‘George Serafeim, an Accounting professor at HBS, has been leading a very interesting and impressive project, called the Impact-Weighted Accounts (IWA) Project:
The mission of the Impact-Weighted Accounts Project is to drive the creation of financial accounts that reflect a company’s financial, social, and environmental performance. Our ambition is to create accounting statements that transparently capture external impacts in a way that drives investor and managerial decision making.
In this post, I’ll give some basics of their approach, and highlight how it relates to moral accounting. The upshot is that the impact accounting project proposes a particular improvement to reporting on how businesses affect the world; moral accounting provides a framework for resolving disagreements about what impacts matter, and how to integrate their reports into accountability systems. There will be a lot of such disagreements, and they are going to be distinctly moral disputes.
The IWA Project has four aspirations: they want to change people’s intuitions about what creates impact, and get those impacts used by investors, used by managers, and tied to incentives. Here’s where it gets interesting, because they argue this requires monetizing the impact:
Converting impact metrics into dollars or other monetary equivalent helps managers place impact into the greater business context seamlessly. It follows that the instrumental value of money is easy to understand. Everyone can convert currency into virtually any good or service they value, at a rate clearly indicated by a price. In contrast, the impact represented by non-financial metrics is either of inherent value – for example, a number of acres of preserved wilderness – or is of instrumental value for something less familiar or intangible – for example, an amount of carbon emissions avoided, which is instrumental in stemming climate change. Either way, it is simply harder for people to wrap their minds around the value of something non-financial. Royal Philips noted the difference in resonance in their Environmental Profit and Loss Accounting Whitepaper (2018) noting that the commonly constructed life-cycle assessment metrics were “barely understandable for non-expert readers.” However, when these impacts were monetized, it was clear that the environmental damage caused by their business operations exceeded the profits of the company.
But monetizing raises its own concerns:
Assigning a monetary value to a formerly “priceless” social or environmental outcome runs the risk of capping its perceived value. Putting a price tag on impact seems to give a sufficiently wealthy buyer carte-blanche to capture or destroy it. This risk must be weighed against an arguably greater risk of maintaining the status quo in which social and environmental value is destroyed freely because we have no mechanism to price it. Another risk is that continuing to train business leaders to focus on monetary figures may erode their intuition about the inherent value of things such as social and economic inclusion or biodiversity.
And here’s where moral accounting comes in. Let’s take a look at how they handle the impact of one of the single most important products on earth: water.
First, they rely one of their first research studies to spell out the dimensions of the impact any product might have:
FIGURE 1 Product Impact Framework Dimensions
- Reach
- Quantity: The magnitude of individuals reached
- Duration: Length of time the product can be used, particularly for durables
- Dimensions of Customer Usage
- Access: Accessibility of product through pricing and efforts to provide for the underserved
- Quality: Quality of product through health, safety, effectiveness, and inherent need or goodness
- Optionality: Ability to choose an alternative product with full information and free will
- Environment Use
- Pollutants & efficiency: All pollutants and efficiencies enabled through customer usage
- End of Life
- Recyclability: Projected product volume recycled at end of product life
Pretty straightforward, right? Not really, but let’s hold off on controversy until we see their monetization. Let’s take the cost of low quality in the form of waterborne illness, specifically e Coli.
To estimate the impact of safe water, we multiply the total number of quality violations by the number of customers affected per violation to estimate the total number of customers affected by a water quality violation. We multiply the total number of customers affected by a water quality violation by the associated cost of the contaminant present to estimate the impact from breaches to safe water provision.
Now, what’s the cost of e Coli? $6,510. That comes from the USDA, which bases their estimates on Quality-Adjusted Years of Life (QALYs). Here’s a nice summary:
A year in the hypothetical state of “perfect health” is worth 1 QALY. Being deceased is worth 0 QALYs. Other health states fall between these bounds, with less desirable states closer to 0. QALYs are useful because they combine mortality and morbidity into a single metric, reflect individual preferences, and can be used as a standard measure of health gains across diverse treatments and settings.
“Consider, for example, calculation of QALYs accrued by a hypothetical individual after age 70 years who develops cancer at age 74 years and who dies at age 76 years. If the health utility weight for a typical healthy individual in his or her 70s is 0.95 and the health utility weight while living with this particular cancer is 0.75, then after age 70 years, this individual accrues (4 years × 0.95) + (2 years × 0.75) = 5.3 QALYs. If screening leads to elimination of the cancer before symptom onset and extends the individual’s life from age 76 years to age 80 years, then with screening, the individual accrues 10 years × 0.95 = 9.5 QALYs.
Quality of life estimates can be based on questions about mobility, ability to care for oneself and engage in usual activities, pain and discomfort, and anxiety and depression. To get a dollar figure, they start by trying to estimate a year of highest-quality life.
Studies of individual willingness to pay (by trading off salary for additional years of life) have widely varying results but many are in the range of two times the individual’s salary. Given the mean personal income in the US in 2015 was $44,510, this would suggest a threshold of approximately $90,000 per QALY.
We can take issue with the QALY on purely scientific grounds–I’ve conducted a lot of experiments, and many of the least reliable answers come from asking someone a bizarre hypothetical, like “if your favorite celebrity asked to marry you, but insisted you put your beloved pet to sleep, would you say yes?”–or “if you could have one more a year of high-quality life down the road, how much would you pay?”
But let’s assume the science is sound, so we can jump right to morality. If people are willing to pay twice their salary for a QALY, does that mean the lives of the rich are more valuable? If someone is already suffering from limits to mobility and self-care, is their life less valuable? Do e Coli outbreaks in poor communities have less impact?
I’m glad to see the work being done by the IWA Project, and they surely don’t need to answer all of these questions now. And they are already taking the strategy of “chipping away everything that doesn’t look like an elephant“–they’re building a framework, avoiding making impact an assessment of character, and even using conservatively low estimates of impact because (it seems to me) they think that even lowballing the negative impact of a lot of products still shows makes fixes look good under a cost-benefit analysis. Incremental, sure, but in the right direction.
But ultimately, the impacts they are talking about are moral ones, and underlying their project is the assumption that impact comes with obligations. So they are moral accountants at heart!