Unusually much of my blogging today will be on just one subject, which is a new idea I am launching today, which I have dubbed sustainable cost accounting.
I am posting a paper, a blog explaining what Sustainable Cost Accounting is and slides from the presentation I am making on the issue today. But I still feel it worth adding another comment as to why I have worked on this issue and why I now think it important.
I would not have done this work except for the fact that I was asked to do so by Prof Aled Jones of Anglia Ruskin University and Dr Rupert Read of the University of East Anglia. Many of my ideas have started this way: it's almost as if I need a question from someone else to answer to get me started.
Having begun to read and to think about whether financial accounting as we now know it and accounting in the way that the climate crisis demands can be reconciled I realised that this is impossible. I explain why in the blog and the paper. I can literally now see no way in which IFRS can survive if we are to tackle the climate crisis. IFRS provides no incentive to tackle it; indeed, it may do the opposite, and instead provides incentives to abuse the environment, which is exactly what we do not want.
My resulting suggestion is not that we go back to past methods: they were not forward-looking. Sustainable cost accounting (SCA) has to be that. What SCA does is require provisioning for the costs of the transition any business will incur if it is to trade sustainably. And because that transition is required now it requires that the provision be made now. And that the provision be the full cost, because we need to know what that is. Nothing less will do given the scale of the crisis that we face.
I would stress that the resulting provisioning for the costs of transition will be enormous. I suspect it will be hundreds of billions and maybe trillions, whatever currency you choose. Some companies will undoubtedly by climate insolvent as I define it as a consequence: what this will mean is that they will have insufficient capital to make the required changes. And nor will they have a viable plan for raising that required capital. And on the basis for prudent accounting that I propose - which is that a precautionary principle be applied to both climate and financial forecasting - this means that at the very least any company in this position must enter administration whilst it solves these issues. If it can't, whether it is financially solvent or not at the time, it would have to cease trading.
This looks to be brutal. It could be construed as an attack on the business models of many large entities. And the reality is that this is exactly what it is. But those business models are killing us. Quite literally the business models of most major corporations have to change now (and I mean now), or we die. I suggest that this is the choice that the evidence suggests that we now face. Sustainable Cost Accounting is my response to that fact - because I think it is a fact as indisputable now as the climate and biodiversity crises now are.
I am, of course, aware that the consequences of this prudent form of accounting would be dramatic. Stock market values would decline, often dramatically. So too would dividends as profits were diverted to reinvestment. The demand for new capital would be enormous. But that is because there are many businesses that really are not sustainable as they are. The extractive industries cannot extract as it has. Airlines cannot fly at will. The idea that we can simply substitute electric cars for diesel or petrol ones is just wrong. And fast fashion will be a thing of the past, whilst food supply will have to change. And I am only scratching the surface there. It is time that we recognised all this, and its consequences for us all if (and I stress the ‘if') we are to survive.
What SCA does is impose the requirement that we accept that this change is necessary, must be planned now and has massive consequences. It rejects greenwash accounting, and puts climate crisis at the very heart of accounting instead. It could be argued that it is the ultimate expression of going concern accounting. It's SCA, or we're all out of business, in my opinion.
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[…] slides I used when presenting the case for Sustainable Cost Accounting at an Institute of Chartered Accountants in England and Wales event today were as follows. These […]
[…] slides I used when presenting the case for Sustainable Cost Accounting at an Institute of Chartered Accountants in England and Wales event today were as follows. These […]
I find it hard to imagine what such accounts would look like. Could you construct a simple example using a real business? For example Tax Research LLP?
For Tax Research LLP the accounting would be exceptionally simple – but there would be a narrative
For Shell it would be very different
As yet I have not done this
If I get a grant I will
oh I like this!
I keep building ‘Green’ castles in the air, scrutinising them, tearing them down and rebuilding them with new refinements, but they always fail by being ‘not financially viable’ by the current definition,
I think you could probably construct several regional recycling industrial parks where everything discarded by modern society is carefully deconstructed and processed to provide a stream of high quality raw materials for further manufacturing, even recovering a decent portion of the energy needed for the processes,
unfortunately the capital investment required and labour costs for running these processes make it unviable when compared to the costs of existing extractive industry models, many of which are based in bloody big holes in South America & Africa,
am I right in reading between the lines and imagining this sort of accounting could make a sophisticated recycling and material reclaimation system viable?
could we end landfill and waste export?
I think you read the implications entirely correctly
Speaking of accounting, due to heavy government privilege*, the liabilities of depository institutions toward the non-bank private sector are largely a sham which means the accounting for depository institutions is largely a sham, at least toward the non-bank private sector.
So before we find fault with accounting, we should remember GIGO: garbage in, garbage out?
*Such as, except for mere coins and bills, the non-bank private sector may not even use fiat!
Before we reject standard accounting, we should note that, due to heavy government privilege, the liabilities of depository institutions toward the non-bank private sector are largely a sham*.
So garbage in, garbage out – at least toward the non-bank private sector.
*e.g: Except for mere coins and bills, the non-bank private sector may not even USE fiat!
I confess I do not follow your logic
Then imagine that physical fiat, aka “cash”, has been abolished. Then try to cash a check at your bank.
