I have already published one blog recently on sustainable cost accounting. The issue appears to be attracting attention.
I have no written a two page summary of the idea for the Corporate Accountability Network. It's available here. A more detailed version will be available very shortly. For the record, this is what it says:
Sustainable Cost Accounting
The Short Guide
October 2019
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Background
The Bank of England has suggested that US$20 trillion (£16 trillion) of the world's financial assets might be at risk from climate change[i]. Despite this the world's accounting standards setters have not, as yet, tackled this issue. That task has instead fallen to the Bank of International Settlements promoted Task Force on Climate-related Financial Disclosures (TCFD) who have suggested ‘voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks.'
The Corporate Accountability Network (CAN) thinks that this approach is inadequate for three reasons. First, it is too important to be considered outside the framework for financial accounting, which the TCFD necessarily does. Second, it is too significant to be left to voluntary disclosure. And, third, whether or not companies are carbon net neutral is of interest to a much wider range of stakeholders than the TCF approach addresses. As a result the Corporate Accountability Network thinks that a different approach is required.
Sustainable Cost Accounting
The Corporate Accountability Network suggests that a mandatory approach to climate change accounting is required. It calls its proposed approach sustainable cost accounting (SCA). To achieve the goal of mandatory reporting SCA would have to be an accounting standard akin to, or actually, an International Financial Reporting Standard.
The essence of sustainable cost accounting is simple. It would require that every large business prepare a plan to show how it would manage the consequences of climate change. That plan would have to state how it might become net carbon-neutral by a specified date, both within its own business and within its supply chain.
The plan would have to be specific as to what the business must do to achieve this goal, or alternatively state that this is not yet known. A precautionary principle would apply: in other words, the plan could only rely upon those technologies now known to exist and that have been proven to work. In addition, the plan would have to show where the impact of the changes would arise geographically: it would be unacceptable to solve the problem in some countries and not others, or to export carbon risk to developing countries.
That plan would then have to be costed. The requirement of sustainable cost accounting would then be that the full cost of the change to being a net-zero carbon emitter should be provided for in the accounts of the companies to which sustainable cost accounting would apply at the time that it was adopted, which could be by 2022 if sufficient urgency was applied to this task. Annual reappraisal would then be required thereafter to show progress.
If the inclusion of this cost in the accounts of a company resulted in it being shown to be insolvent then the company would have to address that issue so that their solvency might be restored. For example, it could end dividend payments to shareholders and retain profits over time to fund the change to being net carbon-neutral. Alternatively, solvency could be achieved by raising additional capital. In either case the plan would have to be deemed credible by the company's auditors. We stress: we think that all the sustainable cost accounting data would require financial audit since the intention is to include it in financial statements.
And, if a company could not show how it could fund the cost of the transition, or it could not estimate the cost of completing that process, or it concluded that it simply could not make the transition, then it is suggested that it would have to be declared ‘carbon insolvent'. This would not mean that it was financially bankrupt. But it would make clear that the company was not going to survive into the era that we are going to have to live in. As a result an orderly winding up of its affairs would be required, and carbon insolvency administrators would have to be appointed to achieve that goal. But it is stressed: this is not about an immediate winding up of the reporting entity's affairs: it is instead about managing an orderly transition for all involved including, most especially, its employees.
The benefits of sustainable cost accounting
Sustainable cost accounting will achieve four goals. It will bring the biggest issue facing companies today into financial reporting. As such it will make clear which businesses can and cannot survive into an era of sustainability. It will as a result redirect capital to those best able to use it. And by providing data geographically it will enable all the stakeholders[ii] of a business to plan their future relationships with the companies with which they engage.
Sustainable cost accounting is the accounting for the climate crisis that we now need. In comparison there is no other issue more important in accounting.
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[i] https://www.theguardian.com/environment/2019/apr/17/mark-carney-tells-global-banks-they-cannot-ignore-climate-change-dangers
[ii] The CAN explains its understanding of who the stakehoidlers of a reporting entity are here http://www.corporateaccountabilitynet.work/what-we-are-about/stakeholders/
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Thomas Cook was not carbon neutral. Thomas Cook had no plan to reduce climate change. Thomas Cook goes bust. RESULT! Onward to more destruction of carbon-emitting industries.
Almost no one has such a plan
That’s why I am suggesting they are necessary
Please stop wasting my time
Your piece says a lot about what should be done (specifically, companies should account for their carbon footprint) but absolutely zero on how to do it in practice.
How in real terms would you:
A) Measure how much CO2 a company is producing now and in the future
B) Price how much that CO2 should be “worth” in liability terms.
Until you can answer those two questions in a robust fashion SCA really is going nowhere.
