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Topic / Business and Regulation

Global Governance on Impact Investing and Accounting: A Strategy for Developing Global Standards


Responding to the expectations of the international community, private investors have gradually started to consider the social impact of their investment in addition to its financial return. The type of investment made with the intention to generate positive, measurable social and environmental impact alongside a financial return is called “impact investing,” and the size of the impact investing market is growing rapidly which is estimated to be around $1.16 trillion in 2022.1, 2 However, there exists one critical problem; there is no global consensus on how to measure and report the social impact of these private investment activities, which is generally called “impact accounting.” The lack of impact accounting standards enables investors without any social impact to disguise themselves as “impact investors” to improve the image of the company, which is often referred to as “impact washing.”3 For instance, ISO suggests that almost all of the environmental claims by the asset managers in Europe were misleading and non-compliant, which can be categorized as “impact washing.”4 Impact washing can be a serious problem because it can reduce the faith in impact investing and therefore jeopardize the impact investing industry.

The global society has started discussions to overcome the risk of impact washing. For instance, the International Finance Corporation (IFC), the private sector arm of the World Bank Group, developed the “Operating Principles for Impact Management” to standardize the principles impact investors should follow.5 Specifically, the IFC principles request impact investors develop an impact strategy, assess impact during origination, portfolio management, and exit stages, and disclose the impact of its investment. Besides IFC, the Global Impact Investing Network (GIIN), a global nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, has developed “IRIS+,” a standardized metric framework for assessing and reporting social impact.6 However, there exists too many impact measurement/accounting frameworks and there is no global consensus on which framework impact investors should adopt, which still leaves room for impact washing.

In this context, this article proposes a strategy for achieving significant progress in developing global standards for impact accounting. I first analyze the impact of the current global governance trends on impact accounting, especially focusing on the opportunities and constraints created by the trends. Subsequently, I will propose a strategy to develop global standards for impact accounting.

Impact Accounting and Global Governance Trends

One trend is the growing necessity and inflow of private sector capital. There exists a huge financial gap in achieving the United Nation’s 2030 Sustainable Development Goals (SDGs). It is estimated that annual investments required to achieve the SDGs in developing countries will be around $3.3-$4.5 trillion.7 Traditionally, Official Development Assistance (ODA) played a main role in supplying necessary capital for developing countries to solve social problems. However, the amount of ODA is neither enough to achieve the goals (only around $150 billion) nor is growing.8 In contrast, private capital inflow into developing countries has been recently growing rapidly, and the international community has started to cast a spotlight on private investments as an important factor in achieving SDGs.9

When it comes to the trends in global governance, one significant trend is the geopolitical shifts; as Amitav Acharya argues in her book, “American World Order” is coming to an end, and instead, China’s influence on global governance is rising.10 This global governance trend will also have a significant impact on the standard setting for impact investment and its accounting. In fact, China accounted only for 0.3% of the world’s overseas investment in 1990, but China has since become the third-largest investor (after the US and Japan) by 2023, accounting for 10% of world investment, which means China’s engagement is indispensable for setting effective and comprehensive standards.11

This new trend could bring several constraints. Firstly, because “national interests remain a determining factor for international cooperation” for China, they are less likely to support Western standards, especially when China is not involved in the standard-setting process.12 For example, no Chinese companies/funds have become signatories of the “Operating Principles for Impact Management” while many investors from the US and Japan participated in this initiative.13 In addition, the impact investing market in China is still in a nascent stage and people lack relevant capacity, which can be another constraint.14

The rise of China can offer opportunities as well: because of its size of investment and growing influence on global governance, China, if it collaborates with the US and Japan, can create strong momentum to promote an impact accounting to reach the “tipping point,” a critical threshold after which social change accelerates and becomes irreversible.15 Another opportunity is that China is starting to collaborate with the UN’s initiative in this field. For example, the number of Chinese companies that signed the UN Principles for Responsible Investment (UNPRI) has increased rapidly in recent years, which may indicate that China is more willing to cooperate with global initiatives rather than the standards proposed mainly by the Western countries.16

Another important trend in global governance is the rise of “non-state actors:” in the past, only states had the power/authority to influence global governance, but these days non-state actors are getting more and more influence.17 For example, the number of participants in the UN Global Compact has increased rapidly since 2000, indicating more and more Transnational Corporations (TNCs) are incorporated into the global governance mechanism.18 In addition to the TNCs, other non-state actors are also becoming important in this field. For instance, Civil Society Organizations (CSOs) such as GIIN bring the experts in this field together to advocate impact investment promotion strategies, while International Organizations (IOs) such as IFC develop actual guidelines for the practitioners.

This trend creates both constraints and opportunities. The most critical obstacle is that private corporations in general are more reluctant to adopt complicated accounting regulations which could add administrative costs for them, and therefore may oppose the new regulation on impact accounting. For example, the U.S. Securities and Exchange Commission (SEC) faced fierce opposition from business groups when they proposed a new carbon accounting rule that would require publicly traded companies to report verified greenhouse gas emissions and climate-related financial risks.19 Another constraint is that “thick stakeholder consensus” is now required; because of the rise of non-state actors, orchestration among all relevant state and non-state stakeholders is indispensable to make impact accounting standards legitimate.20 On the other hand, this trend also creates opportunities: non-state actors such as GIIN and IFC have accumulated knowledge and expertise in the impact accounting field, which could lead to innovative impact accounting methodologies with which all stakeholders can agree.

