The Institute of Chartered Accountants has published an article in its People and Planet series under the headline:
People and Planet in the Accounts: the future is as important as the present
30 November: “We must act today because the cost of doing so tomorrow will be greater than it is now, and the scale of the issue we will face will have increased.” This is the view of Professor Richard Murphy FCA.
The article is free to access, and is based on a recent conversation I had with the ICAEW team on sustainable cost accounting, on which I am still working and on which I hope to be able to announce a new grant soon.
As it notes:
The question for Murphy now is how should accounting report to all those stakeholders [of accounting] about matters that are of interest to them?
“The IFRS itself is, at the moment, asking questions about what data people need on sustainability from accounting. This fuels my concern that accountancy is living in a bubble,” says Murphy. “There is financial reporting in one circle. Sustainability is in another. There is not even a circle around them both. They are not actually relating to each other.”
Whilst profit and climate remain in different bubbles we have no hope of beating the climate crisis, and that is where the International Financial Reporting Standards Foundation wishes them to be.
This is a disaster for climate change. Until business changes its approach to climate change we are headed for Armageddon. It won't change until it is required to account for the cost of climate change as part of the only bottom line it has ever recognised - which is in the income statement.
Right now sustainable cost accounting remains the only proposal for climate accounting that forces the issue into the financial reporting of larger companies. All the rest treat it as a peripheral, secondary, issue, to be reported on the sidelines. But that is not what it is. Climate change reporting is now the most important topic in considering whether or not an entity is really a going concern. In the future it is either be net-zero carbon or die as far as business is concerned. And that is what sustainable cost accounting is about reporting.
Accounting is at the forefront of the climate change debate now. The trouble is, it does not seem to know it.
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Richard,
Important issue that accounting needs to understand (and quickly).
Couple of questions: The world of “Natural capital” has been driven by accountants in the private sector that seek to quantify the unquantifiable. It uses discounting techniques too often to disqualify the future and is micro-economically biased (as all methods of corporate accounting are). I think your focus on sustainability is a critical one but the efforts of the Natural Capital world have driven the discourse to their field, with grave consequences already. Even if your proposals take off (and I hope they do) how does ths square with the drive to Natural Capital where accounting seeks to quantify quality of life (whereas I perceive your system as guaging the quality of life question and then quantifying those things that society wants to reject).
Second one is related: your proposal is, I assume, company by company (also important to develop this for public sector). The world’s problems are macro-economic – caused by an assessment of demand for certain products being serviced by (in the main) companies (the micro-economic sector). How does the audit of carbon (sustainable cost accounting) on micro-economic entities expand to the macro-sphere in a timely enough fashion to counter the current acceleration of CO2 sufficiently? As audits are a micro-economic activity, but climate change is a macro- problem that ’emerged’ from the complexity wrought by the micro-entities, how does the auditing approach expand (across markets, business areas, nationally and internationally)?
Jeff
Real apologies – I gave just realised I have missed this comment in moderation.
First, re natural capital, the idea was explicitly developed at the request of some with considerable concern about this concept, which I struggle with. It’s simply using the wrong tool at the wrong time for a problem it is not suited to.
Re the audit issue, my aim is to create micro alignment, as far as possible, with a macro goal. If the standard requires (no choice) zero carbon, unless consent is given for offset, then I believe that can happen. I am nit sure how audit can do more. But happy to discuss, of course
Richard
Okay, I think I can see where your focus on accountancy is – not knowing much about it, I kind of thought we’d get a lot of detailed double-entry type chats – this and your previous blog give me an idea of why (regulation of?) accountancy and auditing can make a big difference. I haven’t considered that auditing could be used to assess risk and maybe prevent companies from screwing us over (previous blog), and here I can see it can be used to enable fundamental change in companies’ behaviour to tackle climate change. All stuff you’ve already said Richard, but (a) I didn’t pay attention, and (b) I will now 😉
Double-entry would be like writing in Russian on here
I can speak double entry – it is a language to me
Most can’t
I am only interested in discussing the political economy accounting here
Like all the rest of political economy, this is about power relationships and how they change the allocation of resources
Agree wholeheartedly. As an aside, the regulatory regime that applies to housing associations makes no reference to climate change objectives despite huge financial challenges and the perverse incentives arising from government housing standards. No long view at all.
Bizarre