The company has to decide how to become net-zero carbon: there is no formula
There is no price on carbon in this plan. It is not required. That is the beauty of it. This is all about the actions of the com pan y, not the price of carbon, which does not exist
So what you are saying is that SCA is utterly meaningless.
If there are no rules as to account for the carbon being produced by a company, it is impossible to make any fair decisions about it’s accounts. If there is no “formula” a company could simply declare that it is creating no net CO2, for example, or certainly minimise the amount to be negligible.
Then, in addition, if you can’t then price the cost of that CO2, how could you declare a company insolvent? Or are you just saying that any company that is a net producer of CO2 should simply be shut down?
Accounting is about measurement and calculation of value. What you are saying above is that this can’t be done – at which point I say again, SCA is utterly meaningless.
I get the impression from what you have written about SCA, your post above and the lack of any real methodology that really what you are doing here is nothing more than jumping on the green bandwagon and trying to drum up someone to fund your “work”, which will amount to more of the same generalizations and little in the way of actual methods or solutions for the suggestions you have made in SCA. You haven’t really thought anything through.
Dear Will
Thanks for your comment.
It would seem that you have very little understanding of how accounting standards are set. Precisely because there are so many variations in business models to which accounting standards will apply it is rare that an accounting standard is prescriptive as the precise methods to be used, because that can result in outcomes which are not true and fair. That would be the case here if a method for carbon emission measurement was imposed that might well be inappropriate in some cases.
As a matter of fact, this will not be an obstacle. Something like 80% of all large companies do now have measures of carbon emission in place, and even published. They are not audited, admittedly. And their consequences are not estimated, usually. But to suggest that there is an absence of methodology in this area, or, indeed, of experience, is wrong.
What will be necessary is that a company convince its auditor that the method that they have used, which would have to be clearly explained, is appropriate in their circumstances and provides a true and fair measure of their emissions. This, of course is precisely what audit is meant to do: it is not a test of the application of q rule; rather it is a subjective judgement on the interpretation of a requirement that delivers an appropriate indication of what is actually happening. Again, that means that a precise formulation of measurement would, again, be inappropriate.
Might I also add that you have very clearly not understood what sustainable cost accounting is. It is not in any way a measure of the value of carbon. It is instead a mechanism for estimating the cost that a reporting entity will suffer to become a net zero carbon emitter. I can assure you that some very experienced and well placed accountants who have reviewed it suggest that this is precisely why it is so significant. One has even called it a paradigm shift. Instead of using an artificial and external measure of carbon cost, which few really believe a true indicator of value, it does instead bring the entire estimate the cost to be incurred within the scope of the company’s own management systems. That is its whole merit. You seem to have missed that point, which completely invalidates your comments.
What those, clearly more experienced than you in accounting standards have suggested to me is that this is an issue well worth pursuing. So I am doing so. Seeking to secure research funding for new ideas is what people like me do. Do you object to that? If so, why? And how do you expect an advance in knowledge if you do?
Best regards
Richard
Dear Richard,
I have a fairly good idea of how accounting standards are set, having worked at a standards board in my time. Whilst I agree accounting standards are not totally rigid, they are inflexible enough to allow for only defined variation in how accounts are prepared. There may be more than one method for preparation of accounts (or part thereof) but within that particular scope standards are set and give little leeway for creativity. Regulations and guidelines are in place.
Maybe I should have been more clear and direct in my phrasing earlier. It is a given that companies produce CO2, but how do you audit that? It is a VERY important point. In fact, absolutely the crux SCA rests on. For if you can’t come to an agreement of that process, within a set of rules, SCA falls on it’s face.
Whilst there are indeed methodologies for calculating this, had you done some research into the matter most only account for very particular parts of the CO2 emissions for a given company. Typically via energy use – which in itself may or may not be an accurate predictor of CO2 production. You aim to go past that and make a company liable for CO2 emissions is it’s whole supply chain.
I agree, a company would have to convince the auditor of their CO2 emissions, but you miss the point – what rules does the auditor have to measure those disclosures by?
I should have also been more clear when I used shorthand for the value of CO2. Starting from your statement “It is instead a mechanism for estimating the cost that a reporting entity will suffer to become a net zero carbon emitter” you are making the case that a company will bear some cost on it’s accounts. In your SCA framework, fine.
That however means you need to have a unit cost per CO2 produced. it doesn’t matter if the CO2 reduction comes from using less energy, planting trees or buying CO2 offsets. You still need to set a price – otherwise you simply are unable to say a company is “carbon insolvent”.
Unless you are saying that any company that net produces CO2 should be shut down, regardless of any other factor, you have to put a financial cost against that CO2 produced to make carbon insolvency a meaningful term. You say that “….instead bring the entire estimate the cost to be incurred within the scope of the company’s own management systems” but SCA does nothing of the sort unless you can actually put a (hint) cost to be incurred – for which you have put forward no methodology.
