A project on using Triple Bottom Line accounts has got me thinking about the last decade in sustainability accounting, and its surprising rebirth.
Ten years ago this year I co-wrote the SIGMA Guide to Sustainability Accounting. (I wince at the design, by the way.) I haven’t read it in years but have just had a quick scoot through again, because there is a surprising renaissance in the field.
I say surprising because there was a head of steam (sort-of) in the early 2000s, but then it all seemed to peter out. But now there are several initiatives and activities which point to a new life.
When I joined Forum in 2003 there was several projects which were trying to put a financial value on the impact (positive and negative) of companies. One of Forum’s founders (and now eminent environmental economist), Paul Ekins, had been looking at improving measures of growth and financial success. Forum was trying to encourage companies so there was an idea to help companies calculate their shadow costs – how much they would have to spend to have had no environmental impact. Rupert Howes pulled this together into a method, with the backing of CIMA, one of the accounting institutes. Amazingly you can still buy the book – yours for $50 from Amazon in the US.
Giving a comprehensive account – whether in narrative disclosure or quantified amounts of financial values – felt important. Companies thought they were under pressure to produce a CR report. Clever change agents could use that annual process for learning and for extracting targets, that then forced action – a sort of ‘announce it and it will be done’ approach.
Now, my sense is that it all rather ground to a halt. I’ve written elsewhere that at Forum we felt that reporting was no longer a good-enough lever for change. The shadow cost just told people sustainability was expensive; not a good message.
The number of sustainability reports kept climbing up. But the amount of financial quantification of performance – especially of externalities but internal performance too – fell off. Measuring externalities is hard. It is only worth it if people really want to use the information – within the company for decisions, externally for accountability. My anecdotal sense is people couldn’t figure out how to use the information well, and didn’t demand it.
Also, the action moved to doing things, rather than reporting about them. Doing things like setting ambitious strategies that were aligned to the business direction, and then trying to innovate products and services – and internal processes – to deliver.
The main thing I find surprising about this is how poor change agents in companies are at setting up systems to track the contribution of sustainability to financial performance. So few even try, and then find themselves in a corner later when someone asks for the business case.
Anyway, I just didn’t come across sustainability accounting as much in the RSS feeds of my favoured professional news sources.
But now there are a number of things which mark something of a rebirth.
The most obvious is the Puma Environmental Profit and Loss Account. Sustainability accounting had disappeared enough for Puma to keep claiming their was the first ever. That is just silly (and annoying – please give anyone repeats that claim a hard Paddington Bear stare from me, and also a copy of the SIGMA Guide). But it does mark a next phase after a fallow period.
There is a general attempt to put a financial value on the environment, with The Economics of Ecosystems and Biodiversity leading the way. I’ve lost count of the number of Natural Capital working groups that are trying to put financial valuations of the environment to practical use.
Also, there is the Accounting for Sustainability project. As it happens I know the Executive Chair, and A4S has been diligently been working away throughout the last 5 years. To be honest I was not impressed by the decision-making tool or the practical insights book. But they definitely have got their mojo over the last 2-3 years. The current iteration of Integrated Reporting, including a proposal to use a variant of the Five Capitals, is impressive at both a technical level and for the momentum it has generated.
What explains the rebirth? Two things, I think.
First, there’s the assumption putting a price on things will help to get things done in a market economy. Certainly, as the cows at eftec say (check the blog before thinking I’m insulting them), having an effective price of £0 for the enviornment has not been a success.
Second, people are convinced that you manage what you measure, and therefore you need to measure what you manage.
Let’s say you’re are a senior executive or policy-maker. You get it, sort-of. You understand the message of the science. You are increasingly convinced of why, at least at a societal level (the ‘societal case’, so to speak). Now, you want to know what to do about it, usually at the organisation level. You’re looking for how you can choose between many potential options, in a way that makes enough financial sense (the ‘business case’). So, you start asking for numbers, financial ones. And it’s no longer enough for these to only internal, you need data on external impacts. Lo and behold, we have the rebirth of sustainability accounting.
I’ve seen a few companies go through the journey in the paragraph above in the last year or so. I’m currently working on a Triple Bottom Line with one of them, and it’s all about externalities (effectively – look, its complicated). The rise of A4S speaks to investors in particular wanting more and better financial data.
What happens next? Another period of experimentation, building on the (half-forgotten) foundations of the last period. Things tend to get specialist at this point, and we’re seeing this with the focus on particular topics (valuing environmental world) or audiences (investors).
The missing piece for me is internal decision-making, bringing an analysis of external impact to internal resource allocation. Where is the sustainability accounting equivalent of Activity-Based Costing? The key problem here is that internal decisions tend to be very contextual – the specific industry, the specific business strategy, the specific culture and so on. Maybe it isn’t possible. Maybe they will be able to scale an approach based on the Puma accounts. Maybe the Integrated Reporting framework will work from the outside in for lots of businesses, and so effectively force different companies to arrange their internal information systems in the same way. If so, it gets a lot easier to fashion a common internal decision-making tool in the post-fragmentation phase, where people try to get coherent again.
There are also risks. As students of Meadows 12 leverage points to intervene in a system know, better information is only a good-ish lever. It can be trumped by the rules of the system, power, the goal or the fundamental mindset.
At a base level putting a financial value on nature may be tactically necessary in a market society, but it is still saying that the environment is there for us to use for our purposes. If that mindset is the true source of our problem, valuation will be a fix that fails.
Sustainability accounting by itself can never be the full answer. But its rebirth is heartening, as proof of intent. Its going to be interesting to be part of what happens next.