Healthy Environment, Healthy People

When was the last time you cleaned your home? I bet it was pretty recently! Keeping our living environment clean and orderly is a priority rooted in our DNA, but we haven’t fully expanded this idea to business. Why aren’t we really considering the impacts companies are having on the environment and our planet? Previously, we discussed how Adidas and IKEA have both shifted their manufacturing practices to be more environmentally conscious. Today, we will investigate the environmental impact of well-known companies and discuss how Impact-Weighted Accounts will enable us to arrive at a company's net impact (or its social and environmental bottom line), making it possible for impact to take its rightful place alongside profit.

Pepsi vs. Coca-Cola

Let’s take a look at the environmental impact of several companies from the Impact-

Weighted Accounts Initiative’s (IWAI) sample, which currently contains over 3,500 companies. Calculating monetary estimates of the environmental impacts of these companies based on publicly available data provides interesting insights. For instance, historically, Coca-Cola and PepsiCo had a corporate rivalry, yet their environmental footprints are noticeably different.

In 2018, PepsiCo's sales ($64.7 billion) were twice Coca-Cola's ($31.8 billion), yet PepsiCo's estimated annual environmental cost was just $1.8 billion compared to Coca-Cola's $3.7 billion. This drastic difference in environmental efficiency can be attributed to differing behaviors regarding water usage: Coca-Cola withdrew about three and a half times more water than PepsiCo in 2018 yet discharged much less, resulting in total water use five times the volume of PepsiCo's. Even though Coca-Cola generated half of PepsiCo's revenue in 2018, its impact through water use alone resulted in an environmental cost of $2 billion. In contrast, the environmental cost of PepsiCo's water use was significantly lower at around $408 million.

Exxon vs. Shell

Another interesting industry to look at is the oil and gas industry. For example, comparing the environmental costs arising from Exxon Mobil's operations, Royal Dutch Shell and BP (not taking into account their products' environmental cost) sheds new light on the true performance of these companies.

In 2018, Exxon Mobil's revenue was $279 billion, and its environmental cost was estimated to be around $38 billion. In comparison, Shell's revenue in the same year was $330 billion with an environmental cost of $22 billion. BP had an annual revenue of $225 billion and an environmental cost of $13 billion. Exxon Mobil stands out, therefore, as the least environmentally efficient of the three rivals with an environmental intensity (environmental cost/revenue) of 13.6% vs 6.7% and 5.8%, respectively. This is mainly due to the substantial cost of Exxon's greenhouse gas emissions; at about $40 billion, they were roughly one and a half times higher than Shell's emissions and almost two and a half times greater than BP's. Exxon also had the highest sulfur oxide discharge and water withdrawal volume of the three companies. When we start to measure impact and compare the profits of these companies with the costs of their environmental damage, it allows us to view their success not just as the sum of their profits, but also in regard to the impact they are (or aren’t) delivering.

General Motors vs. Mercedes

Now let’s look at the environmental effect of greenhouse gas emissions from car companies' operations. The environmental damage caused by Ford amounts to $1.5 billion, representing 1 percent of its sales revenue. When we compare this with other car companies of a similar size, we see that the environmental damage caused by General Motors amounts to $2 billion, representing 1.4 percent of its revenue. In contrast, the damage caused by Daimler AG, commonly known as Mercedes, amounts to $1 billion, representing 0.5 percent of its revenue. In other words, for every $100 of its sales in 2017, Ford's emissions of greenhouse gases from its operations caused $1 of environmental damage, General Motors' caused $1.40 and Daimler AG's caused $0.50.

Measuring operational impact in this way reveals insights about each company's performance. Due to the lack of public effort to monetize the corporate-level effects so far, investors have been unaware of how companies are performing environmentally. Impact-weighted accounts allow everyone to see the cost of environmental impacts and make comparisons across companies and industries, enabling accurate analysis. This is the key to reducing the environmental damage caused by companies and achieving our environmental goals. Companies don't just create environmental impact through their operations; they also create it through their products.

Generally Accepted Impact Principles

Until now, the prevailing view has been that impact cannot be measured reliably enough to be truly useful. However, in John Maynard Keynes's words, “It is better to be roughly right than precisely wrong.” We do not require 100 percent accuracy in our measurement of impact. Risk thinking did not require 100 percent accuracy either—it only required dependable accuracy. The evidence in the examples above makes that clear, and also shows why it is not sufficient to just measure some specific impacts which companies create. In order for investors and others to make intelligent investment decisions, we need to measure all the key impacts a company creates, put values on them and reflect these values through their financial accounts.

Once we start measuring impact, we will have plenty of scope to refine our impact accounting system over time, as we have done with our financial accounting system. Framing and implementing Generally Accepted Impact Principles (GAIP) will take time, but we must remember that the financial accounts we use today have taken nearly a century to refine. Every journey starts with a single step. Some might point out that impact-weighted accounts will involve judgment calls to design the underlying accounting treatment. While this is true, it is important to recognize that this is also true for our financial accounts.

Take the recent decision in Generally Accepted Accounting Principles in the US to change the treatment of leases. This decision, based on a judgment, has had enormous consequences for companies' balance sheets. We should not be afraid of making judgments. When investors can look at impact-weighted accounts, they will start to compare companies' financial and impact performance at the same time. Financial analysts will begin to search for a correlation between companies' impact, growth and profit, and money will flow to those

businesses that do the best job of optimizing risk-return–impact, bringing about a significant change in the general behavior of companies.

The companies that are reacting to major industry trends by making the most radical changes to their products' impact are most likely to enjoy increased interest from consumers and investors. Impact-weighted accounts create a 'race to the top' among rival companies, which improves the well-being of our population and reduces the damage to the environment, and as we continue down this road, companies' impact will significantly influence the capital, talent and consumers they attract. New competitors will overtake businesses that do not deliver both an attractive financial performance and an equally impressive impact. They will become the Blockbuster Video or Kodak of their day and be at risk of disappearing because they are too slow to adapt to a changing world. This is how this new accounting method will drive new and impactful solutions to our biggest social and environmental challenges.

Impact-Weighted Profit Incentives

By incentivizing companies to deliver impact to maximize their impact-weighted profit, impact-weighted accounts will help reduce economic inequality and preserve the environment. Companies will be incentivized to develop products that provide better value for money, serve underserved communities, reduce negative and create positive impact on the environment. They will be incentivized to improve employment conditions, retrain their workers, pay proper wages, employ individuals who are usually excluded from the workforce, and maintain gender and ethnic diversity.

In sum, the use of impact-weighted accounts will establish new norms of behavior in business. Imagine businesses actively improving their environmental footprint by:

· Reducing their emissions

· Limiting their water usage

· Launching healthier food products

· Developing more effective and affordable medicines

The possibilities are endless.

When companies become convinced that impact-weighted accounts are on the way, they will begin to collect the data necessary to calculate and manage their impact. The transition from our existing system to one that creates a positive impact will involve some cost, but, as I like to say, principles might have a cost but are always a bargain in the end. Businesses that lack impact integrity will run the risk of losing customers, investors and talented employees.

To quote Warren Buffet, "It's only when the tide goes out that you learn who's been swimming naked." Once the tide goes out and impact-weighted accounts are in everyday use, everyone will be astonished that companies could ever make decisions based on profit alone.

Join me next time when we discuss a topic near and dear to my heart, Impact Philanthropy. In the meantime, read my book IMPACT: Reshaping Capitalism to Drive Real Change if you are interested in learning more about impact-weighted accounts and how they can help balance the scales between impact and profit.

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