The Opportunity
The Opportunity
The answer has four elements:
Changing our intuition about what creates impact. To build an impact economy, we need to ensure that all participants understand that every action has consequences and produces impact. In the absence of impact-weighted accounts, we are creating the illusion that most commercial activities might have no impact and the false impression that impact is irrelevant when it comes to an individual’s choice of where to work, what to consume, and how to invest. Consequently, most people relegate impact considerations to philanthropic or volunteering activities. Impact-weighted accounts could increase the salience of business impacts and therefore change our intuition about when and how we are all having impact. All companies have impact and investors can contribute to that impact in different ways.
Bringing impact to the ESG investing market. As ESG investing continues to grow its share of capital markets—and indeed, if it follows its current trajectory and becomes the new status quo—we need to understand the actual impact of this transformation. To the extent investors incorporate existing ESG metrics into their investment decisions today, they are investing based on inputs or outputs, not impact, forcing an assumption that similar inputs produce equal impacts across funds. Additionally, many types of impact are not covered by routine ESG measurement, including most consumer impacts. Impact-weighted accounts would allow for a better understanding of the societal and environmental effects of ESG investing. Equally important is enabling cost effective characterization and classification of funds that label themselves as ESG or impact/SDG enabling funds. Today, many ESG funds purport to align investment decisions with asset owners’ values, but asset allocators have a difficult time assessing the claims of investment managers and to what extent inputs lead to the presumed impact. Producing portfolio-level price-to-impact-weighted-earnings metrics could create the same level of clarity in the marketplace as size- or growth-vs.-value-classifications historically created.
In addition to providing a better understanding of investment impact, impact-weighted accounts would decrease transaction costs in ESG capital markets. Over $20 trillion is invested globally by funds claiming to consider ESG metrics in their investment decisions. Many of these funds – passively or actively managed, public equity or private equity or debt investments –establish their own method of evaluating impact. Familiar problems arise, such as the potential for portfolio managers to introduce personal bias or to manipulate performance figures. The lack of standardization makes investment diligence more difficult, thereby increasing transaction costs. For asset owners, the lack of standardization prohibits benchmarking funds against one another and makes it nearly impossible to hold advisors accountable to their impact promises. Ultimately, the assets under management fall short of their value creation potential. Impact-weighted accounts would ease the flow of accurate information for a more efficient allocation of ESG assets.
Allowing managers to make better informed decisions. Impact-weighted accounting standards give corporate managers new information about the costs and benefits of their actions. With better information, managers might start changing their decisions towards choices that produce more positive impact. In fact, a methodology that measures holistic impact in monetary terms is useful to assess and compare all strategy options for better management. A European bank, ABN AMRO, used monetary impact valuation as a tool to analyze decisions, such as interest rate averaging where mortgage clients could reduce their interest rate to reflect lower market rates. The decision to accept interest rate averaging led to customer savings and improved customer satisfaction.[31] A Belgian chemicals firm, Solvay, has constructed the sustainable portfolio management tool, which assesses the monetized environmental manufacturing footprints of products and has become an input in strategy development, research and innovation, capital budgeting and due diligence in Mergers and Acquisitions (M&A).[32]
Consider the following examples of business decisions using the framework depicted in Figure I. A decision to donate to a philanthropic cause unrelated to the firm is a move to the right and downward whereas donating to a cause that indirectly helps the firm is an opportunity to expand the impact ‘frontier’ by moving to the right and upward simultaneously. Cutting employee health benefits to increase profits is a move to the left and upward whereas a more impact-efficient option might be to invest in preventive care to keep employees healthier (at a lower cost). As these examples illustrate, adding the second stakeholder dimension brings to light the consequences of business strategies beyond strict financials, which allows for better outcome optimization at any given cost to firm owners.
The ability to articulate the benefits of decisions in the common language of monetary value is a way for businesses to justify investing in long-term value creation. Many of these investments, such as the example of preventive care, require time for their impact to be realized and may come at the expense of near-term profits. Monetary valuation provides managers with an extra tool to forestall short-term market pressures.
Strengthening incentives. Once we have impact-weighted accounts, the data can be used to create incentives for companies to improve their impact. As implied in our discussion of the growing ESG investing sector, companies with positive impact will be more likely to attract financial capital. In addition, governments and regulators could create incentives for companies and talent to improve their impact by tying tax rates or procurement requirements to impact-weighted accounting performance thresholds. For example, in the construction sector, the inclusion of lifecycle analysis (LCA) in public tenders to promote green procurement has been increasingly used in recent years. Customers in business-to-business or business-to-consumer transactions may tie their own purchasing decisions to these metrics as well, thereby rewarding the suppliers with the greatest impact. One report found approximately half of U.S. consumers say they “would definitely or probably change their consumption habits to reduce their impact on the environment.”[33] How consumers will interact with information received from impact-weighted accounts is unknown, but regardless, the transparency of how companies and products impact society will add another dimension in the customer choice set.
