As many readers will know, apart from my work for Tax Research UK I also direct the Corporate Accountability Network. In that capacity, I work most especially on issues relating to audit and the development of sustainable cost accounting.
Sustainable cost accounting is a mechanism to bring the costs of managing climate change onto the balance sheets of companies so that these costs might be included within their financial statements for the sake of appraising which companies are likely to be most impacted by the transition to a sustainable economy. From an investor perspective this is vital, and yet this is not what the International Financial Reporting Standard Foundation is proposing to supply with its new Sustainability Standards.
A description of sustainable cost accounting is available here. The links to the guides in there are useful, the longer version being the most useful.
What I have been challenged to do is prepare an indication of how I think this accounting might actually work. In anticipation of a seminar on sustainable cost accounting that the Institute of Chartered Accountants in England and Wales are hosting next week I have done that. The guide in question is here.
For those expecting something desperately complicated I am sorry to disappoint. In eleven pages I spend most of my time explaining what SCA is, before providing a perfectly adequate example of the type that was often used to accompany UK accounting standards when these were of significance.
All that sustainable cost accounting does, in terms of double-entry, is require that a provision be made, with it then being necessary to report in detail on its use, and changes in the overall value of the estimated liability as it is utilised. The concept of carbon insolvency, and the associated accounting requirements are also referred to, but in accounting terms the issues raised are not at all complicated.
I should add that this was always my intention. As was the case with country-by-country reporting, my object in thinking about changes to accounting standards is to deliver maximum impact for the smallest number of additional variables requiring disclosure. This appears to be a definition of efficiency to me.
In this case the accounting appears simple but the impact is massive. What sustainable cost accounting does is to change the capital maintenance concept by which the survival of a company is appraised. It says that unless a company can be net-zero carbon and still pay its bills it will not be a going concern and will instead be carbon insolvent. Previously being able to pay was sufficient, but it is no more.
I stress that sustainable cost accounting only relates to large companies because it is they that are key to the change that is required.
And I would stress that carbon insolvency will not require that a company be wound up immediately. But, in due course it signals that this company is not a going concern.
It's a simple idea. And it is simple accounting. But what it does is deliver what the International Financial Reporting Standard Fo9undation and Mark Carney's Task Force on Climate-related Financial Disclosures are refusing to supply, which is a clear indication of which companies really will make it beyond the next ten years or so. And since most of us - at least indirectly - are long term investors in some way or other knowing this is crucial.
Sustainable cost accounting might be simple, as was country-by-country reporting. But sustainable cost accounting has to be adopted more quickly than country-by-country reporting. We cannot afford delay on this issue. It has the capacity to rock the business world with just a few numbers. That's why it's worth looking at.
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Hi thank you for this. As ever very clear and logical!
I’m not an accountant so these might be a couple of daft questions. Is this a bit like how banks had to account, and make provision, for PPI except with an impact on various asset classes?
When you say this should probably apply to larger companies do you mean all PLC’s for example? And what about larger public sector organisations (although I appreciate their accounting processes are different)?
Many thanks
The idea of a provision is similar, yes
The cause is very different
Large companies are defined in the note
Hi Richard,
Could you post a link to the ICAEW seminar please? I can’t find any mention of it on their website.
Thanks
It is not a public event
I meant for ICAEW members. I was assuming there’s a webinar members can join – there usually is.
Not on this occassion
It is by invitation only to facilitate discussion
I’ve read through your worked example and I have some questions, because the example itself doesn’t really answer anything.
In it you just assume some value for the cost of achieving zero emissions, place it on the balance sheet and amortize it. This tells us exactly nothing.
How do you calculate that number for costing net zero?
What exactly happens if a business can’t achieve zero emissions?
Many businesses and industrial sectors are impossible to be net zero. Should they all be closed down?
Why are small businesses excluded?
Why are only private businesses subjected to this. To be equitable shouldn’t government and individuals also account for their emissions?
Why is country by country necessary when the effect and distribution of emissions are global?
How can you account for emissions created by consumers?
I think you’ve not really shed any light on what your plan really entails. It is full of more questions than answers and you haven’t really dug into any of the huge numbers of problems it has. Every time detail is needed to explain something there doesn’t seem to be any.
I’m not sure how you can put this forward as an accounting framework as the rules are so vague they could not be implemented, you have not actually tested it and you don’t give clarity on how it would work.
I’d also add you are about 20 years behind – various bodies have been looking at this over the last 20 years. It is a very complex problem and I’m not sure 11 pages with little real detail is going to cut through.
First, there are those in the ICAEW who think I am ahead of the game, and since no one else has a plan to pit this on the balance sheet I clearly am. That puts your last comment in context, and suggests that all the rest is likely to be misinformed. It also suggests that you have to read my notes that I linked to, suggesting that your questions are not informed comment.
But let me deal with the issues:
How do you calculate that number for costing net zero?
That’s for the company to decide – and for its auditors to agree. The cost is that of eliminating carbon. It will be different for every company. Of course no standard can say how every situation can be addressed. No accounting standard does. I guess you have never read one. But as many companies are saying they have such plans it is clearly possible. I am simply asking that they disclose the detail and have it audited.
What exactly happens if a business can’t achieve zero emissions?
It is carbon insolvent. Unless it got permission from the government to continue despite that I am sure that in due course it will be required to close. I am only anticipating what is inevitable in the net carbon zero society we are committed to.
