I’d like to respond to the authors’ statement that they "can find no evidence that advocates for impact accounting have evaluated the potential risks inherent in their proposals."
Twenty-plus years ago when the precursor to impact accounting, Social Return on Investment (SROI) analysis, was first championed for use among private sector actors by the Roberts Enterprise Development Fund’s Jed Emerson and colleagues, those who were inspired by their work thought it would be not only possible to translate social and environmental impact into monetary terms, it would be revolutionary. And as practitioners began experimenting with this approach, comparing notes and convening, we debated intensely the pros and cons of monetizing impact. Once in a blue moon those debates were even documented (like this one https://impactmanagementproject.com/emerging-consensus/have-your-say-on-impact-monetisation/) though such instances are still hard to find.
Though it is not apparent in the literature, the evidence of these debates is to be found in the body of work of those who have formalized efforts to account for and understand the value of impact, and in how that work has evolved over time. This work includes among others: Social Value International (the former SROI Network), whose methodology has shifted over time from monetization being essentially required, to it being one of various methods of weighing the importance of impacts, at the discretion of the parties performing the analysis who are best positioned to determine what is appropriate for their purposes; the Impact Management Project and its Impact Frontiers initiative, which emphasize the quantitative and qualitative information necessary to account for “impact” in a way that is both meaningful and useful to investors; the UN SDG Impact Standards, which recognize the essentialness of using information to improve impact (as does an in-formation addition to SVI’s seven core principles); B Lab’s work and that of GRI, which haven’t tried to do impact valuation, but whose standards have shifted to hold space for the external impacts of the business beyond policies and outputs, while striving to find the right balance of simplicity and meaning, and which increasingly also emphasize improvement over time; and the Value Reporting Foundation (the merged SASB and Integrated Reporting Council), which focuses on the interplay between financial, social and environmental value.
While these efforts have approached the problem of how to measure and value impact in various ways, not all of which started with or even include monetization, they have shared the goal of simplifying that exercise– without oversimplifying it. This collective movement has sought to avoid the potential risks of measuring or valuing impact incorrectly, while balancing practical reality.
Across this constellation of efforts, one major shift over time has been away from impact assessment as an entirely desk-based exercise toward one that directly involves the parties who are experiencing impact in its measurement and valuation– quite the opposite of what is observed in this piece. Another shift has been to focus on impact measurement that supports actions to improve impact as opposed to impact measurement for its own sake. The article does not mention these phenomena, and I think that is because they are not well-documented or understood outside the practitioner community.
Which gets at a key problem: silos continue to prevent both practitioners and academics from discovering or building upon one another’s knowledge, and thus from developing and scaling effective practices. And although journals like this one exist to help overcome this problem, practitioners in the impact space are rarely paid to write about their work. And academics may have difficulty discovering information that is only in the heads of those outside of their classrooms and offices.
There is insufficient investment in documenting the innovation occurring in the field and publishing it in a way that is findable: in the academic literature. Until this changes, I fear that too often this field will continue to see both would-be innovators reinventing square wheels, and critics pointing them out without shedding light on what would make them go round.
Being good advocates, Andrew King and Kenneth Pucker focus on the most problematic applications of social accounting in their criticism of the entire enterprise. By contrast, our forthcoming article, “Measuring Corporate Virtue and Vice: Making ESG Metrics Trustworthy,” examines the same basic issues but comes to more nuanced conclusions. Efforts to measure some impacts, such as consumer surplus, are indeed heroic and, at least at present, unreliable. We show, however, that it is both feasible and crucially important to measure some other impacts, such as companies’ contributions to global warming and the safety of their workplaces.
A major reason that investors, consumers, employees, and other stakeholders demand social and environmental accounting metrics is to compare companies with each other, so they can decide where to invest, buy, and work. Disagreements about the appropriate price of carbon don’t really matter for these purposes. Comparisons can be made by using generally accepted metrics for greenhouse gas emissions, scaled based on companies’ sales or operating expenses. While we are skeptical about aspects of the current environmental, social, and governance (ESG) investing craze, the authors’ critique would foreclose rating and comparing companies based on their environmental and social performance.