Monetization of Impact
There are several reasons why it is important to distill impact into monetary currency as an indicator of value rather than use a diverse collection of observable metrics. First, currency is already used in the context of managing firms and investments. Accounting systems and analytical tools (e.g., internal rate of return and net present value) are configured to handle currency. Converting impact metrics into dollars or other monetary equivalent helps managers place impact into the greater business context seamlessly. It follows that the instrumental value of money is easy to understand. Everyone can convert currency into virtually any good or service they value, at a rate clearly indicated by a price. In contrast, the impact represented by non-financial metrics is either of inherent value – for example, a number of acres of preserved wilderness – or is of instrumental value for something less familiar or intangible – for example, an amount of carbon emissions avoided, which is instrumental in stemming climate change. Either way, it is simply harder for people to wrap their minds around the value of something non-financial. Royal Philips noted the difference in resonance in their Environmental Profit and Loss Accounting Whitepaper (2018) noting that the commonly constructed life-cycle assessment metrics were “barely understandable for non-expert readers.” However, when these impacts were monetized, it was clear that the environmental damage caused by their business operations exceeded the profits of the company.[34]
Additionally, using a common currency for all impact metrics enables sophisticated decision making around the tradeoffs between different types of impact and the tradeoff between impact goals and financial goals. By converting different sources of impact – hours of employee training, tons of waste generated, workplace injury rate – into currency, it is possible to do comparative analysis and make informed, strategic decisions. Because the ‘conversion rate’ from impact to dollars would be prescribed by universal impact accounting standards, managers would not have to grapple with defining their own ‘rates,’ which dramatically simplifies their analysis as well as comparisons between products and companies.
While expressing impact in monetary terms dramatically increases the usefulness of impact accounting, it is not without risks. Assigning a monetary value to a formerly “priceless” social or environmental outcome runs the risk of capping its perceived value. Putting a price tag on impact seems to give a sufficiently wealthy buyer carte-blanche to capture or destroy it. This risk must be weighed against an arguably greater risk of maintaining the status quo in which social and environmental value is destroyed freely because we have no mechanism to price it. Another risk is that continuing to train business leaders to focus on monetary figures may erode their intuition about the inherent value of things such as social and economic inclusion or biodiversity. It is an empirical question whether and how monetary impact accounting standards would change how people value social and environmental impact. Certainly, implementing monetary impact accounting involves risk, but the benefits are potentially enormous.
Summarizing: To better illustrate the goal of the Impact-Weighted Accounts Initiative, it is helpful to visualize another four-quadrant grid which plots a causal value chain on one axis and distinguishes between financial and non-financial valuations on the other. The examples provided are just to illustrate the concept and are not intended to be exhaustive or normative.
Figure IV: The metrics landscape classified by two characteristics

The current reporting landscape provides examples for each of the quadrants:
- Quadrant I: Represents the goal of the Impact-Weighted Accounts Initiative to both link outputs and outcomes to impact through tested theories of change and monetize those impacts. Examples are cost of goods sold and revenues that are adjusted for the environmental impacts of the firm.
- Quadrant II: Characterized by easily monetized inputs and outputs. Examples include environmental research and development or environmental risk mitigation expenditure.
- Quadrant III: Aligns with most ESG and corporate sustainability reporting. An example is the percentage of energy sourced from renewable energy.
- Quadrant IV: Distinguished from III by measurement of outcomes which are linked to outputs by a tested theory of change. An example is the reduction in CO2 emission as a result of renewable energy sourcing.
While many companies are pursing important sustainability initiatives and are quantifying and reporting outputs in annual sustainability reports, efforts to monetize these impacts are far fewer. We found 56 companies had undergone some process to monetize an aspect of their business impacts. A few key conclusions can be drawn from the table below. First, a disproportionate number of companies are headquartered in Europe. Second, most of the companies that have claimed to have measured employment and social capital impact so far have focused primarily on monetizing inputs/activities rather than impacts. Third, product impact is much less often measured.
