Image by Martin Leon Barreto

In 2021, while the pandemic was amplifying social inequities and climate catastrophes, investors were busy pouring more money than ever into environmental, social, and governance (ESG) investments: In the United States alone, an estimated $120 billion was funneled to companies taking on these challenges. It’s been a steep ascent for ESG in recent years, from a fringy outlier straight to the mainstage, as investments increased tenfold from 2018 to 2020. And there’s no sign of that pace slowing. Some estimates suggest that global figures could surpass $50 trillion by 2025, which would amount to a third of all assets under management around the world. But sandwiched somewhere between the high hopes and higher stakes of sustainable investing looms the big question: Will it ever be enough to solve the problems of our times?

For its part, the School’s Impact Weighted Accounts (IWA) Project has set about tackling accountability, a major hurdle on the path to an impact-driven economy. While the number of firms reporting their own ESG data has grown exponentially, and companies of all stripes are now articulating their purpose, no universal standards exist as to how companies measure and report their ESG metrics. A company that touts its record in one dimension might be failing to mention hidden societal costs in others, like harmful labor practices, environmental degradation, or further intensification of racial inequities, all of which are externalities that don’t turn up in their financial reports. So how is a consumer—or an investor or board of directors, for that matter—to know how well a purpose-driven company is really doing on any of these metrics?

In short, we can’t, cautions Professor George Serafeim, faculty chair of the IWA Project and author of the 2022 book Purpose and Profit: How Business Can Lift Up the World. “It’s very hard to have accountability about those claims, both externally and internally, without a valuation mechanism to track how they’re performing.”

The IWA Project is working on it, by establishing accounting methodologies for the valuation of impacts that a company has on society—e.g., carbon emissions generated, water withdrawal from water-scarce locations, employee wages, job creation in areas of high unemployment relative to profit—translated into currency. These impact-weighted numbers would complete the picture of a company’s impacts alongside its financial value creation.

To get there, the IWA Project has been building a large-scale data set to get a baseline for what impact looks like in a real sense and has, to date, published results for about 6,000 companies. Sir Ronald Cohen (MBA 1969), who chairs the project’s Leadership Council and chairs the GSG (Global Steering Group) for Impact Investment and The Portland Trust, says that all companies deliver some positive impact through employment, but the data make clear there’s already a chasm between the leaders and laggards when you look at negative impacts.

“The fact of the matter is that 450 of the 3,000 companies in our environmental data set create more damage in a year environmentally, in monetary terms, than profit; and 1,000 create damage equivalent to a quarter or more of their profit. That is very significant damage,” observes Cohen, who is the author of IMPACT: Reshaping Capitalism to Drive Real Change. “It’s also a sign of a broken system,” he says.

“Capitalism has created huge benefits to populations across the globe over 250 years, but we’ve reached a point where the consequences have become so great that governments can’t cope with them anymore.” We are at a turning point, Cohen notes, the likes of which we have seen before.

In 1972, when Cohen cofounded Apax Partners, one of Europe’s first VC firms, the business community was struggling to understand the significance of the microchip: “I remember that it was perceived by lots of people as affecting only the computer industry; but, of course, it’s led to the cellular phone and the internet, and it has changed all our lives. The same is going to happen here,” he says. True transparency into a firm’s impact on society—taken into account alongside its profits—will be a transformative step on the road to a more sustainable form of capitalism, according to Cohen. Thoughtful leaders will see this moment as a paradigm shift and an opportunity to enhance growth and profits. Those who don’t, like those who couldn’t see the tech revolution coming, will be left in the cold.

The shift is already under way, Cohen explains, pointing to the fact that Tesla arrived at a trillion-dollar valuation in 20 years by optimizing on three dimensions—what Cohen calls the triple helix of risk, return, and impact—instead of two. The impact revolution will sweep through all industries from clean energy and telemedicine to fintech and edtech, he predicts. And with $7 trillion in venture capital and private equity available globally—far more than existed at the start of the tech revolution—this is going to happen quickly. “It has already become unstoppable,” he says.

Not that realigning capitalism will be an easy undertaking. Serafeim is the first to admit that. But two years ago, people told him that accounting for impact couldn’t be done. “Many of the same people now say they’re blown away by the progress that’s been made,” he says. He also points to booming enrollments in the impact courses and clubs at HBS, as well as the proliferation of purpose-driven companies founded and led by students and alumni, globally. “Tremendous energy is being unleashed by young people all over the world who want to deploy their capabilities, skills, and knowledge to find profitable and innovative solutions to the world’s problems, and that innovation is unleashing a new wave of value creation throughout the economy.”

Serafeim also thinks that we’re due for a rethinking of our assumptions: “There is a myth that has been created and diffused over time about the invisible hand of the market and that—somehow—things just happen. That is a very uninspiring view of the world. The reality that I’m witnessing and experiencing, through my interactions with students and alumni, is that there’s a very visible hand. We all have agency about the future of the world.”

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