Illustration by Ben Mounsey-Wood
If the Biden government is to reduce racial inequality and environmental damage, it must harness the power of investors and corporations. As? With a new force that is shaking up our system: transparency about the social and ecological impact of companies.
The harm to our planet and society is widely recognized and the responsibility to create and reduce that harm is on the company’s doorstep. For example, two-thirds of Procter & Gamble’s shareholders recently rebelled against management over P&G allegedly using palm oil to cause deforestation and asked management to disclose details. Little did shareholders know that research by Harvard Business School found that P & G’s operations in 2018 also caused $ 1.7 billion in environmental damage, which is more than 10% of profits.
Shareholder revolts will multiply as information about the corporate impact spreads. And they will also target diversity and unfair employment practices. They reflect the pressure from investors to turn more than $ 30 trillion into ESG and impact investments, which equates to a third of global assets under management.
Evidence of this pressure is everywhere. The challenge today is that we have little transparency about the impact of companies. This gives the Biden administration an opportunity to introduce them and drive real change.
Impact accounting is now possible. Company details have been merged with technology and big data to express the impact of a business in US dollars like profits. The Impact-Weighted Accounts Initiative, led by George Serafeim of Harvard Business School, shows how we can report precise, comparable figures about the effects of business processes, employment and products and reflect them in financial accounts. The initiative combines cutting-edge science, big data, and algorithms to collect ESG data, assign it sound monetary values, and express it as accounting items that show the impact businesses have on the world.
Data from 1,800 publicly traded companies around the world shows that 250 companies cause more environmental damage than profits per year, 600 companies cause damage equal to 25% or more of profits, and the 1,800 companies together damage a staggering $ 3 trillion annually cause. It identifies impact leaders and laggards in each sector. in the chemical industry, for example
The environmental damage accounted for 10% of sales in 2018
was an astonishing 137%. Significantly, it also shows that companies that cause more pollution are worth less in sectors where impact information is available.
The initiative also provides valuable insight into the impact on employment, including diversity, fair pay and career advancement.
Why is Impact Transparency a powerful driver for change? Because it creates a race to the top among companies – not for unlimited profit regardless of damage, but to improve our society and our planet. When companies realize that investors, consumers, and talent are shifting to make decisions based on profit and impact, they will strive to achieve both. In this way, companies will play a new helpful role alongside governments in meeting our challenges, rather than causing damage that governments must repair with taxpayers’ money.
Impact Transparency will also stimulate corporate innovation. New entrants will disrupt established industries, as Tesla did with the automotive industry. New Impact Ventures will use technology to create positive impacts, attract customers and talent, avoid regulatory and tax risk, and capitalize on growth opportunities in huge, underserved markets. By introducing Impact Transparency, President Joe Biden can align investors and businesses with his government’s goals to create a fairer society and a more sustainable world.
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In 1933, the Roosevelt government introduced generally accepted accounting principles and auditors to provide investors with reasonable transparency about the profits of companies. At the time, objections were raised that it would be impossible to apply all accounting principles to all companies, regardless of size and industry, and that this would mean the end of US capitalism. As we know, they were wrong.
The Biden administration’s plan for the first 100 days should include the introduction of generally accepted principles of impact and the publication of impact-weighted accounts by companies. Company managers and trustees of pension funds and foundations should be required to consider the social and environmental implications in their decision-making. And it should lower corporate tax rates for businesses that have a positive impact, and increase them for those that pollute the environment and promote social inequality.
Such a plan would reduce negative impacts and amplify positive ones, save valuable government resources and stimulate investment, create jobs and support the long-term success of businesses. It would transform our economic system into a fairer and more sustainable one.
Economic systems are not set in stone. We have moved from mercantilism to capitalism, which has developed itself several times. Biden can remodel it again for growth and profit while improving society and the environment.
Ronald Cohen chairs the Impact-Weighted Accounts Initiative and the Global Steering Group for Impact Investment, co-founder of Apax Partners, and author of Impact: Reshaping Capitalism to Drive Real Change.