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by Charles Giancarlo
Environmental, social, and governance (ESG) frameworks began in 2004 as a concept from the United Nations to help investors assess a company’s global impact and drive corporate responsibility. In the 20 years since its introduction as a broad concept without strict guidelines, ESG has become politicized. Detractors argue that it introduces divisive social causes into corporate decision making.
Certainly, there are many areas for serious debate within the topics of social responsibility and corporate governance. However, anything done with greater efficiency is a general good. Reducing waste and pollution is positive for all concerned, and the reduction of uncontrolled costs to society is to be applauded.
Still, the ESG measurement landscape has become highly fragmented, marked by inconsistent standards and , making environmental reporting unreliable, often misleading, and difficult to interpret. Today, 75% of companies say they are unprepared for upcoming ESG audits, according to Reuters.
Confusing Calculations
Companies reporting ESG metrics must sift through many layers of supply and distribution chains over which they have little oversight and must deal with diverse methodologies, agencies, and reports. They must estimate the environmental impact of partners far out in their supply chains with which they have no direct business, leading to both scalability and accuracy issues, and to potential manipulation, as SEC settlements show. If unchecked, ESG compliance costs will rise sharply, risking report reliability, according to CNN.
The confusing comparisons of various ESG measurements’ environmental performance exemplify the challenge businesses and consumers face in evaluating products’ and companies’ environmental claims. “Greenwashing”—companies’ dishonest efforts to embellish their environmental credentials, engage in selective reporting, or use carbon credits with dubious effectiveness—has become a common problem.
No reasonable person would argue about whether companies should do better in addressing sustainability issues. Proponents say ESG has proved to be a compass for identifying companies that excel financially, demonstrating that prioritizing environmental sustainability, social responsibility, and governance is both good economics and good ethics.
However, disentangling ESG’s components into separate priorities would simplify and reduce needless complexity and disagreement. With the advancement of artificial intelligence, new energy and environmental challenges will also necessitate new dialogue among all stakeholders.
The Impact of Impact Accounting
So the question remains: How can organizations most efficiently and effectively reduce their corporate environmental impact with integrity and clarity?
Historically, market-based mechanisms and transparent corporate practices have driven global economic growth, expanding the middle class and enhancing living standards worldwide. Today’s environmental sustainability challenges stem from the absence of these market-based mechanisms in managing critical resources, pollution, and waste.
The good news is that the practices and tools exist to address this measurement gap through impact accounting. By using impact accounting standards, companies can:
• Use their existing cost accounting capabilities for externalities—the indirect costs (such as carbon dioxide or other pollution) that companies impose on society but that do not show up in their financial statements or products’ specifications;
• Use universal standardized measures for these indirect costs; and
• Employ standard audit practices and auditors to ensure fair, common, and supportable numbers and reports across companies and industries.
Impact accounting is transparent and scalable because it allows each organization to use the metrics its direct suppliers provide to its own accounts, and then to transform these inputs into metrics for their customers.
This is a far more efficient process than having every company analyze the many layers in its supply chain. It uses standardized metrics for each critical resource and integrates them into its financial reporting. And it allows companies to incorporate these costs into their product pricing and features. In so doing, impact accounting also creates a competitive market based on products’ environmental qualities, while fostering transparency through standard auditing oversight.
For public companies, impact accounting transforms the environmental landscape. It introduces a market-based mechanism that quantifies the environmental impact of production, packaging, and usage of products and services in monetary terms, creating a competitive market for the reduction of externalities, which in time will lead to a significant reduction of external costs to society.
Through impact accounting, each supplier can disclose to customers the true resource costs to manufacture and use their product, in addition to the product’s price. The practice expands traditional cost accounting to incorporate societal costs—addressing the gap where companies cover direct costs, like consumption of energy and materials, but not the environmental costs of emissions or waste disposal.
Integrating these costs into both product sales and corporate financial reporting allows companies to report profits alongside resource usage such as energy, water, precious metals, and even plastics, providing a true total cost of production and a true audited view of the environmental footprint to ensure fairness and comparability. Importantly, impact accounting is a scalable and efficient practice for businesses that aligns with increasing consumer demand for sustainable practices, marrying profitability with sustainability.
Leading Sustainable Change
Modern efficiency relies on accurate pricing and audited statements, fostering business trust. Impact accounting extends this trust by quantifying indirect costs, promoting efficiency, and allowing choices based on resource efficiency and product value. This approach is gaining traction among institutions like Pure Storage.
Adopting impact accounting and innovating to reduce the energy and carbon footprint of business takes society steps closer to a transparent, accountable, and sustainable future, which is beneficial for our collective well-being. Pure Storage is replacing outdated, energy-intensive hard disk drives with efficient flash storage, cutting energy use and power-related emissions by up to 85%, and setting the standard in environmental reporting in the data storage industry through impact accounting.
We call on technology leaders to help reduce the energy demands of data centers, which are projected to double to 4% of global electricity use in the next two years. Impact accounting will reduce the cost of and confusion in ESG reporting and benefit all customers, significantly strengthen our communities, and allow businesses to play a sizable role in leading us toward a more sustainable future.
Learn more about Pure Storage’s sustainable tech infrastructure and its impact on reducing energy consumption and minimizing e-waste.
Charles Giancarlo is the CEO of Pure Storage
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Copyright for syndicated content belongs to the linked Source : Harvard Business – https://hbr.org/sponsored/2024/04/impact-accounting-raising-esg-reporting-standards
