Biden administration is to reduce racial inequality and environmental damage, then it needs to harness the power of investors and companies.
How? Through a new force that is beginning to shake up system: transparency on the social and environmental impacts created by companies.
The damage to our planet and society is widely acknowledged, and the responsibility for creating—and reducing—it is landing on company doorsteps. For example, two-thirds of Procter & Gamble’s shareholders recently rebelled against management because of allegations that P&G’s use of palm oil causes deforestation, and demanded that management disclose details. Little did shareholders know that research from Harvard Business School found that P&G’s operations also created $1.7 billion of environmental damage in 2018, equal to more than 10% of its profits. Shareholder rebellions will multiply as information spreads about companies’ impacts. And they will take aim at lack of diversity and unfair employment practices, too. They reflect the pressure of investors who are directing more than $30 trillion to ESG and impact investment, equal to a third of global assets under management. Evidence of this pressure is everywhere. The challenge today is that we have little transparency on the impacts of companies. This creates an opportunity for the Biden administration to introduce it and drive real change. Impact accounting is now possible.
Company disclosures have come together with technology and big data to Express a company’s impacts in dollar terms, like profits. The Impact Weighted Accounts Initiative led by George Serafeim at Harvard Business School shows how we can report precise, comparable figures about the impacts of corporate operations, employment, and products, and reflect them in financial accounts. The initiative combines cutting-edge science, big data, and algorithms to gather ESG data, assign substantiated monetary values to them, and express them as accounting line items that show companies’ impacts on the world. Its data on 1,800 quoted companies across the world reveal that 250 businesses create more environmental damage a year than profit, that 600 create damage equal to 25% or more of profit, and that together the 1,800 companies create a staggering $3 trillion of damage annually. It identifies impact leaders and laggards in each sector; in the chemical industry, for instance, BASF’s environmental damage equaled 10% of its sales in 2018, while Sasol’s was a staggering 137%. Significantly, it also reveals that in sectors where impact information is available, companies that pollute more are worth less.
The initiative also provides valuable insights about employment impacts, including diversity, fair pay, and career advancement.
Why is impact transparency a powerful driver of change? Because it creates a race to the top among companies—not for limitless profit regardless of damage, but to improve our society and planet. As companies realize that investors, consumers, and talent are shifting to make decisions based on profit and impact, they will strive to achieve both. In doing so, businesses will begin to play a new, helpful role alongside governments in meeting our challenges, rather than creating damage that governments will have to remedy with tax dollars. Impact transparency will stimulate business innovation, too. New entrants will disrupt established industries, as Tesla has done with the automobile By Ronald Cohen industry. New impact ventures will use technology to deliver positive impact, attracting customers and talent, avoiding the risk of regulation and taxation, and taking advantage of growth opportunities in huge, underserved markets.
By introducing impact transparency, President Joe Biden can align investors and companies with his administration’s goals to create a fairer society and more sustainable world. In 1933, the Roosevelt administration introduced generally accepted accounting principles and auditors to give investors proper transparency on the profits of companies. Objections were raised then that it would be impossible to apply the same set of accounting principles to all companies, irrespective of their size and sector, and that this would be the end of U.S. capitalism. As we know, they were wrong. The Biden administration’s plan for its first 100 days should include the introduction of generally accepted impact principles and the publication by companies of impact-weighted accounts. It should require company directors and trustees of pension funds and endowments to consider social and environmental impacts in their decision-making. And it should lower corporate tax rates for companies that deliver positive impact and raise them for those that pollute the environment and drive social inequality.
Such a plan would reduce negative impacts and boost positive ones, save government precious resources, and stimulate investment that creates jobs and supports companies’ long-term success. It would transform our economic system into one that is fairer and more sustainable. Economic systems are not engraved in stone. We have progressed from mercantilism to capitalism, which has itself evolved several times. Biden can reshape it again, to deliver growth and profits while improving society and the environment!