We see no reason to throw the baby out with the bathwater. Rather, to substitute a different cliché, we applaud measurement efforts such as the Impact-Weighted Accounts Project in the belief that the perfect shouldn’t be the enemy of the good.
We appreciate much of what Professor Olsen has to say, particularly her argument that valuable information resides in the heads of people outside classrooms. How could we not? One of us, Ken, spent most of his career as an operator. Also, in preparing our article, we held discussions with many people in the business community, including some of the principal supporters of Impact Accounting.
We also acknowledge the problems created by disciplinary silos, and submit that this is part of the reason impact accounting has not been subject to sufficient due diligence. As noted, discussions of Impact Accounting have been held within the investment and accounting communities, but this is insufficient because reinventing capitalism will have much broader effects. At a minimum, one would expect that discussions would include people with practical and theoretical knowledge of economics, government, sociology, ethics, ecology, and so on. That is what is required, and that is what has been lacking.
We must respectfully object to the notion that one should not critique an idea without having a viable solution to address it, if that is what Professor Olsen intended to convey. Consider this from a Rawlsian perspective as a general principle for organizing social discourse. This would mean that one would not be able to critique proposals to use Hydroxychloroquine as a treatment for COVID (or lights or cleaning fluid) until one had a cure of one’s own. Clearly, such a rule would not be in the interest of society.
Indeed, just such consideration of the practical, ethical, and consequential merits of Impact Accounting is what we hope our article will engender. Ideas that sound appealing on the surface may look less attractive when more fully evaluated. Just as we require evidence before delivering medicine, shouldn’t we also require evidence and analysis before intervening in the world’s economy?
Thanks for your reply, Ken and Andrew. To clarify, I am not suggesting that one shouldn’t critique ideas unless one has a better idea (although to be honest that would be nice). Instead what I am observing is that there is an issue with how what is going on in practice finds out what else is going on in practice, and informs and is informed by those in the scholarly community, who are often the writers of articles that are the most findable in the literature. My idea is that the field writ large– the Impact Accountants and impact management folks (and ideally philanthropists who love them)– need to put more resources into helping us all find one another.
To put a finer point on it, there is a body of work and a global community of practice thousands strong of people doing social impact valuation, inclusively, transparently and in a way that is continuously improving, that keeps getting missed by those who both promote and critique the recent advent of “Impact Accounting.”
This exchange may do its bit to help (and by the way, hello and nice to meet you- shall we get a virtual coffee? And would you like to attend the upcoming Social Value Matters virtual conference, buff.ly/3zMOAo5?). But your article and others that have been written before (like this one https://hbr.org/2019/01/calculating-the-value-of-impact-investing), repeatedly illustrate that the infrastructure to help us all find and learn from one another remains weaker than it should be if we’re all going to solve the problems that need solving.
I think philanthropic sources should fund more practitioners to write about what’s going on and get those papers published in the academic literature where they can be found.
We did not mean to suggest that people shouldn’t try to evaluate corporate social or environmental performance. Indeed, one of us (Andy) helped develop some of the measures used in evaluating the environmental impacts of companies. What we object to is the notion that the welfare implication of all of these effects can be accurately tabulated, monetized, and attributed to a particular firm so as to provide a measure of its net impact.
We also think caution and humility is appropriate when discussing measures of corporate impact. We know from hard experience the difficulty inherent in trying to develop accurate measures. With Luca Berchicci, Andy has conducted research that suggests that errors in measurement of corporate social performance led to mistaken conclusions about the value of ESG investing. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3848664
We agree that for some effects, like those from emissions of non-toxic well-mixed gasses, it may be easier to estimate the value of impacts, but even here the industry has struggled for decades to create meaningful measures. Twenty five years post the issuance of the first CSR reports, mandated standards remain elusive and less than fifty percent of publicly traded companies report their Scope 3 emissions.
Let’s focus our attention on measuring the most critical impacts, and not get distracted by trying to do it all so that can claim we have a measure of total impact.