Ooops! No can do even though the check says “Pay to the order of ______________” “_____________” Dollars and you have adequate funds in your account. So in this case, the liabilities of banks toward a member of the non-bank private sector would be totally a sham.
As it is, physical fiat still exists but is only of slight usefulness in a modern economy (e.g. try to buy something over the Internet with physical fiat) so the liabilities of the banks toward the non-bank private sector can only be said to be “largely a sham”.
Btw, I apologize for the double post; I thought my first comment had been lost.
I still admit I have not the slightest idea what you are saying
The logic is simply this:
1) The liabilities of banks are for fiat.
2) Except for mere physical fiat, grubby coins and bills, the non-bank private sector may NOT even USE* fiat.
3) Hence the liabilities of the banks toward the non-bank private sector are not GENUINE liabilities but are largely a sham.
4) Hence the accounting is largely a sham too.
The fix is to allow everyone to have inherently risk-free debit/checking accounts of their own at their respective Central Bank and to abolish all other government privileges for the use of bank deposits over the use of fiat such as government provided deposit insurance. Then the liabilities of the banks toward the non-bank private sector would be genuine liabilities and serve to check the ability of banks to create deposits; i.e. they would serve as much needed negative feedback.
* To be clear, the non-bank private sector may SAVE fiat, e.g. US TreasuryDirectâ„¢, but except for mere coins and bills, may not USE fiat.
I am sorry, but this makes no sense
Can I just check that I have understood what you are proposing regarding companies going into administration or having to cease trading who don’t meet the SCA requirements?
Is your proposal that (for example), lets say Tesco which is trading profitably fails to meet the SCA requirements and are declared climate involvement and are therefore required to enter administration, where they still don’t meet the SCA requirements , following which they are forced to cease trading and >400,000 people loose their jobs, to say nothing of the other impacts?
They ate required to develop a plan to become climate compliant
Then they can exit administration
If they cannot they could only exit under strict conditions with permission to not be net zero compliant as part of a government plan for overall net zero compliance
[…] is only fair to give feedback on yesterday’s discussion of sustainable cost accounting, although as is commonplace on this blog, when I discuss an idea rather than current politics […]
I envy your ability to undertake serious thinking on these issues. I have not had the time to read your presentation and paper in full, and I will do, but the ideas you have proposed seem relevant and timely.
As time is now critical, just twelve years to the tipping point for CO2 concentrations and temperature increases, perhaps we should encourage climate savvy businesses to publish SCA accounts, not as a legal duty initially, but as a contribution to the debate. To achieve this they will need a blue print to follow?
The key, I think, is to encourage investment in green businesses who have identified a way to tackle their carbon footprint issues, but need inward investment to do so. Those of us with a yen to back this sort of green-leaning business can then choose to invest in this way. We could lobby pension funds and other investment institutions accordingly.
Perhaps government could offer loans at decent rates to companies that adopt SCA on a voluntary basis?
This would dis-empower the cynics and allow them business as usual, BUT if investment tipped towards the support of the SCA, green initiative outfits they would have to follow suit or be sidelined.
And of course there are international concerns. Perhaps I need to read your testament in full Richard?
My personal concern is that SCA may come to late to the party. A rapid change of global accounting standards sounds as feasible as a rapid change in Donald Trump’s ability to read Noddy goes shopping.
However, despair solves nothing. We need a Mandela to appear that will champion the best in human nature, including the address of climate change, and to rapidly dismantle the present “greed” based, consumptive activity that is leading us all to the abyss.
I will read on.
A final note, whilst writing this response the phrase Carbon Footprint Accounting (CFA) came to mind, might that be a better description of what you intend than Sustainable Cost Accounting?
Bob
Thanks for this
I agree I may be too late
And I agree we need models – I am seeking funding – post-October I still have precisely none
But this is not CFA – it is cost accounting and not carbon accounting, which I think really important. Carbon accounting is a largely unknown quantity and will be treated as peripheral whereas I want to make this mainstream accounting – hence the angle I have taken. This is firmly in the realm of accounting to make the transition possible
I have no idea of course where it goes from here…..but the paper is already hitting universities and regualotors
The scary thing here is that we likely only have five years.
The twelve year figure apparently doesn’t factor in the feedback loops that get triggered by our rising CO2. It only focuses in the impact of our CO2 emissions.
Nothing about methane in the permafrost or the darkening of the land as the ice melts in places like Greenland.
We are already dealing with the extreme events they said were 100 years away.
We need mobilization like wartime to seriously contain this.
Instead we have brexit and bojo and trump which is totally destroying our timeframe for rational intervention.
This blog seems to be one of the sane avenues of thought out there.
Ideas like this no doubt will be railed against by the establishment.
Business as usual for our resilient professor.
I for one would like a planet capable of sustaining the existing lifeforms into the future so this type of accountability seems to make perfect sense.
Then this pops up in my feed and I wonder how sanity and the sanctity of planetary lifesystems can go head to head with any accountability;
https://theconversation.com/amp/us-military-is-a-bigger-polluter-than-as-many-as-140-countries-shrinking-this-war-machine-is-a-must-119269?utm_source=twitter&utm_medium=twitterbutton&__twitter_impression=true&fbclid=IwAR124oG1cGs0yinhsadnDvWSmxM0VeMjU_TsQl_uCx2sOCf7iP9vDPb6eT0
Thanks