- Transparent impact metrics are becoming increasingly important for sustainable investment capital.
- Impact-Weighted Accounting (IWA), championed by Sir Ronald Cohen, is a standardized accounting methodology for measuring impact.
- Quantifying risk, inputting return, and measuring impact are the three components of the Sustainable Investment Trinomial.
- IWA translates social and environmental impact into monetary units, allowing for better assessment of corporate performance.
- Over a dozen multinational corporations and global institutional investors are already using IWA.
Is Impact-Weighted Accounting the Key to Success?
Investment professionals are increasingly focused on generating financial returns while also producing positive impact. This has led to a demand for transparent impact metrics and a rotation in portfolios towards “impact positive” investments. One proposed solution to measure impact is Impact-Weighted Accounting (IWA), championed by Sir Ronald Cohen.
The Sustainable Investment Trinomial consists of quantifying risk, inputting return, and measuring impact. Investment managers traditionally use risk-adjusted return metrics, such as the Sharpe Ratio, to assess risk. However, risks related to sustainability, such as climate risk and regulatory risk, are also important considerations for investors.
The concept of return is similarly complex, with considerations of time horizon, costs, and currency. The Global Investment Performance Standards (GIPS) were developed to overcome challenges in obtaining accurate investment performance data. However, the adoption of GIPS is not yet universal.
Measuring impact is a fundamental aspect of sustainable investment. The quantitative methodology behind IWA has been detailed by researchers at Harvard Business School. IWA takes existing sustainability reporting frameworks, such as SASB and GRI, a step further by monetizing social and environmental impact in decision-useful monetary units. This allows for a better understanding of corporate performance and facilitates the use of existing financial analysis tools.
Several multinational corporations and institutional investors are already using IWA to assess and select investments. IWA has the potential to unlock ESG (environmental, social, and governance) Alpha for investors by aligning portfolios with impact objectives.
In conclusion, transparent impact metrics and standardized impact measurement, such as IWA, are becoming increasingly important in the world of sustainable investment. The adoption of such methodologies can lead to a rotation in portfolios towards “impact positive” investments and unlock ESG Alpha for investors.
