A new term “impact accounting” is a new discipline that enables the application of monetary values to environmental, social and human capital in the space of ESG reporting
The movement to quantify how companies report how their operations impact the environment, people, and the overall economy has been building since the 1970s. Only in the last decade, however, has it emerged into the mainstream in part because of investor demand and the mandate of the European Union’s Corporate Sustainability Reporting Directive that requires some EU and non-EU companies to report social and environmental impacts, which in turn has driven a rise in the use of impact accounting.
Defining impact accounting
The term impact accounting is an emerging label that outlines a method of reporting that accounts for those factors that are not necessarily tracked by normal accounting processes. In partnership with Reuters, technology consulting firm Wipro explores the concept of impact accounting in a new white paper. The paper describes impact accounting as an evolution of capital accounting that sets out new standardized accounting and valuation principles to account for, track, and disclose an organization’s impact on all its capital sources, including natural, social, and human capital.
Interestingly, human, social, and natural capital are key inputs of sustainability impacts but are not classified as assets in conventional accounting despite their dramatic effect on enterprise value creation. Impact accounting changes this dynamic and builds upon existing sustainability and environmental, social & governance (ESG) goals, which include:
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- Quantifying holistic impact — A holistic capital accounting approach through impact accounting provides a more directionally consistent and accurate way of measuring and quantifying a company’s overall sustainability (impact and monetary equivalents).
- Introducing standardization — Growing public-partnership collaborations help to establish standardized impact accounting principles to mobilize the private sector based on Environmental Profit & Loss (P&L) and extend into Integrated P&L to include both the monetary value and the price of environmental impacts of business activities.
- Measuring impact in the real world — Impact accounting offers an effective process to integrate and manage data across an organization’s value chain to prepare the data for more accountable sharing — one of the most significant data and data quality challenges.
- Protecting reputations through transparency — Impact accounting practices can help guard against reputational damage, adding rigor to organizations’ transparency, branding, and messaging. This approach, which recognizes the importance of these diverse forms of capital in creating business value beyond just financial aspects, compels companies to incorporate these impacts into their operational outcomes.
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Collaboration is critical to apply monetary value to impact
In June 2023, a new framework was launched by the Value Balancing Alliance, which developed an accounting approach that allows corporations and investors to translate social and environmental impacts into the language of business through the integration of financial, natural, human, and social capital in a unified understanding of business value; and the Capitals Coalition, which changed the math of valuation by identifying and measuring the value that flows from nature, people, society, and the economy to provide decision-makers with holistic data to reshape their decision-making calculus.
The recently introduced framework is in sync with the European Green Deal, functioning as a joint effort between public and private sectors to develop uniform principles for valuing and accounting natural capital. This initiative aims to engage the private sector in supporting the transition towards eco-friendly practices. It also builds on the Environmental P&L concept, which originated in the 1990s and strives to standardize measuring and valuing impacts, employing a widely accepted and universally applied method for accounting natural capital across various businesses.
Wipro, for example, has been calculating an environmental P&L for most of the last decade, and efforts are underway to integrate their methodology, which brings together natural, social, and human capital alongside financial capital into a more holistic impact accounting view.
Challenges exist but will improve with time
There are many challenges for impact accounting, but they are manageable. One of the biggest hurdles is that companies must address data and data quality and different units of measurement. In addition, data is no longer confined to a company’s operations — it extends to supplier footprints across their value chains. This dramatically expands the impact areas and measures around social, human, and natural capital.
The growing interest of stakeholders in a company’s impact necessitates enhanced transparency. Even with its growing pains, impact accounting establishes uniform principles for accounting and valuation to monitor and report an organization’s effect on all its capital forms. Adopting an integrated method to assign monetary values and prices to both positive and negative impacts across all capitals — including natural, social, and human — ensures consistency, precision, and comparability in data.
Organizations that proactively embrace a comprehensive and integrated perspective on their positive and negative impacts on the world will become more resilient and competitive while setting themselves apart from their rivals.
This article had significant contributions from Wipro’s Chantal Contijoch, Sophie Abbott & William Clarke
