What if profit accounted for harm? 

From an article by Impact Entrepreneur

What if profit were calculated only after accounting for the harm businesses impose on people, communities, ecosystems, and future generations?

Jeremy Nicholls, senior fellow at the University of Liverpool, in his book "The Accounting Paradox", argues that accounting is not a neutral technical practice but one of the economy’s most powerful hidden design choices - and that changing it could give impact enterprises a genuine competitive advantage.

He proposes that the way profit is currently calculated is deeply flawed because it ignores many of the harms businesses impose on people, communities, ecosystems, and future generations. By recognizing revenue and legally enforceable costs while excluding uncompensated social and environmental harm, conventional accounting makes damaging business activity appear more profitable than it really is.

Jeremy stresses that these hidden costs do not disappear. They are simply shifted elsewhere - onto workers, public institutions, local communities, nature, and those yet to come. This means that markets reward businesses that generate private returns while offloading real costs onto others. These accumulate until society starts calling for reparations, regulation, taxes, or public spending to clean up the damage. This is a structural issue, not just a matter of bad corporate behaviour. The accounting system itself encourages this outcome by assuming that users of financial accounts care only about financial returns and not about the broader consequences of how those returns are produced.

He says what is often criticized as “capitalism” is largely the result of an accounting framework that fails to recognize harm. Because businesses are not required to factor many forms of damage into profit calculations, capital flows toward activities that may look efficient financially but are socially or environmentally costly. If these costs were included, he argues, wealth would likely be distributed more fairly and different, less harmful business models would emerge.

Jeremy proposes redesigning accounting around a different moral and economic assumption: that investors, businesses, and societies expect returns within a broader framework of responsibility. Profit, in this model, would be calculated only after harms have been avoided or compensated for. He believes this would allow impact-oriented businesses to compete on fairer terms and potentially gain a real advantage, rather than being penalized for acting responsibly. Human creativity and entrepreneurship would still flourish, but they would be directed toward meeting needs without simply shifting burdens onto others.

He argues that accounting could be grounded in something closer to the Golden Rule: people should not benefit from actions that harm others without taking responsibility for that harm. Such a system would better reflect broader cultural, ethical, and legal expectations and would also give more weight to people who are usually excluded from financial reporting, including future generations.

Jeremy notes that in many cases the current profits made are not enough to cover the harm caused. If the full costs had been accounted for from the beginning, some business models might never have developed, while more sustainable alternatives might have taken their place.

Short-term investors focused only on immediate returns may see this revised accounting as a disadvantage. But long-term investors, especially institutional ones exposed to systemic risks, could benefit because better accounting would reveal harms and vulnerabilities that are currently hidden. He also suggests that some investors already want returns only when the harm linked to those returns has been addressed, and that improved accounting would support them by providing more reliable information. In the meantime, investors can ask whether accounts are fairly presented. In many countries it is already possible for directors to take responsibility for harm done and compensate for it.

If accounting systems included harm and compensation, GDP would also begin to reflect those realities. Aligning our accounting system with wellbeing would shift us toward a wellbeing economy while maintaining private financial returns within that wider purpose. This would also lead to different policy decisions on regulation and taxation, helping build an economy that rewards value creation without shifting damage onto others.

Read the full article here.

See also this blog - Impact Weighted Accounts