The Standardization Problem: Why the lack of a common impact accounting framework is slowing progress
According to a PwC survey, “nearly two thirds of investors globally want information that describes a company’s impact on the environment and society,” and “of those investors who want impact information, 66% want to see companies disclose the monetary value of that impact.” Whether it’s reducing carbon emissions, assessing the value of wages on workers, or protecting biodiversity, stakeholders — including investors, customers, and policymakers — are demanding that these efforts be measured and reported in a way that is consistent, reliable, and comparable.
Over the past decade, we’ve seen over 70 leading companies, investors, and service providers worldwide, including Anglo American, BlackRock, and Natura &Co, proactively answer these demands using impact accounting to develop compelling and easy-to-understand insights that drive a more holistic view of corporate risk and value. Impact accounting has allowed these organizations to gain clarity on stakeholder risks on the horizon (often referred to as tail risk or idiosyncratic risk), to more effectively allocate capital, and to future-proof their businesses for the long term.
However, the absence of a universally accepted, accessible, and transparent impact accounting approach has delayed or discouraged many companies from engaging fully with impact accounting, ultimately preventing true progress in the fight for a more sustainable world. At IFVI, we argue that a critical way to support businesses in navigating these challenges is through the standardization of impact accounting.
The importance of standardization in impact accounting
This is not the first time calls for standardization in the sustainability ecosystem have been made. For years, businesses have had to navigate a maze of different sustainability reporting frameworks, each with its own set of criteria and rules, “leading to inconsistencies, non-comparable data in the market, and a lack of trust in provided information.”
Our colleagues at the leading standard setters have been focused on meeting this moment; for example, in 2021, the IFRS established the International Sustainability Standards Board, which merged the Value Reporting Foundation and the Climate Disclosure Standards Board (CDSB), and began working more collaboratively with the Global Reporting Initiative (GRI) to build a global baseline for sustainability reporting.
Impact accounting is now facing a similar juncture. The idea of translating environmental and social impacts into currency is not a new one. Noted economist William Nordhaus has been advocating for putting a price on carbon emissions since the 1970s. Decades later, we’ve reached a point where several frameworks for monetizing impact exist, but with inconsistent approaches, leading to three main consequences:
1. Incomparable data
Companies may report their impacts using different methodologies, making it difficult to understand the true scale of their efforts in relation to others in the same industry.
2. Inefficiencies
Without a transparent, robust, and universally agreed-upon approach, the presumption is that businesses, which likely don’t have the internal expertise and capacity to implement impact accounting, need to figure out how to do impact accounting on their own or hire external support to develop proprietary methodologies and solutions. That can be time-consuming and expensive, limiting uptake.
3. Poor quality
A lack of standardization could lead to a race to the bottom with businesses using methodologies that make them or their portfolio companies look the best. There is an inherent conflict of interest in non-standardized approaches because they are never really fully independent if chosen by a company, developed by them, or paid for by them.
It’s unlikely that real systemic change can occur without standardization, which would lead to a tipping point where impact accounting is done at scale.
Working together: Collaboration in action
At IFVI, collaboration is key to creating a credible and rigorous framework that companies and investors can rely on. That’s why we’ve built partnerships with a wide array of organizations and stakeholders in this space and invested in robust due process.
Our work with the Value Balancing Alliance (VBA), an alliance of multinationals invested in impact accounting, has been instrumental in testing the viability of the frameworks we’ve developed across different industries, markets, and geographies. This work is overseen by the Valuation Technical & Practitioner Committee (VTPC), whose expertise ensures that our methodologies are constantly reviewed and improved, grounded in the best available scientific research, and built upon sustainability metrics businesses already collect.
One of our primary advances has been moving beyond methodological approaches into real-world implementation. We’re collaborating with several pioneering data platforms and software as a service (SaaS) tools from partners, including EcoMap, GIST Impact, Lunum, Richmond Global Sciences (RGS), and WifOR to bring impact accounting to life by integrating IFVI’s impact accounting methodologies and value factors, enabling businesses, investors, and policymakers to assess returns, risks, and impacts more comprehensively. We are not just talking about the theory of impact accounting; we are testing it, adapting it, and showing how it can drive business decisions that create positive change, like a retailer finding hidden risks in its supply chain, a telecommunications company revealing more than 500 billion Yen in social value, or an economic development corporation attracting high quality investments to an underserved region of the US.
We are also part of the Impact Valuation Hub, a collaborative initiative aimed at advancing the use of impact accounting among impact investors. The Hub is committed to being the go-to platform for investors seeking to integrate impact into decision-making, with a global network of members, widely used tools, and demonstrated influence on how capital is allocated across the financial system.
It is with great pride that we can say our collective efforts are greater than the sum of their parts. Together, we are building an ecosystem that is united in its goal: to develop standardized approaches to impact accounting and ensure that these frameworks are freely accessible, fostering wider adoption across industries.
Emerging debates around standardization
Speaking of collaboration, there’s also the aspect of challenging each other in order to make space for innovation. Hence, some key debates continue to shape the field, such as the role of standardization. At IFVI, we envision one approach that is recognized as the widely adopted system that provides a common baseline for impact accounting, complemented by other approaches that fill existing gaps and market demands and enable complementary analysis.
Analogs exist in financial accounting where the income statement is commonly used, but other approaches or metrics, such as EBITDA, are also used to capture the unique context of different sectors and provide valuable insights for stakeholders.
Additionally, discussions around valuation techniques are gaining traction. For example, a common debate is whether we should use the same exact valuation technique across topics (from water pollution to worker wages) or have fit-for-purpose techniques for each topic guided by common principles, as articulated in IFVI and VBA’s General Methodology 2: Impact Measurement and Valuation Techniques.
To be clear, while healthy debates are necessary for the advancement of impact accounting, we also want to ensure that these debates do not lose the forest for the trees. While there are disagreements on the details around the role of standardization and specific valuation techniques, we don’t see them as a cause for inaction. Instead, if we zoom out, we see much more commonality in the path to determining a common approach, even if there’s some disagreement in any specific answer.
A hopeful path forward
Despite the challenges and complexities of standardizing impact accounting, we believe the work being done across the sector is driving us toward a future where impact is not only recognized but also quantified and valued. Through collaboration, innovative partnerships, and efforts like the Impact Valuation Hub, we are laying the groundwork for an independent system that will enable businesses and investors to make better-informed decisions — decisions that will positively affect the world for generations to come.
– T. Robert Zochowski, IFVI