34 BARRON’S February 15, 2021
OTHER VOICES
The Biden administration has an opportunity to
align companies with the goal of creating a fairer
society and more sustainable world.
Show, Don’t Hide,
Corporate Impact
I
f the 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
our system: transparency on the social
and environmental impacts created by
companies.
The damage to our planet and soci-
ety 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 re-
cently 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 environmen-
tal damage in 2018, equal to more than
10% of its profits.
Shareholder rebellions will multiply
as information spreads about compa-
nies’ impacts. And they will take aim
at lack of diversity and unfair employ-
ment practices, too. They reflect the
pressure of investors who are directing
more than $30 trillion to ESG and im-
pact investment, equal to a third of
global assets under management.
Evidence of this pressure is every-
where. The challenge today is that we
have little transparency on the impacts
of companies. This creates an opportu-
nity for the Biden administration to
introduce it and drive real change.
Impact accounting is now possible.
Company disclosures have come to-
gether 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 initia-
tive combines cutting-edge science,
big data, and algorithms to gather
ESG data, assign substantiated mone-
tary 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 busi-
nesses 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 com-
panies 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 im-
pact information is available, compa-
nies 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, avoid-
ing the risk of regulation and taxation,
and taking advantage of growth oppor-
tunities in huge, underserved markets.
By introducing impact transparency,
President Joe Biden can align investors
and companies with his administra-
tion’s goals to create a fairer society and
more sustainable world.
In 1933, the Roosevelt administra-
tion 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 im-
possible to apply the same set of ac-
counting principles to all companies,
irrespective of their size and sector, and
that this would be the end of U.S. capi-
talism. As we know, they were wrong.
The Biden administration’s plan for
its first 100 days should include the
introduction of generally accepted im-
pact principles and the publication
by companies of impact-weighted ac-
counts. It should require company di-
rectors 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 eco-
nomic 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.B