Why Use Impact Accounting: An Introduction TEST

Impact accounting quantifies social and environmental impacts into a common unit of measurement: currency. It aims to take a wide range of sustainability metrics that are difficult to contextualize and makes them decision-useful and comparable — across entities and impacts, and even between an entity’s sustainability and financial performance.  

But what makes impact accounting valuable, especially in a sea of other standards and frameworks?  While impact accounting is certainly not the only option available, it has unique attributes that make it useful as a standalone approach for impact management or as a complement alongside other approaches.   

A Common Impact Accounting Methodology for the Public Good 

Multiple approaches to impact accounting, or ‘impact valuation’, but there has been lack of comparability and accessibility because of their traditionally proprietary nature. In order to address these challenges, a public good methodology is being developed by the International Foundation for Valuing Impacts in partnership with the Value Balancing Alliance, following an official Due Process Protocol and independently governed by the Valuation Technical and Practitioner Committee (VTPC).   

This methodology is informed by the best available approaches to impact valuation, emerging science and expertise on impact, market feedback, and alignment with common standards for corporate sustainability reporting.  It is being developed on a rolling basis, with many methodologies on specific topics available and ready to use while additional methodologies are continually developed.  These official methodologies are also intended to be complemented by other methodologies and impact management approaches that extend beyond impact accounting altogether.   

This document articulates the main reasons to use impact accounting, with a particular focus on companies and investors.  Regardless of one’s size, sector, location, or (for investors) asset class and strategy, impact accounting is designed for you.  Whether you are seeking to optimize impact or manage financial risks, just starting on your sustainability journey or a leader looking to find ways to innovate and improve, impact accounting provides added value.   

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Reason #1: Communication

Impact accounting helps communicate impact performance in an understandable and meaningful way.

People understand languages they can speak.  In the business world, and to an extent, the entire world – money talks.  Presenting impact in a unit of currency therefore takes an impact that is abstract and removed from their day-to-day experience and makes it more tangible.  Whether you are trying to talk to your manager, the Chairman of the Board, or your grandmother, they will respond differently if you talk about tons of GHG emissions versus the dollars of impact from GHG emissions, because dollars are something that they can understand.

This makes the presentation of impact accounting, in the form of currency, uniquely beneficial for some forms of sustainability communication compared to existing reporting requirements.  Combined with the fact that it is presented in a way that is analogous to financial accounts, and matches the rigor, comparability, and independence of financial accounting, impact information can be presented in a quantitative and compelling way that builds trust and understanding. 

Ways to Improve Communication with Impact Accounting

For Companies	For Investors
Presenting impacts resulting from their sustainability performance to the Board of Directors using impact accounting to help the Board better understand the actual significance of that impact	Incorporating impact accounting in reporting to LPs who are interested in understanding the impacts of their portfolio companies
Including impact accounting results in public sustainability reports, to provide stakeholders a way to quantitatively understand and compare performance over time in a consistent and comparable way across topics and over time.	Using impact accounting to communicate the added, or relative impact of investments compared to alternatives the monetary value of their portfolio decisions compared to alternative portfolios (i.e. compared to indices) to highlight how impacts differ, in much the same way that portfolios compare their financial performance

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Reason #2: Prioritization

Impact accounting provides unique insights into what impacts to prioritize.

Impact accounting goes beyond what an entity is doing (i.e. their inputs, activities, and outputs) in order to understand the results (i.e. impacts) of what they are doing. In a complex world where an entity is navigating stakeholder expectations about multiple impacts, all representing various degrees of significance and risk, it’s necessary to figure out which ones require the most attention. By focusing on impacts, and then valuing those impacts and calculating them in a common unit of measurement, impact accounting makes it possible to understand how significant each different impact is, relative to others, in a rigorous way.

Such an approach can complement or confirm other sustainability related efforts (e.g. materiality assessments) that are primarily based on subjective judgments and are time consuming and subject to bias. Users can therefore have a better sense of which impacts are most significant and therefore require time and attention, while simultaneously increasing efficiency in one’s efforts.

