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Design Methodology

Design Methodology

In the same way that accounting standards define which financial transactions to capture and how to account for them within financial statements, we need a methodology that reveals a firm’s overall value to society through its impact.

Accrual accounting effectively facilitates the evaluation for firms because it strives to reflect the economics of a firm’s activities, it is well-understood, and it is standard across companies and industries. These qualities create transparency into the economics of firms, which helps external parties evaluate and compare economic opportunities. It allows financial benchmarking of firms with very different business models, products, geographies, etc. – an important tool for both internal managers and external parties. It also is easier for external parties to hold firms accountable to financial targets because it limits discretion in reporting results. Creating a GAAP or IFRS analogue for impact accounting would generate benefits: transparency, comparability, accountability.

As discussed above, this impact accounting methodology should take shape through a series of choices about how to define value. The inclusion or exclusion of different stakeholders is a choice. The inclusion or exclusion of different sources of impact is a choice. The tradeoff between accuracy and generalizability of impact metrics is a choice. There has already been a great deal of work by the Organisation for Economic Co-operation and Development (OECD), Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Principles for Responsible Investing (PRI), Social Value International and others in partnership with the Impact Management Project (IMP) through the Structured Network to provide a framework for managing these choices. The impact accounting methodology should build upon this prior work.

Preliminary Design Principles

Before designing the specific measurement and reporting standards, we must establish a set of guiding principles for impact-weighted accounts. Drawing upon existing principles and norms where possible, below are a set of initial design principles meant to guide our decisions about accounting standards, along with the associated benefits and costs of choosing different configurations:

 

Dimension

Benefits of Low

Benefits of High

Our Thinking

Scope of source of impact
  • Reduces cost of monitoring and measuring firm behavior and products
  • Simplifies and accelerates design and implementation
  • Lowers barriers to adoption 
  • Maximizes potential to change firms’ impact creation – e.g., by incorporating not only the impact of business activities, but also the impact of the goods and services a business produces
  • Start Low; Aim High. Begin with a small set of simple, important, non-controversial metrics to test implementation. Grow the scope over time to be comprehensive.
Scope of stakeholders included in impact accrual
  • Reduces ‘noise’ associated with measuring indirect effects on remote stakeholders
  • Reduces inaccuracy that results from assuming outcomes, given demonstrated inputs
  • Simplifies and accelerates design and implementation
  • Increases relevance of IWA to a broader range of stakeholders
  • Maximizes potential to change firms’ impact creation by taking into account a greater number of, and more diverse, stakeholders
  • Start Low; Aim High. Begin with a small set of directly impacted stakeholders to test implementation. Grow the scope over time to be comprehensive.
Specificity of impact metrics
  • Can be customized at a company by company level
  • Reduces resistance to adoption from opponents of one-size-fits-all standards
  • Increases comparability across companies
  • Leaves less room for discretion in definition/measurement
  • Increases confidence of a user and credibility of metrics
  • High. While material impacts may vary across industries, common impacts, as determined by various impact measurement setting bodies, should be measured and reported with standardized metrics and methodology.
Monetization of impact metrics
  • Preserves objective meaning (e.g., # metric tons of water used, # product recalls issued)
  • Avoids putting a price tag on hard-to-value goods
  • Maximizes contextual meaning by translating the objective measure into dollars and cents, which are universally understood and simple to compare
  • Allows ‘conversion rate’/’impact coefficient’ updates as needed
  • High. All impact metrics should be expressed in dollar terms (or other currency).
Scope of value
  • Only to the firm: measure value that is financially material to the firm. Capture long-term financial value to owners that is currently hard to quantify because it is indirect or too far in the future
  • To society: measure what value is created for society and the environment. Capture value to non-owner stakeholders independent of whether it might increase profits in the future.
  • High. Accurately capturing the material impacts that a firm is having on the world requires a broad definition of value.

Realism as our Compass

“ It is better to be roughly right than precisely wrong.”
John Maynard Keynes
“ It is better to be roughly right than precisely wrong.”
John Maynard Keynes

 

We recognize that we will not be able to research, analyze, and incorporate all possible impacts in our work. We also recognize that some of the impact metrics and monetary valuation coefficients are far from perfect. But so are the financial accounting numbers that we have been using for thousands of years. They rely on judgements, managerial discretion, and forecasts of the future. They are noisy estimates of the underlying economic reality. Often, simple changes in accounting rules change balance sheets by trillions of dollars, as has been the case with leases, pensions and equity investments, and give rise to income statements that portray a fundamentally different picture of the organization’s performance.

We do not allow these limitations to constrain our ambitions. Fully recognizing the inherent tradeoff between impact measurement accuracy and scalability of application, we aim to create both dependable and scalable measurements of impact.

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