and for the company reports. Procurement decisions, hiring decisions, product development, new service delivery, and so on, will all benefit from this thinking, he says.

But investors will be especially interested. “We have seen investors develop a huge interest in ESG reporting,” says Serafeim. “They are moving increasingly from looking at ESG as inputs and intentions towards outcome-based metrics.”

Combat greenwashing

There is a step-change taking place. ESG reporting that puffs out company reports with little more than marketing hype is starting to look very old fashioned. “This mechanism combats greenwashing. The reality is there are many challenges that businesses are facing so there must be some negative outcomes to also report. By focusing on outcomes, this framework delivers transparency. It is about having a balanced view,” he says.

“It is not about blaming anyone but about understanding where we are and how we can improve going forward.”

What does impact-weighted accounting look like? “It is best to think of it in terms of parallel balances and parallel income statements alongside the financials,” he responds. 

“Today there are organisations that look very profitable, but they have a very negative impact. They are ‘cheating’. Then there are organisations that are very profitable and have a very positive impact. Those are the true leaders of the 21st century,” he says. 

Of course, there are many permutations between these two extremes, but it is a way of plotting where an organisation sits in the journey towards becoming a sustainable, responsible and successful business. It also helps investors assess both the risks and the opportunities for them.

Serafeim says that by adopting this framework, a company can measure both its impacts within its own operation across time, but also externally against its competitors. 

“The more transparency you have about those impacts the more you will find there will be a race to the top rather than a race to the bottom,” he concludes.

Are you professionally ready for climate change? Find resources, information and inspiration on the ICAEW Climate Hub.

Find out more about the work ICAEW and its members are doing to change behaviour and drive sustainable outcomes by visiting icaew.com/technical/sustainability.

Article series: People and Planet in the Accounts

Convergence of non-financial frameworks and standards is gaining momentum and we are beginning to see how nature and society might be included in the financial statements. But can these frameworks tolerate such change? In these articles we explore this from the perspectives of different actors in the debate.

See the series