The financial world thrives on transparency and trust, principles fostered by standardized accounting practices that have underpinned global capital markets for decades. Yet, as the world evolves, so too must the tools we use to measure and assess value. Traditional financial accounting, while foundational, fails to capture the full spectrum of an organization’s impact on the environment and society. This gap leaves investors exposed to risks that could compromise the resilience of their portfolios.
Impact accounting bridges this divide, offering a transformative framework that incorporates unpriced externalities into financial reporting. By doing so, it not only enhances market transparency but also empowers investors to align their portfolios with long-term value creation and societal progress.
The shortcomings of the current system
The impact organizations have on the environment and the society have significantly changed over the last years. Current accounting practices excel at capturing tangible assets, revenues and costs, but are ill-equipped to address externalities such as environmental degradation, social inequalities or reputational risks tied to unethical practices. Consider these scenarios:
- Public health costs: Manufacturers of sugary products contribute lifestyle-related illnesses like diabetes, placing heavy demands on healthcare systems and costing taxpayers vast sums annually.
- Environmental risks: Airlines generate more pollution than profit, exposing investors to unaccounted environmental and regulatory risks in their portfolios.
In an era where extreme weather events, worker disengagement, and social backlash are increasingly influencing firm value, the limitations of traditional financial analysis become glaringly apparent.
The case for impact accounting
In the simplest terms, impact accounting quantifies unpriced externalities that can affect long-term profitability, transforming them from invisible risks into measurable factors. This methodology incorporates environmental and social factors into financial statements, providing investors a more complete picture of organizational resilience and value potential.
Transparency and accountability go hand in hand, yet the lack of effective impact measurement has, until now, hindered the ability to hold companies accountable for their externalities. Impact transparency changes this by ensuring management teams remain accountable while motivating them to improve corporate impact.
Furthermore, regulatory trends increasingly recognize sustainability risks as material. For instance, the U.S. Department of Labor’s 2023 ruling allowing ERISA pension fund managers to integrate ESG considerations signals growing acknowledgement of the materiality of these factors. Despite facing legal challenges and judicial scrutiny, this ruling underscores the expectation for fiduciaries to account for sustainability risks.
The role of artificial intelligence in impact accounting
Artificial intelligence is a game-changer for the adoption of impact accounting. AI can streamline data collection, processing, and analysis — among the most resource-intensive tasks in corporate disclosure—to help companies more accurately and efficiently report their externalities.
For example, with the power of AI, we can now collect nutritional data from hundreds of thousands individual food products, link them to healthcare outcomes and identify risks tied to regulatory changes like sugar taxes, while pinpointing growth opportunities in high-demand market segments. AI can also help standardize impact metrics across industries, enabling apples-to-apples comparisons that build investor confidence.
These capabilities position AI as a critical enabler of the impact accounting revolution, transforming how companies disclose their impacts and how investors assess them.
Toward a sustainable investment paradigm
As global regulators and market forces converge on the materiality of sustainability factors, impact accounting is poised to become a cornerstone of modern financial reporting. Here are three ways investors can lead the charge:
- Advocate for transparency: Encourage companies to adopt impact accounting frameworks and disclose their environmental and social impacts alongside traditional financial metrics.
- Integrate impact metrics into decision-making: Use impact accounting data to identify investments that align with long-term value creation and societal progress.
- Support standardization: Back initiatives working to establish consistent global benchmarks for impact accounting.
Building resilient capital markets
Impact accounting is not just a tool for assessing risk; it is a framework for fostering sustainable growth. By quantifying externalities and embedding them in financial analysis, impact accounting equips investors with the insights needed to navigate a rapidly changing world. More importantly, it lays the groundwork for a capital market system that prioritizes resilience, transparency, and equity — ensuring that investments drive not only financial returns but also a more just and sustainable future.
The time for impact accounting is now. Investors, companies, and policymakers must work together to embrace this transformative approach, turning sustainability into a central pillar of modern finance.
Sakis Kotsantonis, is co-founder and CEO of Richmond Global Sciences, based in London. Julia Veglesi is vice president of strategy and partnerships at Richmond Global Sciences, based in Budapest. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
