Insights
Bringing Accounting Lessons into IMM
By Ryan Clancy CPA, Head of Impact Management
Lessons from Accounting: Overcoming Impact Measurement’s Biggest Barriers
As highlighted in the recent GIIN State of the Market 2024 report, impact investors still struggle with fragmentation. Over 90% of impact investors reported issues stemming from inconsistent standards, making it challenging to compare impact results and allocate capital effectively. To address these challenges of fragmentation and comparability, we and other impact investors are drawing valuable lessons from the history of accounting.
How the History of Accounting Offers a Blueprint for Impact Measurement
The path toward achieving comparability in accounting was not simple. In the early 20th century, a lack of reporting standards meant that companies reported their financial performance in inconsistent ways, leading to widespread investor confusion. The Great Depression of 1929 underscored the risks of inadequate financial transparency, kick-starting a movement towards greater regulation and standardization. This period led to the formation of the Securities and Exchange Commission (SEC) in 1934 and established the accounting profession’s role in providing decision-useful information for investors, lenders and stakeholders.
There was a growing recognition, much like today, that more consistent and decision-useful information was needed—not just for capital providers making investment decisions, but also for broader stakeholders trying to interpret the financial performance of companies. This mirrors our current crossroads in impact investing, as new regulations emerge globally to combat greenwashing, ensure more effective decision-making, and transparently disclose impact performance to a broad group of stakeholders.
In the mid-20th century, as accounting standards began to develop, regulators and investors initially sought to achieve comparability through absolute uniformity. This involved creating detailed rules, known as “uniform accounts,” for leading industries like electric utilities, railroads and insurance companies. These rules specified exactly how each company must conduct its accounting, with the belief that making financial statements the same across industries would improve comparability.
However, by 1965 top accountants recognized that this rigid, one-size-fits-all approach was actually impeding comparability. Uniform accounts often obscured important differences between companies’ specific contexts, making it harder for investors to accurately assess a company’s financial health. As a result, accountants and companies began advocating for a level of flexibility within accounting standards. They argued that allowing companies some leeway to choose the accounting techniques that best reflected their unique circumstances – while still adhering to certain guidelines – would result in more relevant, accurate and useful information for investors.
Over time, an important innovation emerged in the form of bounded flexibility, a concept that allowed consistency without losing important context. This was formalized through the development of an overarching conceptual framework, which underpins today’s International Financial Reporting Standards (IFRS). This framework guides how to organize information and group similar types of data, providing guardrails for accountants (and IMM practitioners) to use their professional judgment. It helps present a summary of the data that allows readers to focus on the bigger picture without losing sight of important details, balancing relevance, comparability and transparency.
Bringing Accounting Lessons into IMM
Today, we see the same kind of innovative thinking being adopted in IMM through the Common Framework and Impact Performance Reporting Norms:
- The Common Framework, developed by the Common Approach to Impact Measurement, brings bounded flexibility into IMM, allowing both standardization and context-specific adaptation. The framework guides IMM practitioners to group conceptually similar indicators together even if the metrics are not identical, making it possible for impact results to be reported in a way that respects individual circumstances without sacrificing meaningful comparisons.
- The Impact Performance Reporting Norms, facilitated by Impact Frontiers through a process of public consultation involving more than 350 investors, consultants and assurance providers, take the structured approach developed in accounting and adapt it to impact measurement. The norms guide us on “what to report” and “how to report,” drawing directly from accounting’s conceptual framework, adapted from the International Accounting Standards Board (IASB). The conceptual framework emphasizes the key qualitative characteristics such as relevance, faithful representation, comparability and verifiability, ensuring that impact data is decision-useful and trustworthy. By emphasizing relevance, faithful representation, comparability and verifiability, the Reporting Norms provide a foundation for consistent, decision-useful impact data—empowering investors to make informed choices that drive meaningful social and environmental change
We’re Putting the Standards into Practice
At Rally, we invest directly and through a fund-of-funds approach across both private and public markets, which means we must interpret diverse impact data. In public markets, we often receive limited impact data. In private markets, we work to collect high-quality impact data while preserving the flexibility that allows innovators to communicate their unique impact effectively.
We adopted the Impact Performance Reporting Norms early – initially designed for private market funds – and applied them to both public and multi-asset funds. The Common Framework has helped us aggregate diverse metrics meaningfully, while the Reporting Norms have guided us in managing trade-offs and ensuring transparency.
Our initial experience using these frameworks has shown that while there is still room for improvement, they allow us to compare our impact performance with peers in a more meaningful way. Despite existing fragmentation, bounded flexibility is enabling us to work with context-specific data while moving toward a unified system. By using these frameworks, we’ve made significant progress in bridging the comparability gap and remain committed to further advancement.
Take Action: We call on all stakeholders – standard setters, regulators, investors, accountants, IMM practitioners, asset allocators and fund managers – to join us in advancing these standards and accelerating the path toward convergence and comparability.