Companies are trying to put monetary value on a broad range of both tangible and intangible impacts. Does the effort add up?
The following article originally appeared on GreenBiz.com as part of our partnership with GreenBiz Group, a media and events company that accelerates the just transition to a clean economy.
The green-eyeshades profession’s stock has risen recently, as companies seek to address their sustainability challenges. Accountants’ ability to translate risks and opportunities into numbers, the theory goes, will enable the rest of us to evaluate the financial impacts and assess the resilience of a given product, brand or company.
And by embedding climate-related risks into strategy and operations, companies can make the kinds of meaningful shifts needed to address the climate crisis, biodiversity crisis and all the rest.
The past year or so has seen a frenzy of activity seeming to bolster that theory. The Big Four accounting firms — Deloitte, PwC, Ernst & Young and KPMG — have been ramping up their audit departments with ESG assurance services while investing countless millions in employee training on these issues. There is a cacophony of standards developed by groups such as the Sustainability Accounting Standards Board (now the Value Reporting Foundation), the Global Reporting Initiative, the International Integrated Reporting Council, the Climate Disclosure Standards Board and CDP. There’s the alluring prospect of these groups aligning their standards via a proposed global consortium led by the International Financial Reporting Standards Foundation and the International Accounting Standards Board.
The idea of converting every type of impact into dollars, euros, yen or other currency is alluring. But it doesn’t add up.
To say nothing of the growing push for companies to conduct carbon accounting, or the trillions of assets managed by institutional investors, who are now requiring portfolio companies to disclose a small mountain of environmental, social and governance data.
As International Federation of Accountants CEO Kevin Dancey recently put it: “Accountants need to translate risks and opportunities into numbers. Without quantification of the risks and opportunities, companies will find it very hard to evaluate the financial impact and the resilience of the business.”
If it all comes together, the theory continues, accountants will become a linchpin for these and other efforts, taking disparate environmental and social data and harmonizing it into financial metrics — dollars, euros, yen, yuan, etc. That would enable them to more easily assess and compare how companies and other institutions are responding to today’s challenges — and, presumably, help them go further, faster. Along the way, number crunchers would become game-changers.
Impossible and perilous
The reality is exceedingly more complex.
Consider a recent article on the topic in the Stanford Social Innovation Review. Titled “Heroic Accounting,” it suggests that efforts to monetize companies’ impacts “are alluring, impossible and perilous.”
The article — by Andrew A. King, a professor at Boston University’s Questrom School of Business, and Kenneth P. Pucker, a senior lecturer at the Fletcher School at Tufts University and formerly chief operating officer at Timberland — takes on “impact accounting,” in which companies attempt to put a monetary value on a broad range of both tangible and intangible impacts.
It attempts, write King and Pucker, to “tabulate every way that individual companies influence planetary welfare — including economic profit, employment, social equity, biodiversity and climate — and translate all these into a single measure of impact, represented in dollars and cents.”
A broad range of interests seem to agree with impact accounting’s potential, they note. “The European Union, the World Business Council for Sustainable Development and a consortium of multinational corporations are all developing impact accounting methods, as is the Capitals Coalition, a group of 380 entities, including The World Bank, Walmart and the U.N. Environment Program. Several consulting firms — led by KPMG, BCG and PWC — have developed their own methods for valuing a company’s total impact. And a Harvard University research initiative focused on Impact Weighted Accounting has an advisory board that includes leading figures from asset management, banking, advocacy, philanthropy and academia.”
But it doesn’t add up, say King and Pucker. The perilousness, they write, comes when proponents of impact accounting “propose to translate social, human and environmental impacts into dollar values to elevate heretofore minimized impacts.” The complexity, not to mention the subjectiveness imposed by the designers of impact accounting frameworks, could lead to a broad range of undesirable outcomes.
The complexity, not to mention the subjectiveness imposed by the designers of impact accounting frameworks, could lead to a broad range of undesirable outcomes.
Consider airline travel, which the Harvard project considers a luxury good. Yet, note King and Pucker, “a single airplane includes people traveling for many reasons: for a major family event, to tend to someone ill, to interview for a job or to take a ‘luxury’ vacation.” Making assessments about flying’s social and environmental impacts based on such criteria may seem arbitrary at best, never mind assessing countless thousands of other products and services, and the millions of ingredients that go into them.
The co-authors write:
Creating valuations of every impact for every company will require the labor of many people, to measure, validate and value company impacts. It seems probable that tens of thousands, maybe hundreds of thousands of analysts would be needed to create these measures. Clearly, they would be engaged in activities that influence the public interest.
How would they be selected and governed? If they are selected by private interests, what gives them the right to make value judgments about things ranging from trans fats to guns to air travel? If they are selected by a democratic process, then the scale and scope of government will have to increase dramatically; government officials would need to decide the value of everything for everyone.
They conclude: “Unfortunately, impact accounting is likely to create more problems than it solves.”
That’s dispiriting, to be sure, but also somewhat comforting: that these proposed frameworks, which aim to transform the global economy to address climate change and a myriad of other issues, are being appropriately vetted. Even if we may not like all the answers.
After all, the basic idea remains alluring: Company A has an economic profit of X but has externalities that can be calculated to cost Y. Creating a simple, comparable measure, across sectors and borders, could be a boon to investors, regulators and consumers.
Again, that’s the theory. In a conversation last week, Ken Pucker pointed out that such noble pursuits don’t always deliver. For example, the 2002 U.S. law known as Sarbanes-Oxley, which mandated that companies report on the ratio between the pay of executives and average workers, hasn’t closed that gap; indeed, it’s gotten worse. And the federal law that requires certain chain restaurants to disclose calorie and nutrition information hasn’t exactly curbed obesity.
“I would love it if we changed what the real price of water was, what the real price of carbon was, and the accountants actually incorporated those prices into our P&Ls.”
To be clear, neither King nor Pucker is saying that these frameworks are unnecessary, or that their proponents aren’t well-intentioned.
“I would love it if we changed what the real price of water was, what the real price of carbon was, and the accountants actually incorporated those prices into our P&Ls,” Pucker told me. “We would accelerate the transition to renewable energy, we’d accelerate the transition to storage, we would take down fossil fuels faster.”
He added, speaking of his and King’s article: “I hope it leads to an honest discussion of this stuff. We have limited time, and we need to find solutions with maximum leverage. I would rather focus a conversation more on things that I think will have more leverage than this.”
We didn’t have time to delve into what those higher-leverage things might be. For now, I’ll gladly take the honest discussion — the value of which is, to be sure, incalculable.