A Strategy towards Standard-Setting on Impact Accounting

Considering the constraints and opportunities discussed above, I will now suggest a strategy to develop and promote global standards for impact accounting. Specifically, I will discuss who should be the standard-setting body and how to draft and promote the standards.

Who Should be the Standard-Setting Body

The first question that needs to be discussed is who should be the standard-setting body. This is an important topic because the character of a standard-setting body can define not only the quality and speed of drafting but also the adoption rate of the standard. In this perspective, Buthe and Mattli’s work may give us a hint: they categorize standard-setting bodies into four types according to the dichotomies of “public vs private” and “market vs non-market” (Figure 1).21 The former dichotomy is simply based on whether the standard-setting body is a public or private entity, while the latter dichotomy considers whether the standard faces market competition with other potential standards. For example, the Windows operating system (OS) developed by Microsoft can be categorized as a “market” standard because their OS may be competed with by other company’s OS (such as the Mac OS by Apple).

Figure 1. Four Types of Standard-Setting Bodies

Source: Buthe and Mattli, 2010

Among the four categories, I propose to choose the “private and non-market” type bodies. First of all, I think we should not choose public bodies because 1) the public international standard-setting process usually takes longer time and 2) public bodies tend to lack the technical expertise in finance and accounting that is a prerequisite to creating appropriate standards, as discussed by Buthe and Mattli.22 With regard to the dichotomy between market and non-market, I argue against the “market” standard because market competition would be less likely to promote convergence of existing standard into one single standard unless there exists one perfect standard that has clear-cut advantages to most people, while the market demand for impact accounting is heterogeneous and ambiguous. Based on this analysis, I suggest selecting the “private and non-market” standard-setting bodies (the top right box in the figure), which have clear advantages such as a speedy drafting process and a certainty in the convergence into one common standard.

The next question is who is the most suitable standard-setting body under the category of the “private and non-market,” and I argue that the International Sustainability Standards Board (ISSB) is the most appropriate candidate. ISSB is a sister organization of the International Accounting Standards Board (IASB), one of the most successful private non-market international standard-setting bodies, both of which are under the IFRS Foundation. One of the key objectives of the ISSB is to develop standards for a global baseline of sustainability disclosures.23

There are two reasons why ISSB is the most suitable body. The first reason is its parental body, the IFRS Foundation. The IFRS Foundation creates and implements International Financial Reporting Standards (IFRS) and is the most powerful and widespread standard-setting body in terms of accounting, with around 120 nations permitting or requiring IFRS for domestic listed companies.24 In addition, ISSB aims to build on the work of market-led investor-focused reporting initiatives such as the standards of the Sustainability Accounting Standards Board (SASB) that are widely used in the US, indicating that ISSB standards can be widely adopted.25 One possible concern here is whether China and Chinese investors are likely to follow the ISSB standards. On this point, I argue there’s a decent chance of its adoption considering the fact that China has already aligned its local accounting standards with IFRS, implying China is not opposed to the IFRS Foundation.

How to Draft and Promote the Standards

When ISSB prepares and updates impact-focused accounting standards, I propose that ISSB engage potential allies, particularly focusing on China and Chinese investors first. As discussed in the previous section, China’s engagement is indispensable for setting effective and comprehensive standards. In addition, ISSB should also engage non-state actors such as CSOs to obtain “thick stakeholder consensus”, which is required to make impact accounting standards legitimate. The involvement of CSOs is also important as some CSOs such as GIIN have accumulated knowledge and experience in the impact accounting field and we should leverage their expertise. Lastly, ISSB should engage allies who could limit the impact of opponents. As I discussed above, private corporations are supposed to be more reluctant to adopt new accounting regulations, so ISSB should first approach investors of these private corporations (such as commercial banks and PE funds) because they have an incentive to make private corporations follow the impact accounting standards to get more information on the investee companies. In this perspective, Development Finance Institutions (DFIs) such as IFC and AIIB can also be allies in persuading private corporations to accept impact accounting standards.


Impact investing can be a game changer in solving social problems and achieving global goals such as SDGs. Global standards for impact accounting are indispensable to mitigate the risk of impact washing, and I strongly believe ISSB can and should play a leading role in drafting and promoting the accounting standards.

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  2. Dean Hand, Ben Ringel, and Alexander Danel, “Sizing the Impact Investing Market 2022,” Global Impact Investing Network, October 2022, ↩︎
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  15. Martha Finnemore and Kathryn Sikkink, “International Norm Dynamics and Political Change,” International Organization 52, no. 4 (1998): 887-917, ↩︎
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  17. Thomas Weiss, Conor Seyle, and Kelsey Coolidge, “The Rise of Non-State Actors in Global Governance: Opportunities and Limitations,” A One Earth Future Discussion Paper, 2013, ↩︎
  18. United Nations Global Compact, “UN Global Compact 2020 Annual Management Report,” December 2020, ↩︎
  19. Alejandro Lazo, “Newsom Signs Climate Bills that Force Large Companies to Reveal Role and Risks in Climate Change,” CalMatters, October 7, 2023, ↩︎
  20. Lazo, “Newsom Signs Climate Bills that Force Large Companies to Reveal Role and Risks in Climate Changes.” ↩︎
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  25. “International Sustainability Standards Board.” ↩︎