Thank you, Andrew and Ken, for this article. I see Impact Accounting as an important tool, but not one that alone delivers comprehensive insights on how to address critical ESG challenges. That is because the drivers of performance cannot be discerned from measures of performance. And in line with your argument, I also worry that the reduction of organizational responsibility to measurable ESG impacts may lull some executives into a sense of satisfaction that incremental progress is enough to remediate climate impact and to address important social problems. Incremental governance improvements in broken systems made actually exacerbate adverse impact (i.e., analogously to throwing deck chairs off the Titanic). Above all, we cannot let regulators, legislators, and other governmental leaders off the hook with Impact Accounting. A tool for understanding what’s going on at the level of organizations may be important for holding executives accountable to specific outcomes, but it does not get us to the kind of comprehensive, system-level, well-led social movement needed to address the SDGs in time to avert climate disaster and humanitarian crises.
Andrew and Kenneth eloquently convey powerful arguments against the system-wide implementation of impact accounting.
While comprehensively understanding and governing the environmental and social impacts of economic decisions is probably a bridge too far at the central level, a more intimate knowledge of the societal repercussions for decision-makers at a decentral level (i.e., producers and consumers) remains important. As such, striving for better metrics—which need not be reduced to one single figure—that accommodate more-informed decisions (e.g., through credible sustainability labels) is still a useful endeavor, even though it admittedly remains an uphill battle to comprehensively cover the multitude of relevant aspects.
The article suggests that strong legislation is a better alternative. While fully buying into the necessity of stringent regulation when consumers and producers see no (apparent or immediate) self-interest to behave ‘responsibly’, this does not rule out the important complementary function of charting and conveying the different environmental and social implications of economic decisions.
COMMENTS
BY Sara Olsen
ON September 27, 2021 10:51 PM
I’d like to respond to the authors’ statement that they "can find no evidence that advocates for impact accounting have evaluated the potential risks inherent in their proposals."
Twenty-plus years ago when the precursor to impact accounting, Social Return on Investment (SROI) analysis, was first championed for use among private sector actors by the Roberts Enterprise Development Fund’s Jed Emerson and colleagues, those who were inspired by their work thought it would be not only possible to translate social and environmental impact into monetary terms, it would be revolutionary. And as practitioners began experimenting with this approach, comparing notes and convening, we debated intensely the pros and cons of monetizing impact. Once in a blue moon those debates were even documented (like this one https://impactmanagementproject.com/emerging-consensus/have-your-say-on-impact-monetisation/) though such instances are still hard to find.
Though it is not apparent in the literature, the evidence of these debates is to be found in the body of work of those who have formalized efforts to account for and understand the value of impact, and in how that work has evolved over time. This work includes among others: Social Value International (the former SROI Network), whose methodology has shifted over time from monetization being essentially required, to it being one of various methods of weighing the importance of impacts, at the discretion of the parties performing the analysis who are best positioned to determine what is appropriate for their purposes; the Impact Management Project and its Impact Frontiers initiative, which emphasize the quantitative and qualitative information necessary to account for “impact” in a way that is both meaningful and useful to investors; the UN SDG Impact Standards, which recognize the essentialness of using information to improve impact (as does an in-formation addition to SVI’s seven core principles); B Lab’s work and that of GRI, which haven’t tried to do impact valuation, but whose standards have shifted to hold space for the external impacts of the business beyond policies and outputs, while striving to find the right balance of simplicity and meaning, and which increasingly also emphasize improvement over time; and the Value Reporting Foundation (the merged SASB and Integrated Reporting Council), which focuses on the interplay between financial, social and environmental value.
While these efforts have approached the problem of how to measure and value impact in various ways, not all of which started with or even include monetization, they have shared the goal of simplifying that exercise– without oversimplifying it. This collective movement has sought to avoid the potential risks of measuring or valuing impact incorrectly, while balancing practical reality.
Across this constellation of efforts, one major shift over time has been away from impact assessment as an entirely desk-based exercise toward one that directly involves the parties who are experiencing impact in its measurement and valuation– quite the opposite of what is observed in this piece. Another shift has been to focus on impact measurement that supports actions to improve impact as opposed to impact measurement for its own sake. The article does not mention these phenomena, and I think that is because they are not well-documented or understood outside the practitioner community.