Table I: List of Companies Producing Monetized Impact Estimates
Company Name |
Environment |
Employment/Social Capital |
Product |
Examination Scope |
Start of Results Year |
GICS® Industry |
Headquarters Country |
---|---|---|---|---|---|---|---|
Infosys |
X |
Full company |
2003 |
IT Services |
India |
||
Puma |
X |
Full company and upstream supply chain |
2011 |
Textiles, Apparel & Luxury Goods |
Germany |
||
Levi Strauss |
X |
Project level |
2011 |
Textiles, Apparel & Luxury Goods |
United States |
||
Crown Estate |
X |
X |
Full value chain |
2011 |
Equity Real Estate Investment |
United Kingdom |
|
Sompo Japan Nipponkoa |
X |
Project level |
2011 |
Insurance |
Japan |
||
Novo Nordisk |
X |
Full company |
2011 |
Pharmaceuticals |
Denmark |
||
Kering Global |
X |
Group and supply chain |
2012 |
Textiles, Apparel & Luxury Goods |
France |
||
Interface Global |
X |
Two carpet tile products; one manufactured in North America one in Europe |
2012 |
Commercial Services & Supplies |
United States |
||
Ambuja Cement |
X |
X |
Full company |
2012 |
Construction Materials |
India |
|
Veolia UK |
X |
X |
Key activities |
2012 |
Multi-Utilities |
France |
|
Danish Apparel Sector |
X |
All apparel companies operating in Denmark |
2012 & 2013 |
N/A |
Denmark |
||
Stella McCartney |
X |
Company level |
2013 |
Textiles, Apparel & Luxury Goods |
United Kingdom |
||
Robert McAlpine |
X |
Activities at two sites in the UK |
2013 |
Construction & Engineering |
United Kingdom |
||
BASF |
X |
X |
X |
Full supply chain and customers |
2013 |
Chemicals |
Germany |
Hammerson |
X |
Activities at two sites in the UK |
2013 |
Equity Real Estate Investment |
United Kingdom |
||
TUI |
X |
X |
Full value chain for one year in 8 hotels |
2013 |
Hotels, Restaurants & Leisure |
Germany |
|
Natura |
X |
Comparison of palm oil cultivation methodologies |
2013 |
Personal Products |
Brazil |
||
Algix |
X |
Full lifecycle impacts for two types of plastic |
2013 |
Food Products |
United States |
||
Monsanto |
X |
Comparison of soybean cultivation methodologies |
2013 |
Chemicals |
United States |
||
Skanska |
X |
Pilot project |
2014 |
Construction & Engineering |
Sweden |
||
LafargeHolcim |
X |
X |
Full company and second and third order community effects (salaries and dividend spending) |
2014 |
Construction Materials |
Switzerland |
|
ABN-AMRO |
X |
X |
X |
Company and customers |
2014 |
Banks |
The Netherlands |
Volvo |
X |
X |
X |
Product level analysis |
2014 |
Machinery |
Sweden |
Dutch Railways |
X |
X |
X |
Full company |
2014 |
Road & Rail |
The Netherlands |
AkzoNobel |
X |
X |
X |
Full product value chain |
2014 |
Chemicals |
The Netherlands |
Yorkshire Water |
X |
X |
X |
Full company |
2014 |
Water Utilities |
United Kingdom |
United Utilities |
X |
Activities in a specific geographic region |
2014 |
Water Utilities |
United Kingdom |
||
Arla Foods |
X |
Full company cradle-to-grave |
2014 |
Food Products |
Denmark |
||
Coca-Cola Company |
X |
8 replenishment projects |
2015 |
Beverages |
United States |
||
Cementos Argos |
X |
X |
Company level |
2015 |
Construction Materials |
Colombia |
|
Soneva |
X |
X |
Full company direct and indirect impacts |
2015 |
Health Care Equipment & Supplies |
Maldives |
|
American Chemistry Council |
X |
Plastic use in 16 consumer goods sectors for full lifecycle |
2015 |
N/A |
United States |
||
The Navigator Company |
X |
Four processing plants in portugal |
2015 |
Paper & Forest Products |
Portugal |
||
Roche |
X |
Swiss operations |
2015 |
Pharmaceuticals |
Switzerland |
||
Dell |
X |
Lifecyle for two types of product component inputs |
2015 |
Technology Hardware, Storage & Peripherals |
United States |
||
Yarra Valley Water |
X |
X |
Full value chain |
2015 |
Water Utilities |
Australia |
|
Safaricom |
X |
X |
X |
Full company in Kenya |
2015 |
Wireless Telecommunication Services |
Kenya |
Vodafone Netherlands |
X |
X |
Full value chain for a number of business areas and products |
2015 |
Wireless Telecommunication Services |
The Netherlands |
|
Firmenich |
X |
X |
Cradle to gate for products |
2015 |
Personal Products |
Switzerland |
|
Eosta |
X |
X |
Lifecycle for 9 fresh produce products |
2015 |
Distributors |
The Netherlands |
|
Hugo Boss |
X |
Select product level |
2016 |
Textiles, Apparel & Luxury Goods |
Germany |
||
Dow Chemical |
X |
Cradle to gate for one site |
2016 |
Chemicals |
United States |
||
Solvay |
X |
Cradle-to-gate for 80% of existing products |
2016 |
Chemicals |
Belgium |
||
Tata |
X |
Full value chain for five Tata Companies' select divisions |
2016 |
Metals & Mining |
India |
||
Royal DSM |
X |
Internal carbon price applied to all growth projects |
2016 |
Chemicals |
The Netherlands |
||
Philip Morris International |
X |
GHG footprint of tobacco curing |
2016 |
Tobacco |
United States |
||
Mitsubishi Elevators |
X |
X |
X |
Unknown |
2016 |
Trading Companies & Distributors |
Japan |
Heerema Marine Contractors |
