30 Sep 2020 Impact-weighted accounting, Ronal Cohen’s solution to rewire capitalism
“How do we take into consideration externalities in companies’ reporting?” The debate about reforming capitalism is strong.
The Egyptian-born British multimillionaire Sir Ronald (Ronnie) Cohen is a dyed-in-the-wool capitalist who, at the age of 75, aims at transforming the mind-set of today’s capitalism to a more sustainable (and less social and environmental damaging) way of doing business.
Impact: Reshaping Capitalism to Drive Real Change is Ronnie’s new book. Despite the vintage slogan, the book is a critique to today’s capitalism which comes, surprisingly, with an actual and ready-packed solution. He proposes to reshape capitalism by rewriting century-old financial accounting norms to cost in the social and environmental externalities of a corporation’s assets and activities.
A kind of The Untouchables’ style, Ronnis alias Elliott Ness wants to knock down Al Capone pardon, capitalism, by making clear who is naughty and who is not. He wants companies to be total transparent about the positive and negative impacts they create in different areas through products, employment and operations, dovetailing impacts-related metrics results with existing financial and business analysis tools.
The solution has a slogan “impact-weighted accounting” and a project team at Harvard Business School (Cohen’s alma mater) dedicated to its development. The augmented form of traditional financial accounting aims at filling the gap of current income statements and balance sheets, which do not account for environmental and social externalities of corporations. Instead of reporting the damage they create, corporations pass it on to governments, so to taxpayers and through public taxes, to try and fix the problem.
The Harvard project team has already made available online a breakthrough dataset, which lays out in full the environmental costs associated with 1,800 companies (an equivalent evaluation for social costs will be published next year). In the spirit of transparency, shared (and free) learning, the methodology is all open-source and the data for the most part (roughly 80%) is drawn from the public domain.
To understand the extent to which Ronnie’s impact-weighted accounting diverges from conventional accounting, take the case of the chemical giants Sasol and Solvay. With sales revenues of around $12bn per year, both the chemical giants would see $17bn and $4bn immediately wiped off their top line if their environmental damage had to be cost in. Another astonishing example is Intel. The US tech firm is a stellar employer, annually putting an aggregated £7bn in the pockets of its 50,000 US employees and implementing an award-winning equality programme. Yet, measure its diversity stats relative to local demographics and its positive employment impact on communities falls to about $2.5bn
These are portfolio stalwarts for mainstream investors, this is why Ronnie argues that to bring about the change he wants for the world of business, investors will have to start getting on board. Only when capital moves away from the social and environmental damage-makers to more sustainable businesses meaningful changes can take place.
Ronnie’s solution represents a breakthrough in financial accounting, but even if people’s mind-set had to be changed, would the current fossil-fuels-energised state of political and economic affairs be ready to reduce its pace? If companies had to cost in their social and environmental damages, current energetic solutions would have to be replaced with alternative energetic sources which could completely modify (and slow down) our habits. With the Covid-19 been around for quite some time so far, our habits have partially changed and already experienced a braking. If the Covid-19 recover resets our pace to pre-Covid-19 rhythm, will governments and corporations be willing to accept Ronnie’s solution?
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