Which gets at a key problem: silos continue to prevent both practitioners and academics from discovering or building upon one another’s knowledge, and thus from developing and scaling effective practices. And although journals like this one exist to help overcome this problem, practitioners in the impact space are rarely paid to write about their work. And academics may have difficulty discovering information that is only in the heads of those outside of their classrooms and offices.
There is insufficient investment in documenting the innovation occurring in the field and publishing it in a way that is findable: in the academic literature. Until this changes, I fear that too often this field will continue to see both would-be innovators reinventing square wheels, and critics pointing them out without shedding light on what would make them go round.
BY Paul Brest
ON September 28, 2021 04:35 PM
Being good advocates, Andrew King and Kenneth Pucker focus on the most problematic applications of social accounting in their criticism of the entire enterprise. By contrast, our forthcoming article, “Measuring Corporate Virtue and Vice: Making ESG Metrics Trustworthy,” examines the same basic issues but comes to more nuanced conclusions. Efforts to measure some impacts, such as consumer surplus, are indeed heroic and, at least at present, unreliable. We show, however, that it is both feasible and crucially important to measure some other impacts, such as companies’ contributions to global warming and the safety of their workplaces.
A major reason that investors, consumers, employees, and other stakeholders demand social and environmental accounting metrics is to compare companies with each other, so they can decide where to invest, buy, and work. Disagreements about the appropriate price of carbon don’t really matter for these purposes. Comparisons can be made by using generally accepted metrics for greenhouse gas emissions, scaled based on companies’ sales or operating expenses. While we are skeptical about aspects of the current environmental, social, and governance (ESG) investing craze, the authors’ critique would foreclose rating and comparing companies based on their environmental and social performance.
We see no reason to throw the baby out with the bathwater. Rather, to substitute a different cliché, we applaud measurement efforts such as the Impact-Weighted Accounts Project in the belief that the perfect shouldn’t be the enemy of the good.
Paul Brest and Colleen Honigsberg
References.
Our article online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3786252
The book in which it will be included: (online here and forthcoming here https://www.amazon.com/Frontiers-Social-Innovation-Essential-Sustaining/dp/164782141X/ref=sr_1_1?dchild=1&keywords=neil+malhotra&qid=1632591742&sr=8-1 )
BY Andrew King
ON September 29, 2021 09:38 AM
We appreciate much of what Professor Olsen has to say, particularly her argument that valuable information resides in the heads of people outside classrooms. How could we not? One of us, Ken, spent most of his career as an operator. Also, in preparing our article, we held discussions with many people in the business community, including some of the principal supporters of Impact Accounting.
We also acknowledge the problems created by disciplinary silos, and submit that this is part of the reason impact accounting has not been subject to sufficient due diligence. As noted, discussions of Impact Accounting have been held within the investment and accounting communities, but this is insufficient because reinventing capitalism will have much broader effects. At a minimum, one would expect that discussions would include people with practical and theoretical knowledge of economics, government, sociology, ethics, ecology, and so on. That is what is required, and that is what has been lacking.
We must respectfully object to the notion that one should not critique an idea without having a viable solution to address it, if that is what Professor Olsen intended to convey. Consider this from a Rawlsian perspective as a general principle for organizing social discourse. This would mean that one would not be able to critique proposals to use Hydroxychloroquine as a treatment for COVID (or lights or cleaning fluid) until one had a cure of one’s own. Clearly, such a rule would not be in the interest of society.
Indeed, just such consideration of the practical, ethical, and consequential merits of Impact Accounting is what we hope our article will engender. Ideas that sound appealing on the surface may look less attractive when more fully evaluated. Just as we require evidence before delivering medicine, shouldn’t we also require evidence and analysis before intervening in the world’s economy?
