Building back better will require better ways of measuring corporate impact

“We should embrace this time of change to leapfrog beyond old norms and adapt quickly to the new challenges we face ahead. It’s time to put numbers where numbers are due, weighing impacts on society and the environment at par with a company’s bottom line.”

Marcelo Lu

As published by the Corporate Knights.

For the first time in a response to a global economic crisis, we are seeing mounting pressure to respond with a triangular-shaped recovery. Rather than blindly assigning stimulus and aid to companies, Canada is poised to assign similar weights to societal and environmental considerations as it does to the economic benefits a company or a sector provides. 

The recent cabinet shuffle in Ottawa has placed an intensifying focus on a green and caring recovery, one that will likely tie stimulus support and investment to corporations meeting climate goals and contributing to society. This will be a bold move. If there is a time to do it, it’s now. But how can we objectively measure and monitor what companies are doing and give them the incentive to move in the right direction?

For almost 60 years, the core of accounting principles has remained unchanged. Basically, it captures the revenues and costs of a company’s direct economic activity. It does little to account for, in monetary terms, the company’s societal and environmental value contributions and impacts, namely jobs created, wages paid, climate impact, water usage, et cetera. 

At this point, companies disclose these components differently, with varying measures, focus and metrics. To capture the “true” value contribution of business to society, environment and the general economy, this needs to change. Corporate impacts need to be measured and valued using standardized methodologies. Putting a dollar value on impacts on water, air, workers and more (both positive and negative) and stating it in a financial report, would unlock billions in potential sustainable investment. Most importantly, it will make accounting for environmental and societal impacts part of the fiduciary duty of companies’ boards of directors – thereby rewarding measured decision-making, bold actions and accountability.

BASF recently became a founding member of the Value Balancing Alliance (VBA), a non-profit organization whose goal is to change the way company performance is measured and valued. Under the directive of the European Commission, the VBA has been mandated to draft a new set of green accounting principles to support the implementation of the EU Green Deal. More specifically, it will standardize a common method to assess the value a company brings to society, provide a framework for comparability within sectors, enable scalability of adoption, and incentivize a “triangular” approach to business steering and decision making. 

With the convergence of these new management accounting principles, companies will be driven to define and measure their often otherwise abstract statements of purpose and disclose progress on them. These principles will also benefit companies that have had difficulty communicating their positive impact under current financial reporting. This includes energy companies in Canada that are among some of the most innovative and heavily invested in communities and, surprisingly to some, the environment. These new standards will help lure a new generation of investors who will reward companies for considering their total value and impact on society, the environment and the economy, rather than just their profits. 

While many believed that climate change and ESG (environmental, social and governance) metrics would be dismissed during the pandemic-induced downturn, a large number of companies have doubled down on their commitments. COVID-19 has reminded the public and investors what it means to be a company for the good of society. That means protecting and ensuring the safety and jobs of employees, meeting tax responsibilities and responding to crisis with actions, not words, and having purposeful strategies that can weather societal, environmental and business uncertainties.

What’s also clear is that companies that have successfully tied their mission statements to the 2030 UN Sustainable Development Goals agenda have a lot to gain with the transparency that will emerge out of a triangular-shaped recovery.

In the wake of the pandemic, a major reset is coming to all businesses. We need a formal departure from the old ways of accounting. We need companies to work closely with the federal government and international standard setters to align on a new reporting standard that shows a company’s real total contribution to society. Europe has a model that’s worth considering. We should embrace this time of change to leapfrog beyond old norms and adapt quickly to the new challenges we face ahead. It’s time to put numbers where numbers are due, weighing impacts on society and the environment at par with a company’s bottom line. 

The new finance minister may be surprised by how open businesses are to making this change. If it is done in a collaborative way, we may truly see a seismic shift in reporting and decision making that puts Canadian businesses back in the global lead.