The latest tool in the global push toward environmental sustainability may be an enhanced financial statement.
Researchers at Harvard Business School suggest that business leaders need a quantifiable way to assess the impact that their companies have on the planet to make informed decisions. Their solution: Adding line items called impact-weighted accounts to financial statements.
The system would supplement traditional financial reporting to provide a snapshot of how a company affects its employees, customers, the environment and broader society. Providing investors and managers with information beyond profit and loss through impact-weighted accounts could help combat environmental damage and income and wealth disparity, the researchers say. It would also help reduce stress and depression within booming developed economies.
“Our actions have consequences, not only for financial and physical capital, but also for human, social and natural capital,” George Serafeim, the faculty lead on Harvard’s Impact-Weighted Accounts Project, said in remarks last week during New York Climate Week.
Companies are increasingly evaluating their global footprint, with more reporting environmental, social and governance data in their financial reports. But they need to do more to measure impact, rather than just inputs and activities, according to the study.
“Our world and its climate are on the verge of profound changes as a result of our global economic activities,” Serafeim said, “Our goal with impacted-weighted accounts is to drive the creation of financial accounts that reflect a company’s financial, social and environmental performance and motivates investor and managerial decision making.”
- Impact-fund managers have been amassing record amounts, continuing a five-year trend, according to a McKinsey & Co. report in December.
- Valuing impact can lead to higher rates of return and doesn’t have to mean sacrificing profit, Ronald Cohen, the author of “On Impact: A Guide to the Impact Revolution,” wrote in the Financial Times in December.
- The Harvard researchers tracked 56 companies that are measuring impacts: 86% measured environmental impacts, 50% estimated employment and social impacts and 20% estimated product impacts.
- Investors managing more than $80 trillion in assets have pledged to integrate ESG data in their investment process, the Harvard study showed.