A New Type of Accounting to Learn?

If you have perfected your system of accounting for your clients (and even if you haven't), we may have some bad news for you. Currently, a number of banks and academics are working to define standards of corporate value and new accounting rules to quantify these values. Could there be a future where you need to weight the financials you produce based on the impacts the company has created?

Looking at a corporate responsibility isn't new. In 2005, the idea of environmental, social and governance (ESG) first began to be discussed in terms of investment, with the United Nation’s first mentioning ESG in their 2006 Principles for Responsible Investment report. 

Then, in 2007, KPMG began surveying companies on corporate responsibility and producing reports on the topic. Their annual survey has continued with a new report produced each year. The 2020 report provided insights gleaned from 5,200 companies in 52 countries and looked at reporting by companies in sustainability areas such as biodiversity loss, climate change, and the UN Sustainable Development Goals. 

ESG investing has proven to be not only sustainable, but has shown remarkable growth. Earlier this year, CNBC reported that annual investments in companies that apply environmental, social and governance principles in their operation more than doubled from about $21 billion in 2019 to over $51 billion in 2020.

Here is what is new. There is a growing and significant focus on investments in companies that report on their ESG efforts, which means there is a growing and significant need to quantify impacts both positive and negative. Organizations are calling for that quantification to be done with financial measurements that would then be presented as line items on financial statements. 

Harvard Business School is actively working an Impact-Weighted Accounts Project with a mission to create financial accounts that reflect financial, social and environmental performance. According to their website, their "ambition is to create accounting statements that transparently capture external impacts in a way that drives investor and managerial decision making." In addition, an international group of banks is building on efforts such as Harvard's to build a Banking for Impact framework which would help banks quantify their impacts - both good and bad. 

So, are you ready to balance your impact-weighted accounts?