BY Sara Olsen
ON September 29, 2021 10:27 AM
Thanks for your reply, Ken and Andrew. To clarify, I am not suggesting that one shouldn’t critique ideas unless one has a better idea (although to be honest that would be nice). Instead what I am observing is that there is an issue with how what is going on in practice finds out what else is going on in practice, and informs and is informed by those in the scholarly community, who are often the writers of articles that are the most findable in the literature. My idea is that the field writ large– the Impact Accountants and impact management folks (and ideally philanthropists who love them)– need to put more resources into helping us all find one another.
To put a finer point on it, there is a body of work and a global community of practice thousands strong of people doing social impact valuation, inclusively, transparently and in a way that is continuously improving, that keeps getting missed by those who both promote and critique the recent advent of “Impact Accounting.”
This exchange may do its bit to help (and by the way, hello and nice to meet you- shall we get a virtual coffee? And would you like to attend the upcoming Social Value Matters virtual conference, buff.ly/3zMOAo5?). But your article and others that have been written before (like this one https://hbr.org/2019/01/calculating-the-value-of-impact-investing), repeatedly illustrate that the infrastructure to help us all find and learn from one another remains weaker than it should be if we’re all going to solve the problems that need solving.
I think philanthropic sources should fund more practitioners to write about what’s going on and get those papers published in the academic literature where they can be found.
BY Andrew King
ON September 29, 2021 12:02 PM
To Paul Brest and Colleen Honigsberg,
We did not mean to suggest that people shouldn’t try to evaluate corporate social or environmental performance. Indeed, one of us (Andy) helped develop some of the measures used in evaluating the environmental impacts of companies. What we object to is the notion that the welfare implication of all of these effects can be accurately tabulated, monetized, and attributed to a particular firm so as to provide a measure of its net impact.
We also think caution and humility is appropriate when discussing measures of corporate impact. We know from hard experience the difficulty inherent in trying to develop accurate measures. With Luca Berchicci, Andy has conducted research that suggests that errors in measurement of corporate social performance led to mistaken conclusions about the value of ESG investing.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3848664
We agree that for some effects, like those from emissions of non-toxic well-mixed gasses, it may be easier to estimate the value of impacts, but even here the industry has struggled for decades to create meaningful measures. Twenty five years post the issuance of the first CSR reports, mandated standards remain elusive and less than fifty percent of publicly traded companies report their Scope 3 emissions.
Let’s focus our attention on measuring the most critical impacts, and not get distracted by trying to do it all so that can claim we have a measure of total impact.
BY Anita McGahan
ON September 29, 2021 12:29 PM
Thank you, Andrew and Ken, for this article. I see Impact Accounting as an important tool, but not one that alone delivers comprehensive insights on how to address critical ESG challenges. That is because the drivers of performance cannot be discerned from measures of performance. And in line with your argument, I also worry that the reduction of organizational responsibility to measurable ESG impacts may lull some executives into a sense of satisfaction that incremental progress is enough to remediate climate impact and to address important social problems. Incremental governance improvements in broken systems made actually exacerbate adverse impact (i.e., analogously to throwing deck chairs off the Titanic). Above all, we cannot let regulators, legislators, and other governmental leaders off the hook with Impact Accounting. A tool for understanding what’s going on at the level of organizations may be important for holding executives accountable to specific outcomes, but it does not get us to the kind of comprehensive, system-level, well-led social movement needed to address the SDGs in time to avert climate disaster and humanitarian crises.
BY Frank Wijen
ON October 4, 2021 02:23 PM
Andrew and Kenneth eloquently convey powerful arguments against the system-wide implementation of impact accounting.
While comprehensively understanding and governing the environmental and social impacts of economic decisions is probably a bridge too far at the central level, a more intimate knowledge of the societal repercussions for decision-makers at a decentral level (i.e., producers and consumers) remains important. As such, striving for better metrics—which need not be reduced to one single figure—that accommodate more-informed decisions (e.g., through credible sustainability labels) is still a useful endeavor, even though it admittedly remains an uphill battle to comprehensively cover the multitude of relevant aspects.
The article suggests that strong legislation is a better alternative. While fully buying into the necessity of stringent regulation when consumers and producers see no (apparent or immediate) self-interest to behave ‘responsibly’, this does not rule out the important complementary function of charting and conveying the different environmental and social implications of economic decisions.