X |
X |
Corporate office choice |
2016 |
Energy Equipment & Services |
The Netherlands |
|
Jaguar Land Rover |
X |
Full value chain |
2016 |
Automobiles |
United Kingdom |
||
International Paper |
X |
Three integrated paper/pulp mills |
2017 |
Containers & Packaging |
United States |
||
Philips |
X |
Entire lifecycle |
2017 |
Healthcare Equipment & Supplies |
The Netherlands |
||
Nestle |
X |
Limited to subset of employment pathways |
2017 |
Food Products |
Switzerland |
||
Godrej Consumer Products Limited |
X |
Limited scope on mosquito repellant in two Indian provinces |
2017 |
Personal Products |
India |
||
Novartis |
X |
X |
X |
Global employment and environmental, pilot product valuation |
2017 |
Pharmaceuticals |
Switzerland |
Syngenta |
X |
X |
Nine projects sites globally |
2017 |
Chemicals |
Switzerland |
|
Smurfit Kappa |
X |
Forestry operations in 3 Colombian regions |
2019 |
Containers & Packaging |
Ireland |
Note: The above list is not exhaustive. It was compiled by searching references to companies participating in impact industry collaborative efforts including the Natural Capital and Social & Human Capital Protocol Coalitions, the Product Social Impact Roundtable, the Prince’s Accounting for Sustainability Project, and the findings of the Monetary Natural Capital Assessment in the Private Sector.[35] If your company is missing from this list, please contact DG Park (dpark@hbs.edu) of the Impact-Weighted Accounts Project Team in order for your company to be added.
Risk, Return and Impact
To highlight the catalytic potential of impact-weighted accounts, we believe it is appropriate to draw a parallel to the development of modern financial infrastructure and its effects. Prior to the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the US, there were no financial accounting disclosure standards for public offerings. Over the next decades, the development of US GAAP created uniform and comparable financial disclosures, a notable improvement over the previous system in which each company picked its own accounting principles with its own accounting firm. Globally the adoption of International Financial Reporting Standards (IFRS) has moved the field of accounting measurement and disclosure towards increased comparability and unification. This in turn has enabled more cost effective investment diligence and analysis. Impact-weighted accounts will provide a similar benefit by unifying the myriad of environmental and social disclosure methodologies and formats into a uniform framework that is easily digestible and comparable by investors.
Built atop the uniform financial disclosures frameworks is the development of asset and portfolio risk measurement and quantification. These developments in the second half of the twentieth century, which included the concepts of aggregate portfolio risk, risk-adjusted returns, risk-return optimization, and value-at-risk, provided investors, corporate officers, and financial advisors with a systematic way of optimizing return for a given level of risk. This had dramatic implications for asset allocation. As a result of better risk quantification, the nascent industries of venture capital and private equity saw remarkable inflows from the 1970s onward. Both industries in turn drove catalytic economic developments by supporting the technological revolution.
Monetization of social and environmental impacts represents a critical next step in portfolio theory and will permit the development of effective risk-return-impact optimization tools and the identification of a new efficient investment frontier. The potential to systematically model and optimize impact in similar metrics to those used for risk and returns, versus current market practice of disregarding impact completely or by conducting separate overlay qualitative and quantitative assessments, has the potential to dramatically change capital flows throughout our system.
As stated in the introduction to this paper, it is imperative that we design a sustainable capitalism. Ensuring that capital flows in ways that deliver sustainable growth, improves lives, and regenerates the planet is critical in this process. Impact-weighted accounts provide the underlying structure for such a change.
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- “IP&L: Measuring Long-Term Value Creation Summary Report,” Sustainability Report (ABN AMRO, 2017).
-
- “Sustainable Portfolio Management Guide,” (Solvay, 2015).
-
- “Was 2018 the Year of the Influential Sustainable Consumer?,” Nielsen, December 17, 2018.
-
- Michela van Kampen, “Growing trend in Environmental Profit & Loss Accounting: how to reap the benefits” Philips Innovation Services, 2018, page 5.
-
- Rose Pritchard and Dan van der Horst, “Monetary Natural Capital Assessment in the Private Sector: A Review of Current Status and Research Needs.,” Valuing Nature Programme (University of Edinburgh, 2018).