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Let The Era of Impact Accounting Begin!

In recent years, we’ve witnessed a new phase in the global economy’s evolution towards “no-harm investing,” a term coined by Marco Vangelisti. In the US, states that have long depended on the fossil fuel industry, both economically and politically, are now grappling with a monumental shift. They are moving toward investments that consider their effect on the planet’s life support systems and the well-being of its inhabitants.

The mainstream acceptance of what amounts to impact investing began with a pivotal question that the impact investing community wrestled with, and largely settled, before 2015: “Does considering an investment’s impacts on people and the planet breach fiduciary duty?” As the sector evolved, the inquiries quickly advanced to: “Does this qualify as a genuine impact investment?” and “What tangible impact does this investment create?”

For instance, in October 2022, Louisiana withdrew a substantial $794 million from BlackRock Inc’s portfolios, attributing the move to the financial behemoth’s pivot toward an environmental, social, and governance (ESG) investment paradigm. The state treasurer elucidated, “This divestment is imperative to shield Louisiana from mandates that BlackRock champions, which could debilitate our vital energy sector.” Louisiana’s stance posited that in the interest of buttressing the economy and job market, climate- related risks in investments should be sidelined. However, a prospective advisor to the state’s Bond Commission highlighted a potential repercussion: such a stance might deter leading credit rating agencies from elevating Louisiana’s bond rating, leading to financial repercussions.

In an effort to underscore the key role of fossil fuels to Louisiana’s current economic health, the Louisiana Mid-Continent Oil and Gas Association (LMOGA) and the American Petroleum Institute (API) unveiled an analysis on May 16, 2023. This study illuminated “the escalating economic contributions of America’s natural gas and oil industry across all 50 states.” It highlighted investments in Louisiana, encompassing tax contributions, workforce wages, and the ripple effects spanning sectors like retail, manufacturing, agriculture, and others within the energy supply chain. The data revealed that in 2021 alone, the industry buttressed over 346,000 jobs and injected more than $54 billion into the state’s economy.

Tree seedling growing out of cut log

The analysis was orchestrated by API and crafted by the well-known PricewaterhouseCoopers (PwC). Tommy Faucheux, the President of LMOGA, accentuated the industry’s profound influence on “the living standards of residents throughout the state.”

Interestingly, while PwC did not deploy its proficiency in comprehensive impact measurement for this study, the firm is no stranger to evaluating environmental and social implications. In 2017, PwC pioneered the Total Impact Measurement and Management (TIMM) framework and a corresponding practice area. PwC elucidates that this framework “quantifies impacts (be they positive or negative) across societal, tax, economic, and environmental dimensions. This empowers businesses to juxtapose strategies and investment options, weighing the holistic impact of each.”

To illustrate:

  • “Social impact quantifies and values the outcomes of business activities on societal elements such as health, education, and community cohesion.”
  • “Environmental impact assigns a value to the business’s influence on natural capital, e.g., emissions to air, land, and water, and the consumption of natural resources.”

Remarkably, the PWC/API study excluded these factors in its evaluation of the fossil fuel industry’s influence on Louisiana’s economy and its residents’ well-being. Instead, the analysis zeroed in on:

  • Direct economic impact: This encompasses the jobs, labor income, and value added within the oil and natural gas sector.
  • Indirect impact: This reflects the jobs, labor income, and value added throughout the oil and natural gas industry’s supply chain.
  • Induced impact: This pertains to the jobs, labor income, and value-added stemming from household spending. This expenditure derives from labor and proprietor’s earnings garnered either directly or indirectly from the oil and natural gas industry’s outlay and dividends from publicly traded oil and natural gas corporations.

PWC detailed, “To capture these interconnections, we employ the IMPLAN model, an input-output (I-O) methodology grounded in government data. In our analysis, we’ve distinctly quantified the indirect and induced impacts of the oil and natural gas industry’s operational and capital expenditures.

The impact accounting and management profession provides a publicly-available, structured framework to determine the whole societal – including economic – repercussions of any investment.

But even excluding the social and environmental impacts of the industry on the state of Louisiana, there are pronounced and substantial economic ramifications not addressed in the study – ramifications that come into focus when one considers the economic costs associated with non-economic though direct impacts of the industry. For instance, Louisiana has witnessed the erosion of an estimated 1500-1900 square miles of land since the 1950s. The Coalition to Restore Coastal Louisiana forecasts that the state could lose “an additional 1,000 square miles of land, an area comparable to Rhode Island, by 2050.” This land attrition can be attributed to various factors, many directly and indirectly linked to the fossil fuel industry’s practices or the broader implications of climate change. They include:

  • Hurricanes and tropical storms, capable of decimating vast tracts of wetlands swiftly.
  • The construction of canals and shipping channels through delicate wetlands. This not only introduces rapid salinity fluctuations but also allows water to erode newly exposed areas.
  • Oil spills.
  • The escalating rise in sea levels [due to the melting of polar ice caps due to excessive greenhouse gases produced by the industry and consumers as a whole].

As the state’s land diminishes, in part due to carbon emission pollution and the subsequent climatic alterations, there’s a potential for significant economic devaluation. This loss might manifest in terms of property value, productive utilities, and the costs associated with the disappearance of ecosystem services, aesthetic appeal, and overall well-being. Moreover, Louisiana has embarked on a staggering $50 billion, 50-year initiative to rejuvenate its receding coastline. This budgetary commitment is nearly on par with the state’s annual budget, which stood at $45.7 billion for 2024.

Sun through trees toward sunset

The API/PWC study also overlooked the economic implications stemming from the adverse health effects attributed to the fossil fuel industry within the state, such as the prevalence of breast cancer. For instance, in a predominantly Black and low-income region of Louisiana, colloquially termed ‘Cancer Alley’, the cancer risk skyrockets to nearly 50 times the national average. This stark disparity is influenced by the presence of 150 proximate chemical plants and oil refineries, as highlighted by the Environmental and Energy Study Institute’s fact sheet.

It remains to be seen whether in 2023 an economic analysis with major, systematic omissions will be considered authoritative by officials charged with the economic stewardship of a state’s economy, or by litigants acting on behalf of pensioners.

While it is not yet as widely known or used as conventional economic analysis of the jobs impact of an industry, the impact accounting and management profession provides a publicly-available, structured framework to determine the whole (PWC might say “total”) societal – including economic – repercussions of any investment, including any industry as a whole. At its core, this framework delves into four common-sense inquiries:

  • Whom does it impact?
  • How are they impacted?
  • What significance do these impacts hold for the affected parties? This pertains not only to their economic prosperity but also to their broader well-being.
  • What would the impact have been had the investment not materialized?

Such a structured approach would shed light on the comprehensive benefits and drawbacks to any state of “ESG investing.” It could provide a comprehensive assessment of the overall influence of a particular industry on a state’s economic vitality, and inform state treasurers and judiciaries alike.

Sara Olsen of SVT Group and Impact Management Academy Provides a Brief History of Impact Measurement and Management.

Sara Olsen is the founder of SVT Group, a pioneering impact management advisory firm that supports clients to grow and tap social and environmental value. SVT's work has been used to manage the impact of $9.9Bn+ in assets. Sara has also trained 7,000+ individuals in impact measurement and management skills. ... Read more
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