The next step for companies committed to ESG is to introduce impact-weighted accounting, whereby an organisation’s balance sheet details its wider social effects, as well as its financial health. Silvia Pavoni explains.

After the International Monetary Fund and World Bank annual meetings in Washington, DC – where discussions over climate-related financial risks and environmental, social and governance (ESG) investment became mainstream – bankers should pay attention to another set of talks.

The Global Steering Group for Impact Investment (GSGII) will hold its second annual meeting from November 18 to 20 in Santiago, Chile, and (among other issues) will review its proposal to introduce impact-weighted accounting. The relevance of such a proposal goes well beyond the committed group of global impact investors.

Impact and returns

The idea was more widely promoted by GSGII’s chairman, Sir Ronald Cohen, at the end of 2018. Anyone involved in or aware of impact investing will be familiar with Mr Cohen. The Banker spoke to him for an in-depth article in this field a few years ago. Previously better known for the success of his venture capital firm, Apax Partners, Mr Cohen has been leading the debate on how to achieve social impact without sacrificing financial returns. At its next conference, the GSGII will look at the development of its accounting proposal.

The idea is to apply coefficients to items such as sales and employment costs, for example, all the way down to the profit line, and to do the same for the balance sheet too, as Mr Cohen wrote in an opinion piece for the Financial Times in December 2018. In this way, conventional financial accounts will be weighted for impact – and “when every company publishes impact-weighted accounts alongside financial ones, impact will have assumed its place in investment and business decision making”, he wrote.

Of course, calibrating those coefficients across data points and sectors to indicate their environmental and social impact is a clear challenge. But many organisations have risen to it. Building on the work of the Organisation for Economic Co-operation and Development, the Sustainability Accounting Standards Board, the Impact Management Project and others, Harvard Business School is developing a methodology to create an analogue of the US’s Generally Accepted Accounting Principles and the International Financial Reporting Standards for impact accounting.

Next development

A growing number of companies, including banks, are committing to reporting on ESG; policy-makers warn financial firms to get a grip on their climate-related risks; and regulators are demanding greater transparency. The creation of a methodology to measure, disclose and compare environmental and social impact is the next logical step.

It is time that stakeholders, not just shareholders, are offered a measure to understand businesses’ contribution to society. This applies to banks too. Whether attending the GSGII conference in person or not (and saving on travel and carbon dioxide emissions), the world of finance would gain by keeping up with its proposals.

This is a monthly column focusing on ESG principles and how they are reshaping banking, markets and investment. We would like to hear your views on sustainable finance, how it is changing your organisation, your work and your incentives structure. Contact and, on Twitter, @Silvia_Pavoni


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