Impact accounting is the heir apparent to ESG (environmental, social, governance) accounting and investing. Where ESG investing emphasizes risks to the firm, impact accounting measures how corporate actions help or harm people and the planet. Its advocates predict impact accounting will engender a more transparent, responsible, and sustainable capitalism. Sir Ronald Cohen (a financier and leading advocate of impact accounting) and Professor George Serafeim (head of Harvard’s Impact Weighted Accounts Initiative) claim it will “redefine success, so that its measure is not just money, but the positive impact we make during our lives.”

Impact accounting has attracted influential advocates. IMF Managing Director Kristalina Georgieva describes it as “a blueprint for a hope-filled future,” while former SEC Commissioner Allison Herren Lee contends it could “ensure that those who want to make an impact will make an impact where it matters most.” Leading corporations have begun adopting impact accounting frameworks: BlackRock, Target, and Eisai have pilot-tested methodologies developed at Harvard University, while Kering—the parent company of Gucci—has created its own proprietary system for dollarizing environmental impact.

But impact accounting has a dark side that makes its use dangerous. In a previous SSIR article, “Heroic Accounting,” we reviewed the potential for miscalculation and misuse of its measures. We also highlighted concerns about the feasibility and the perils of centralized, subjective pricing of externalities.

There is another important problem we overlooked in that review: Impact accounting has an equity problem, because practical means for calculating impacts discriminate against poor people. This flaw is challenging to correct because it emanates from its core premise: that social and environmental effects can and should be priced and compared in global monetary terms. One recent example illustrates this defect in particularly stark terms.

The Dark Side of Impact Accounting

Evidence of the discriminatory tendencies inherent in impact accounting appears in a recent report by the International Foundation for Valuing Impacts (IFVI)—an organization co-founded by Sir Ronald Cohen and Tracy Palandjian (Co-founder and CEO of Social Finance). The report estimates the social cost of consuming fresh water—a resource of growing global concern—for each country. Strikingly, the IFVI assigns the lowest social cost to Mauritania, a desert nation identified by the World Resources Institute (WRI) as facing an “extremely high” risk of future water scarcity. According to the IFVI, consuming a cubic meter of groundwater in Mauritania causes only $0.13 in social harm. In contrast, Sweden—rated by the WRI as having a "low" water risk—is estimated to suffer $3.23 in social harm per cubic meter of groundwater consumed, nearly 25 times the estimate for Mauritania.

Read the full article about impact accounting's equity problem by Andrew A. King, Ken Pucker, and Jesse Colman at Stanford Social Innovation Review.