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Revolutionizing Accounting with George Serafeim

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Reimagining capitalism is an imperative. We need to create a more inclusive and sustainable form of capitalism that works for every person and the planet. Massive environmental damage, growing income and wealth disparity, stress, and depression within developed economies amid a substantial economic boom are examples of how our current system of creating and distributing value is broken. We need to be able to factor into our decision-making the consequences of our actions not only for financial and physical capital but also for human, social and natural capital.

In order to provide actionable signals for business leaders, these impacts must be connected to accounting statements. Just as the development of the financial accounting infrastructure has been a necessary condition for the development of large-scale capital markets, the development of impact-weighted financial accounts (“impact-weighted accounts”) is a necessary condition for the development of capital markets driven by sustainability considerations.

What are impact-weighted accounts? Impact-weighted accounts are line items on a financial statement, such as an income statement or a balance sheet, which are added to supplement the statement of financial health and performance by reflecting a company’s positive and negative impacts on employees, customers, the environment and the broader society. The aspiration is an integrated view of performance which allows investors and managers to make informed decisions based not only on monetized private gains or losses, but also on the broader impact a company has on society and the environment.

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Revolutionizing Accounting with George Serafeim

  1. 1. Copyright © George Serafeim Redefining Profit, Value, and Success George Serafeim Charles M. Williams Professor of Business Administration
  2. 2. Profit 2
  3. 3. Success 3
  4. 4. Success? 4
  5. 5. Taxonomy 5 Source: Serafeim, Zochowski, Downing. “Impact-Weighted Financial Accounts: The Missing Piece for an Impact Economy”
  6. 6. Possible? “Most of the things worth doing in the world had been declared impossible before they were done” U.S. Supreme Court Justice Louis D. Brandeis (1913) 6
  7. 7. Where to Start? 7 Environment Employees Customers
  8. 8. Environmental Impact Environmental Impact GHG Water NOx 8 SOx VOC  Capacity o Working o Fish Production o Crop Production o Meat Production o Water Production o Wood Production  Biodiversity  Abiotic Resources
  9. 9. Food Products and Retailing 9 35% $1,06 Billion 13% $180 Million 62% $1,01 Billion 5% $669 million 7% $282 Million 5% $136 Million 9% $2 Billion 6% $269 Million 21% $396 Million 15% $324 Million 9% $1,1 Billion Source: Freiberg, Park, Serafeim, and Zochowski. “Corporate Environmental Impact: Measurement, Data and Information”
  10. 10. Energy and Air Transport 10 73% $15 Billion 44% $6,3 Billion 33% $5 Billion 25% $7,7 Billion 8% $1,4 Billion 212% $3,3 Billion 110% $2,3 Billion 140% $4,8 Billion 81% $4,2 Billion Source: Freiberg, Park, Serafeim, and Zochowski. “Corporate Environmental Impact: Measurement, Data and Information”
  11. 11. Auto Components and Cars 11 14% $401 Million 38% $114 Million 12% $457 Million 41% $417 Million 17% $758 Million 4% $956 Million 8% $440 Million 4% $281 Million 3% $87 Million 4% $396 Million Source: Freiberg, Park, Serafeim, and Zochowski. “Corporate Environmental Impact: Measurement, Data and Information”
  12. 12. No Profits 12 Source: Freiberg, Park, Serafeim, and Zochowski. “Corporate Environmental Impact: Measurement, Data and Information”
  13. 13. Value 13 Source: Freiberg, Park, Serafeim, and Zochowski. “Corporate Environmental Impact: Measurement, Data and Information”
  14. 14. Employment Impact Labor Community Employees • Diversity • Location • Wage Quality • Opportunity • Career Advancement • Health & Well-being 14
  15. 15. Employment Impact Labor Community Employees 15 +69% +$4,5 billion +25% +$7,9 billion +32% +$1,9 billion +180% +$7 billion Note: US operations only Source: Freiberg, Panella, Serafeim and Zochowski. Accounting for organizational employment impact.
  16. 16. Employees 16 Wage Quality Career Advancement Opportunity Health & Wellbeing +98% +$6,5 billion +32% +$10,3 billion +37% +$2,2 billion +252% +$9,8 billion Note: US operations only Source: Freiberg, Panella, Serafeim and Zochowski. Accounting for organizational employment impact.
  17. 17. Labor Community 17 Diversity Location -29% -$1,9 billion -7% -$2,4 billion -4% -$246 million -72% -$2,8 billion Note: US operations only Source: Freiberg, Panella, Serafeim and Zochowski. Accounting for organizational employment impact.
