The Impact-Weighted Accounts Framework
Most pressing questions from the IWAF follow-up webinar for practitioners on September 1st, 2022.
- How does this relate to True Cost Accounting and EP&L?
- How can these monetized values of impacts be reintegrated into the more "classic" accounts of an organization?
- How does this method relate to Life Cycle Assessment
- Is the IWAF software supported?
- How do you expect company valuers to integrate the IWAs into company valuation models?
- Could you elaborate on the difference between applying the methodology to financial instructions where most of the impact is in their loans and investments?
- The data currently available is not purposed to calculate the impacts. Do you think we need to have better public data for impact calculation?
It is very closely related to True Cost Accounting. It is basically an example of TCA, focussing on companies as the central unit. EP&L stands for Environmental P&L accounts. It is basically the one of the building blocks of the IP&L - the 'green building block'.
It is something that we are working on closely with accounting bodies in terms of an impact P&L as well as balance sheet. There are a lot of technical elements to grapple with, including treatment of intangibles, regulatory comfort with the methodology, and expanding the definition of "users of financial accounting information" but we are working on all of these and are very encouraged by the establishment of the ISSB.
Basically, LCA is one of the key data sources into making an IP&L - LCA tells you what are the (environmental) impacts of your products among the value chain. If you value that (and attribute to yourself), you basically have the core of your IP&L.
This is something that will be an area of development once we get the public consultation closed to ensure the foundational methodology is sound.
Company valuation models basically say what the full financial value is of a company - which is often much more than what their balance sheet shows. Now there is a strong link between financial performance and impact performance. A company that today creates value for its investors but destroys value for other stakeholders may very well be in danger next year as it risks losing its license to operate or be at exposed to steep taxes (e.g., a carbon tax). So - a good impact performance will typically lead to higher valuation but how is not easy. The IWAF includes next to the IP&L that I discussed in some detail has the integrated balance sheet that gives the basis for this.
Is this included? Does this work the same? Do you report this separately?
We have worked with many financial institutions. In a very simplified way, we can say that we both build the impact case for their own operations as well as for the companies they loan to or invest in (either doing so explicitly for the largest ones or using statistical techniques). The total impact of the financial institution is the sum of the two.
I think the data limitation could be the big hurdle for impact accounting widely accepted.
This is mostly a fair point. And yes, we would be excited to see more public data. However, we already see great progress in the last number of years. As an example, the IWAF makes lots of monetisation values directly available. As a second example you can have a look at the Harvard Business School IWA website. For many industries there are examples of how to do the calculations based on only public information.
Most pressing questions from the IWAF public consultation launch on June 2nd, 2022.
- How are materiality determinations made in IWAs?
- When will the guidance documents be published?
- How you determine the monetisation factors to translate impact to $?
- When and how do you plan to mandate IWAF?
- Is there flexibility for each country/region on how to apply IWAF?
- Is there any connection between IWAF and ISSB? Especially ISSB published IFRS S1&S2 this year. How can companies use IWAF to solve this big challenge?
- Which countries are leading IWA so far?
- How do you ensure the IWAF is robust enough to curb “impact washing”?
- Challenges to scaling adoption of impact measurement
- Does IWAF expects a new impact could develop in the future?
- A practical example
- Under the IWAI concept, are we supposed to monetize Outcome or just Output?
- How is this approach you are advocating any different from existing methodologies like those developed by the Big 4?
We first and foremost take a double materiality perspective to ensure that impacts for all stakeholder groups are accounted for and transparent. There is then a process that firms undertake to determine whether the negative or positive impacts for businesses are financially material to them, in the accounting period. Though I am of the view that a business cannot operate for long as a going concern at odds with a stakeholder group unless that group has no voice or agency.
They are available here.
The shortest answer is that we heavily borrow from work from True Price. See e.g., these publications: Monetization Factors for True Pricing and Valuation Framework for True Pricing.
As the Impact Economy Foundation, we are not at the position (yet) to mandate any framework. We aim to support and ‘tickle’ the field by offering what we believe is the best possible approach now.
At the same time, we are talking to standard setters. With the aim that they take elements of IWAF, such as value chain responsibility, along.
We have taken a more principles than rules-based approach to some principles are firmer than others. I think this makes it possible to adapt the Framework to different contexts and uses.
We know ISSB well. My reading of the standard exposure drafts they have covered is that their mandate is currently focused on financial materiality whereas we take a double materiality focus- I think the next few years of research will show that the difference is really a false one- a company cannot operate as a going concern at odds with a key stakeholder group. Nevertheless, the work that they are doing to standardize key metrics is a key input into the calculation of many impact-weighted accounts. Our hope is to continue bringing our work closer together over the coming years.
We see exceptional traction growing in the Netherlands, Nordics, South Korea, the USA, and Japan but there are areas of momentum all over.
Ultimately, it is through the principles that we are publishing and civil society helping us to look at whether corporate or investor disclosures meet those principles. We do not anticipate having an audit or certification function within IWA at HBS or Impact Economy Foundation. This is why the public consultation is so important.
While I can relate to the methodology and the principles set of the IWAF, I am of the view that the devil is in the data and the onerous nature of collection, especially on intangible impacts and assets, in a timely and manner. My experience to date shows that this as a fundamental challenge to scaling adoption of impact measurement/ accounting. Does the IWAF provide some thought and guidance around this aspect?
There is a big devil in the data. In the appendices of the Guidance document, you will find some suggested sources and datapoints – we hope these will help.
Next to that: There are a number of efforts being undertaken on the industry to get better data and expedite it- the IMP ran a commission on this in 2021 and it has been taken up by the Capitals Coalition for how to ensure orderly tagging and assure data. Absolutely agree that data collection is a challenge- we have done some experimenting with using input/output tables or machine learning models to estimate missing datapoints with strong success though source data is always best.
E.g., When Black Live Matters started, the human rights and the disparity became recognized as a huge issue for the society, and that became a new important impact item. Do you expect this kind of new impact could come up in the future, and IWAF ready to reflect it?
Yes. We absolutely believe that materiality is dynamic. The IWAF does not give a set framework of material issues (though we do give some examples) but rather provides guidance principles for how to engage stakeholders to understand what is important to them.
Coca Cola spent millions of dollars opening a site in Northern India and after a short time of operation they dried up the local wells. They were forced to shut down due to lack of water and due to community uprising from lack of water. How would Coca Cola report this in their EP&L and IWAF and how would they use the IWAF ahead of building operational sites as a tool to pre-emptively factor in economic risk based on ESG elements?
This is a text-book case of the link between impacts and dependencies.
Impacts are the effect one has on the external world, e.g., water sources.
Dependencies reflect how businesses are dependent on resources, clients, cooperation of local communities, etc.
What Coca-Cola did here, was to use the water sources so intense that a) they were not even available to themselves, and b) the lost all the support from local communities.
I won’t claim that working with IWAF would have prevented this disaster. But going over all potentially material impacts, would in any case have identified this as an important one.
When we think about the impact measurement, Outcome and Output are the different thing. Under the IWAI concept, are we supposed to monetize Outcome or just Output? I understand measuring Outcome is more challenging.
There are outputs (that organisations typically more or less fully control) and outcomes (that they have less control over, but that do in the end affect people’s well-being). IWAF aims to assess the outcomes related to the outputs. It is challenging, but doable.
The biggest difference is that our methodology is open source and from what I know about those, I think we are a lot more specific in our guidance on laying out the just display of IP&L and Balance sheet. However, the Big 4 have been collaborating for a few years with Value Balancing Alliance, a key partner of IWAI.
See also the FAQ document on an overview of how IWAF is compatible to other methods in the field