How Will ESG Impact be Measured?

A July 21, 2021 article in CFO, written by Ted Jackson, notes that environmental, social, and governance (ESG), a movement that seeks to hold corporations accountable for far more than just ordinary financial results, is gathering speed and building momentum.  

“Of course, it is one thing to back what ESG stands for, and another to implement the needed changes,” he says. “One of the key things that needs to be done to facilitate the change is to develop an accounting system — a way to put monetary values on transgressions or successes of ESG principles.”

“Today, impact investment is measured in trillions. Tomorrow, the whole of capitalism will be measured by impact-driven measures,” he quotes Ronald Cohen as saying. Cohen is chair of the leadership council of Harvard’s Impact-Weighted Accounts Initiative and co-founder of London-based private equity firm, Apax Partners.

He points out that “Harvard Business School academics, of which Cohen is one, are leading the way with work on how to express in monetary terms environmental and societal impacts, such as water purity, biodiversity, workplace safety, greater pay equality, and employment diversity, to name just a few, adding that, according to Cohen, “A company’s financials would be weighted on its impacts on all the above factors, and more. The first step is going to be to value impacts.”

According to Cohen, “we need mandatory accounting of social and environmental impacts so that impact performance is measured and compared in a similar way to financial profit.” That means, adds Jackson, that governments are going to have to step in and legislate or regulate for ESG adoption to become commonplace. “So far, signs are encouraging as European and U.S. regulators have begun to work on regulatory frameworks. However, nothing has been mandated by law or by regulation in either locale yet. “ 

Another thing that is critical to the “weighted impact” ESG accounting, being developed by the Harvard Business School’s ESG Weighted Impact Accounting Development Committee, is that the weighted average ESG accounting system they are working on may have a good chance of being widely adopted. Or even mandated by regulatory authorities to be the standard by which ESG adherence is measured.”

And, says Jackson, “other organizations that are reportedly considering working on developing ESG impact accounting frameworks are the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-Related Financial Disclosures, and the Big Four accounting firms.  “With this type of adoption of impact-weighted ESG accounting, if it is widely accepted or even mandated, investors will be able to look at ESG-weighted impact income statements and compare those statements to other companies in an apples-to-apples way, making the values espoused by the ESG movement deeply imbedded in the corporate mindset and value and reporting systems.”

But, he concludes, “we are a long way toward widespread adherence and mandating ESG impact weighted accounting. One thing is for sure though, we are at the forefront of a new form of corporate reform and the fight around it promises to be one of the most important and interesting in corporate history.”