Ways to Improve Prioritization Using Impact Accounting

For Companies

For Investors

System Level Investing and Impact Accounting  

System level investing recognizes societal and environmental impacts, whether it be climate change or inequality, as having an effect on the economy as a whole, particularly over the long term.  For diversified investors that they are essentially invested in the entire economy – known as universal owners – such as pension funds, these system level impacts represent a significant risk to their entire investment portfolio, rendering management of those impacts essential for good stewardship of their financial performance.

By accounting for the impacts of an entity from a societal lens in a unit of currency, impact accounting can help investors considering system level risks by quantifying the impacts of individual parts of their portfolio, as recognized as a risk to society and the economy as a whole, and in turn the financial returns of the rest of their portfolio. 

For more information about system level investment, among others, please see: UN PRI, Shareholder Commons, Pre-Distribution Initiative, The Investment Integration Project. 

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Reason #3: (Enhanced) Compliance

Impact accounting helps companies meet current and future regulatory requirements AND get more value out of those requirements.

And yet while regulatory approaches to sustainability issues may ebb and flow, the underlying impacts do not. In addition to current regulations, the possibility of various, more stringent, regulations remains in the future– be it carbon taxes, other regulatory attempts to better manage externalities, or even incentives to promote the positive impacts of the private sector.

Impact accounting helps users meet the needs of current regulatory requirements, prepare for future regulatory risks, and ensure that they are able to get more value out of those requirements. This is done by aligning with the metrics and expectations of existing requirements to the extent possible, while also making that data more useful not only to provide better insights in the current moment but also to better prepare for future regulatory risks in the future. In this way, impact accounting not only supports compliance with existing regulations, but it also enhances that compliance with a more long term and value driven approach.

Leveraging common metrics from voluntary and required sustainability reporting
The impact accounting methodologies are designed to build off the data that is expected from common sustainability reporting standards of both a regulatory and voluntary nature, particularly ESRS, GRI, and ISSB. All methodologies articulate the data requirements in alignment with these standards, including where, as necessary, impact accounting requires or prefers additional data.

Ways to Improve Compliance Using Impact Accounting

For Companies

For Investors

THE ROLE OF IMPACT ACCOUNTING IN UNDERSTANDING LINKS BETWEEN IMPACT AND FINANCIAL PERFORMANCE

The link between impact and financial performance is among the most important, and controversial, debates in corporate sustainability. While some studies have shown that entities with better sustainability performance perform better financially, other studies have failed to replicate the same results. These links have nonetheless informed many of the key concepts in sustainability and regulation, including the concept of financial materiality (in short, those sustainability issues that affect an organization’s financial performance), impact materiality (sustainability issues that matter to stakeholders independent of impact on financial performance), double materiality (consideration of both financial and impact materiality), and dynamic materiality (the process by which topics that are impact material become financially material over time).

Impact accounting is a bridge between these concepts. By quantifying the impact of an entity on society, impact accounting methodologies takes an ‘impact materiality’ lens. And yet, by quantifying them in monetary form, impact accounting uses the language of financial materiality, thereby enabling a richer conversation about the intersections between the two.

More specifically, impact accounting can help organizations understand and prepare for the risks that their impact holds on financial performance, based on the presumption that over time, external costs to society will be internalized to some degree, driven by a variety of possible factors like stakeholder expectations or regulation, over time. Scenario analyses can therefore be conducted, for instance, in the case of a cost of carbon, in which an entity can use impact accounting to assess the impacts on financial performance based on various scenarios of “internalization” – whether a cost of carbon is 100% internalized, 75% internalized, 50% internalized, 25% internalized, and what the subsequent results would be on the entities’ profits and revenues.

This approach can be further complemented by other methodologies that have the intent of more directly measuring the actual (versus potential) link between impact and financial performance, such as the ROSI Method from the NYU Stern School of Business and the Yanagi Model out of Japan.

Furthermore, impact accounting can also support the more general, normally academic study of the links between financial performance and impact, by providing a common unit of measure that is has not previously been incorporated into existing research to understand more general trends and insights.

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Reason #4: Impact Analysis