  18. 18. Product Impact 18 Reach Dimensions of Customer Usage Environmental Use End of Life Quantity AccessDuration Quality Optionality Emissions & efficiency Recyclability The magnitude of individuals reached Length of time the product can be used, particularly for durables Accessibility of product through pricing and efforts to provide for the underserved Quality of product through health, safety, effectiveness, and inherent need or goodness Ability to choose an alternative product with full information and free will Emissions in the environment and efficiency enabled through customer usage Projected product volume recycled at end of product life Source: Serafeim and Trinh. “A Framework for Product Impact-Weighted Accounts”
  19. 19. Product Impact 19 Quantity and duration How many products are sold and what is the average product life? Access Is the product accessible and affordable? Quality Does the product work as it should? Does it pose health and safety concerns? Emissions What are the emissions’ impacts resulting from product use? Recyclability What happens to the product once it has been consumed? 2019 Company Product Impact in USD bn Source: Richmond Global Sciences -$15 -$10 -$5 $0 $5 $10 $15 Toyota Volkswagen Honda Tesla Hyundai Daimler Ford GM
  20. 20. Product Level 20 2019 Product Impact in USD Tesla Model 3 (Electric) Toyota Prius (Hybrid) Honda Accord (Petrol) GM Sierra (Petrol) Toyota Yaris (Petrol) Source: Richmond Global Sciences Ford Transit (Petrol) Mercedes E-Class (Petrol) Fiat Chrysler Grand Cherokee (Petrol) Honda Ridgeline (Petrol)
  21. 21. Outcome 21 Creation of widely adopted financial accounts that reflect a company’s financial, social, & environmental performance in a way that drives investor and managerial decision making Intuitive Measurement Unit Comparable & Aggregated Existing Assessment Tools Translates social & environmental impact into comparable units that business managers and investors intuitively understand. Can be meaningfully aggregated and compared without obscuring important details needed for decision-making. Displays financial and impact performance in the same accounts, allowing for the use of existing financial and business analysis tools to assess corporate performance.
  22. 22. Perfect vs Progress “It is better to be roughly right than precisely wrong” John Maynard Keynes 22
  23. 23. We Each Have a Role to Play If you lead a company, measure, improve and communicate your impact-weighted performance If you are an investor, demand impact transparency from the companies you invest in and use impact-weighted numbers to assess opportunities and risk If you are a regulator or government official, mandate the publication of impact-weighted accounts, and introduce taxes and incentives based on both profit and impact And since we are all consumers, let’s buy the products of companies that deliver positive impact 23
  24. 24. Copyright © George Serafeim THANK YOU More information: IWAI

Reimagining capitalism is an imperative. We need to create a more inclusive and sustainable form of capitalism that works for every person and the planet. Massive environmental damage, growing income and wealth disparity, stress, and depression within developed economies amid a substantial economic boom are examples of how our current system of creating and distributing value is broken. We need to be able to factor into our decision-making the consequences of our actions not only for financial and physical capital but also for human, social and natural capital. In order to provide actionable signals for business leaders, these impacts must be connected to accounting statements. Just as the development of the financial accounting infrastructure has been a necessary condition for the development of large-scale capital markets, the development of impact-weighted financial accounts (“impact-weighted accounts”) is a necessary condition for the development of capital markets driven by sustainability considerations. What are impact-weighted accounts? Impact-weighted accounts are line items on a financial statement, such as an income statement or a balance sheet, which are added to supplement the statement of financial health and performance by reflecting a company’s positive and negative impacts on employees, customers, the environment and the broader society. The aspiration is an integrated view of performance which allows investors and managers to make informed decisions based not only on monetized private gains or losses, but also on the broader impact a company has on society and the environment.

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