Please do let us all know who has reviewed this though. My best guess it will be the usual coterie of Prem Sikka/Atul Shah plus maybe a few other TJN hangers on. Had this work actually been reviewed by serious accountants or regulatory bodies then I probably wouldn’t be asking the questions I am – they would have got there first. And indeed they have – but more on that later.
SCA as it stands is poorly thought out and what you have said about it carries very little usable detail. You may as well have just said that companies which are not carbon neutral should pay to be or be shut down. It certainly would have saved you some time. But I get the feeling that the verbosity in the pieces you have produced on SCA are little more than fluff to cover for the lack of any real detail or proposed methods, and to convince people to give you money. I assume that Tax Research is not making much these days and I assume your days at City are numbered, so you’ve tried to jump on the green bandwagon and rushed out something to try and get someone to give you yet another grant.
I am more convinced that this is the case because you clearly have done very little research on the topic and seem to think that SCA is a wholly and totally new idea. In fact, Sustainability accounting has been around in various forms since the 70s and directly spawned the GRI. More directly for CO2, Enterprise Carbon Accounting also exists and has done so for quite some time.
So even SCA as a concept is not new or revolutionary – and looks to me like a rushed attempt to claim some limelight (and handouts) by ripping off already extant ideas.
Will
So let’s analyse this.
First, you’re trolling: the comments on TJN, etc., prove that. And for the record neither Prem or Atul have been involved in this. Your assumptions are very wide of the mark.
Second, it’s now clear you’re an accountant making claims behind a veil of anonymity: I hope you are aware that this is unacceptable under any institute’s professional ethics.
Third, your claims re accounting standards are quite ridiculous. If true there would be no accounting scandals. The whole point is that massive variation is allowed now without a true and fair over-ride. The precautionary principle supplies that in SCA. You clearly do not understand the issue.
Fourth, see what I will be publishing in the morning, which elaborates the accounting basis for this.
Fifth, of course there is no price of carbon in SCA: if there was it would have to be a fixed price. It is not. It would be a company price in the model you suggest. So that’s not a price of carbon, at all. It’s a cost of not making emissions, which is utterly different. Your argument makes no sense, at all.
And how to estimate that? Are you saying the methodology for an airline is the same as a supermarket and is the same as a tech company? Really? Why? Of course there will be differences. I am not saying they are all known as yet: I would agree that they may not be. But you know what? People said country-by-country reporting was impossible for a long time and guess what? It wan’t, after all.
So as I said, let’s get down to what this is really about: and that’s that you really do not want your little world where you’re frying your children’s future upset. I get that. And reserve the right to upset that right, because I want my children to survive. And that’s what this is about.
Is SCA perfectly formed as yet? Of course not. But might it be? Yes. And will it be? I suspect so. And if you have a problem with people having the right to fund that possibility, what form of control mechanism do you call that? Do you really want to live in a command economy of that sort? Please tell.
But you need to put all cards face up on the table now: nothing else is professionally acceptable after the claims you have made. Because right now your cowardice is only matched by your obvious lack of accounting comprehension.
Richard
Assymetric CO2 taxation has no funding, but it is still a valid and interesting new idea.
So your point about securing research funding to think up new things is beneficial to you if you succeed in getting that funding as you wouldn’t have to work in a care home instead, but it doesn’t follow that it is necessary to have third party funding for new ideas to be created.
The hard part is the detail of making the ideas into practical proposals that can be picked up by policy makers, and on that I would say that Will has a point. The detail of why net-zero emissions is desirable has not been covered, how you show net-zero to any reasonable accounting standard, how a breach is decided and how the radical new system of penalties are determined and applied (traditional methods involve a fine relative to the damage done), can you purchase off sets. What if a company can show that it has done little to become CO2 neutral but a massive amount to show that it has increased the prosperity of the world to such an extent that it is easier to mitigate the additional effects of the human caused part of climate change because we are rich enough to do so. A lot of auditors would fall for that.
And what of companies specifically designed to have CO2 net-negative outputs – from forestry, to coastal algae production s an input to quorn manufacturing(say), to restoring wetlands and mossy areas to mitigate sea level rise, to building a reservoir with a hydro power unit – can they get some credit if they make a profit and companies that are CO2 positive send them money – can we make a system that means there are incentives to make a profit from this sort of thing? SCA doesn’t suggest so.
I am intrigued Megan: have you ever tried to create, let alone promote, a new idea? If so what? And how did it go?
Did you base your idea on facts? It seems you have scant regards for them. Maybe you have not noticed we face a climate emergency? Or do you really deny it, and that we do really need to become zero net carbon? If you do, why?
