Social expectations for corporate responsibility are changing rapidly across the global economy, with a large increase in the number of companies reporting on environmental, social, and governance (ESG) performance, a rising demand for sustainability reporting regulation, and an increased emphasis on sustainable brand performance from younger generations.

Corporations are frequently asked to comment on or change strategy related to decisions or activities that violate social expectations. For example, Adidas and Ye (formerly known as Kanye West) dissolved their partnership after Ye made antisemitic remarks in October 2022, causing the hugely popular Yeezy clothing and shoe line to swiftly swing from asset to liability.

Indeed, potential liability and brand contagion were so dramatic that they caused a drop in operating profit. In February 2023, Adidas reported that its 2023 revenue would decline by US $1.3 billion and operating profit by $534 million due to this decision (but showed no sign of a reversal). Adidas plans to strip Yeezy logos from existing inventory to try to make the products sellable and cut losses.

Yet, there is substantial opportunity for innovation as businesses adjust to this new paradigm and try to avoid issues like those faced by Adidas. Proactive measurement and management of consumer product impacts can minimize the risks of running afoul of social expectations and enable analysis and decision-making alongside financial metrics by translating those impacts into units of currency. We call this “monetary impact accounts.”

What Are Monetary Impact Accounts?

Today, most mainstream ESG reporting frameworks require disclosure of corporate and investment input and output. Examples include cubic meters of water intake and discharge, metric tons of greenhouse gas produced, nitrogen and phosphorous emissions, and wages paid. Although important, these disclosures do not capture the ultimate ESG effects of corporate activities.

For a more complete view, corporate input and output data must link to impacts and outcomes through impact pathways. Here are two examples:

1. CO2 emissions increase the relative concentration of gases in the atmosphere (outputs). This causes increased radiative forcing, increasing the Earth’s global average temperature, which sets off pathways (impacts) that ultimately reduce crop production, affect human health, accelerate species extinction, and cause a decline in ecosystem health (outcomes).

2. Consumer packaged goods companies produce and manage a portfolio of food and beverage products (outputs). Their choices regarding the nutritional component of this portfolio, marketing practices, and pricing (among other elements) have implications for who purchases the product, what nutrients are accessible at a certain price point, whether the products are recyclable, and whether children are more likely to ask for or purchase the product. These have numerous downstream implications (impacts) on increasing or decreasing obesity, health, and environmental degradation (outcomes).

Because they focus on the beginning of the impact pathway (inputs and outputs) rather than the end point changes for the various stakeholders affected, current ESG reporting frameworks do not contain the amount of information needed to properly evaluate corporate sustainability performance. Today's frameworks provide an important starting point by standardizing scope and measurement of these data points, but they are insufficient. To assess corporate sustainability and product impact, we need to see a complete impact pathway. 

Even if impacts to affected groups or the environment were clearly disclosed, this would not be sufficient to achieve the economy-wide changes needed to solve some of society’s biggest problems. One reason is that many impacts are measured in units specific to a particular discipline. For example, disability-adjusted life year (DALY) and quality-adjusted life year (QALY) are used by public health officials to assess the burden of disease when comparing treatment options.

We frequently hear that corporate decision makers and investors struggle to comprehend the following:

• Is the impact metric a lot or a little?

• Is the impact metric in line with thresholds or benchmarks?

• Are the impacts from one choice better or worse than those for another?

• What produces the greatest positive or minimizes the negative impacts for those affected?

The solution is using rigorous data and stakeholder-driven approaches to reflect the impacts created by any given corporate activity or choice.¹ Impact-weighted accounts use impact monetization to supplement traditional financial accounts used in financial and managerial accounting. By providing comparable, transparent measures of impacts for stakeholders, we can truly understand whether a product, project, or organization creates net value.

Monetarily valued impacts are interoperable with financial analyses and can be directly compared to financial returns, providing critical context to decision makers.

Note

[1]The ISO 14008 Standard as well as the Capitals Coalition Social & Human Capital and Natural Capital Protocols provide guidance for what constitutes a well-defined monetization coefficient and accepted price-discovery methodologies.

Disclaimer: The framework and results presented in this article were developed by the IWA Project at Harvard Business School. The International Foundation for Valuing Impacts (IFVI) grew out of the IWA Project. In 2022, IFVI launched as an independent organization with rights to the IWA Project’s intellectual property and the team in order to scale and achieve the ambitious goals set out by the G7 Impact Taskforce in its December 2021 report.

IFVI assumed the right to all the IP and work products of the IWA Project in December 2022. This article represents legacy research. Under the governance established by IFVI, the Valuation Technical & Practitioner Committee (VTPC) has been established to direct, validate, and approve the IWA research and methodology produced by the cooperation of IFVI and the Value Balancing Alliance (VBA) (The “Mandate”). The above research has not been evaluated by the VTPC at this time, and thus does not reflect the views or positions of that body, but the research is expected to be submitted in due course of IFVI’s research agenda.

© 2023 International Foundation for Valuing Impacts

[For more from the authors on this topic, see: “Monetary Impact Accounts: An Opportunity to Improve Product Design.”]