And do you really think piles of cash will stop that climate crisis? Really? How? Please tell, because 97%+ of the world’s climate scientists disagree with you. Are you one of them?
Can you actually explain how profit anywhere has trickled down to carbon save elsewhere? Again, please tell?
And sure I note your issue on some companies being carbon prositive. Thank heaven for that because you’re right: I suspect some will never make it and we may need offsetting. It is of course a point I have considered. But that stage is not out yet.
Which brings me back to my first point.
And might you explain why you have a problem with people being paid to think?
PS I’d suggest dropping the care home ad hominems too: they’re really unbecoming and somewhat give your game away
Will says:
“I have a fairly good idea of how accounting standards are set, having worked at a standards board in my time. ”
Then I think you should be thoroughly ashamed of your failure to see that some of the standards are are either useless, or not adhered to.
……or are you perhaps exonerating yourself of any responsibility because it was different back in your time ?
Editor note: this comment was deleted for being abusive
It is also appears possible that this commentator has been posting under several names and so is trolling
@ Will et. al.
Why does everything have to be quantified as a cost?
We already measure carbon output in tonnes, not £ worth of carbon.
If you can detach yourselves from accountancy = counting money, then maybe the logic behind SCA will become clear.
The major issue now is carbon output, so it seems reasonable that carbon output is the correct base metric to measure.
This is not to say that I think it will be easy to achieve, but it’s an excellent place to start, and we must achieve it.
Why all the sniping and nay-saying?
An excellent question Johann
And good re carbon
Thanks
And Will is, I think, a persistent troll, I now realise: it seems that he may have several identities
Sometimes you reply “dear..”, sometimes you sign off “best regards” sometimes you refer to people as a “friend” like dear old Caroline Lucas or “randy” (never heard him described as that before”)… you really are an oddball
That’s a basis for concluding that?
Really?
Jon says:
He’s never heard ‘Randy’, for Randall Wray.
Where are you living, Jon. The boondocks on dial-up ?
🙂
“hello Mr Murphy, I’m from the department of averting climate catastrophe. I’ve come to check how you are achieving carbon neutral status” Murphy “ooh err”.
“I notice that there’s are car sitting outside the property that’s powered by an internal combustion engine, Is it yours ?” Murphy — “it might be, but I need it” — “Well Mr Murphy I’ afraid that the lads are loading onto a low loader to take it to be crushed” Murphy ” Oh dear”
“I Notice that this is a 4 bedroomed house but only you live here. is that correct?” Murphy — “but I need the space for my train set!” “That may be so Mr Murphy but it’s not very environmentally friendly, so tomorrow a minibus of EU citizens will be arriving to take up residence” Murphy “that’s not fair!” -“But Mr Murphy , I thought you loved the EU. Anyway they’ll provide some body heat , as we’ve disconnected your gas supply to stop you using your central heating”
“We’ve also noted that you like flying” Murphy -“but I need to fly for my business!” — “and what business is that Mr Murphy?” Murphy “telling everyone else to cut their carbon emissions” — “Well Mr murphy that won’t be a problem for you, as we’ve put you on the no fly list and as an added precaution cancelled your passport” — “what’s that Mr murphy ? — yes I know who you are. Please stop shouting as the next step is to cancel your credit and debit cards so that you stop buying meat” “Have a nice day”
I confess that your comment makes me feel quite sad Tess: sad that you could have wasted your time researching and writing it. The phrase ‘get a life’ seems really quite apt, and I mean it quite seriously. By all men’s engage with me, disagree with me and promote an alternativbe view, but first do your reseafrch correctly and secondly you really need to play the issue and not the man.
And yet at one level you are right. I will quote something George Monbiot wrote this morning in the Guardian. It takes only the tiniest change to apply to me:
“Like other prominent activists, I will be lambasted for hypocrisy: this is now the favoured means of trying to take down … activists. Yes, we are hypocrites. Because we are embedded in the systems we contest, and life is complicated, no one has ever achieved moral purity. The choice we face is not between hypocrisy and purity, but between hypocrisy and cynicism. It is better to strive to do good, and often fail, than not to strive at all.”
Quite so.
What are you striving to do? Please tell? What is your driving force? Or moral principle?
@ Tess Parks
If you are thinking of going into stand-up….don’t give up the day job just yet.
Flippin’ heck – all the snide remarks you’ve been getting for just proposing something new in accounting – who says that it’s a boring profession!!?
Certainly not with you around Richard!
You’ve noticed?
So have I
And so have others off line
A blog may be forthcoming on the issue
[…] then they fight you, then you win.’ I have to admit comments coming in on the blog on sustainable cost accounting last night suggested that it was going to get through stages one and two pretty quickly. The […]