Many businesses and industrial sectors are impossible to be net zero. Should they all be closed down?
This is not true. Even steel thinks it can be. Only cement does not. The government will have to licence such exceptions. But yes, the rest must close if they are not willing to adapt. That’s what sustainability demands.
Why are small businesses excluded?
Because they create few emissions ad like households are constrained in their chance to deal with this issue by the lack of options to do so provided to them by big business, who are the heavy emitters.
Why are only private businesses subjected to this. To be equitable shouldn’t government and individuals also account for their emissions?
I am more than happy for the government to be included. Individuals cannot be because their options are constrained by the options big business gives them.
Why is country by country necessary when the effect and distribution of emissions are global?
To prevent carbon dumping: that is so obvious I am surprised it needs to be asked.
How can you account for emissions created by consumers?
By estimating the carbon produced when using products sold. That’s about as hard as estimating calorie counts.
Thank you for answering my questions, but I’m not convinced by many of your answers. They still suffer the problem of over-simplification.
How do you calculate that number for costing net zero?
Most companies do have plans to reduce emissions with a target of net zero. This is not the full story though. Firstly, you specifically disallow offsetting external to the company. Which is how most companies reduce their emissions. Secondly, you force the whole cost of transformation onto the balance sheet up front, which is likely to mean most companies are no longer going concerns. You don’t specify a time period by which a company must become net zero, so either most companies will fail and fold – with the associated effect on the economy – or the accounting standard has no purpose other than to show some exogenous number on the balance sheet as another carried cost, which need never be cleared.
What exactly happens if a business can’t achieve zero emissions?
I’m not sure you have really done the research here. Without offsetting, basically everything is a net emitter. Does this mean that everything should close? Or does this mean that the standard is pointless?
Having government involved as a licensing agent also creates a massive barrier to entry, which is bound to cost jobs and reduce the economy. I can see massive potential for lobbying, incompetence and outright corruption with such rules in place. If nothing else the incentive to start a business knowing that should it reach a certain size it would be either made bankrupt by this accounting rule or potentially blocked from permissions by government is a major disincentive.
Many businesses and industrial sectors are impossible to be net zero. Should they all be closed down?
As I mentioned above, most businesses can only achieve net zero through offsetting. This includes the steel industry. It also includes agriculture, which at the moment produces about 10% of all emissions. In basic terms, the act or manufacture or production almost always involves creation of some byproduct. These almost inevitably include emissions.
Without offsetting, most business would be forced to close. You allow internal offsetting within the company, but this itself has serious flaws – essentially the cost of doing business would revolve around the ability to buy assets which offset emissions, such as fallow land. Which would drive the prices to insane levels, and drive all but the biggest companies out of business.
Economically, it makes no sense. Likewise the inability to discount future costs by interest rates – this would lead to far larger liabilities than in reality and is against accounting best practice.
Why are small businesses excluded?
Small business account for around 30% of emissions. If you eliminate the large emmiters, concentrated in energy production, that proportion is even higher.
It also creates a perverse incentive for businesses to stay small, as accounting for these costs could literally wipe them out overnight should they pass the reporting threshold.
Why are only private businesses subjected to this. To be equitable shouldn’t government and individuals also account for their emissions?
This makes no sense. If you are asking business to account for the emissions of their consumer, then surely the consumer should also be responsible for their choices and created emissions.
Why is country by country necessary when the effect and distribution of emissions are global?
Emissions are global in nature. It doesn’t matter where they are produced. Emissions produced in the UK don’t stay in the UK, etc.
It makes no sense to me that if a company is responsible for all of it’s emissions globally, with the aim of reducing them to zero, you add an extra layer of difficulty by saying that emissions would have to be net zero in each geographic country. This would be impossible for most companies, and impossible for some countries. Small countries would suffer the most as they simply don’t have the land mass to enable large offsetting arrangements. Companies would not be able to export to countries they don’t already have operations to offset their emissions in, given you want to force companies to account for their consumers emissions as well.
How can you account for emissions created by consumers?
That is very easy to say, very hard to do in practice. It requires a knowledge of the lifetime and usage of a product, which is not easy to ascertain or measure, on top of a huge number of other variables.
It is also not equitable. Surely, a company or individual should be responsible for the emissions they generate. Not the emissions of other people. If you had said that the costs of emissions would be passed to the consumer via a tax, I would be more understanding of your position, though in practice I would assume these costs would be passed directly to the consumer regardless. Either way, your idea is not practical and not equitable.
You don’t have the basis for a workable or practical accounting standard here, with what you have presented. The costs and penalties are hugely draconian yet have unnecessary limitations placed on them – specifically the ability to offset emissions externally to the company.
These rules would create a set of perverse economic incentives and conditions. Small companies would be exempt, but most companies would not survive, so only the very largest would be capable of doing so. Creating perfect conditions for monopolies. Cost of land would skyrocket – and the largest companies again would benefit the most. Most people would end up poorer, with the entailed suffering that would bring.
You might be successful in reducing emissions, but at the cost of a hugely disrupted economy, dramatically reduced production of all basic items, including food, and between the government licensing and the few remaining mega-corporations who survive, what would likely be an oligopoly style government.
I’m not sure any of this is a good idea, and certainly hasn’t been thought through with any care. These things are very complex, and as I mentioned, various organizations with thousands of skilled and talented people have been involved in the process of forming ESG accounting standards. This is over a very long period of time.
I’m not sure the 11 pages you have really counts as being ahead of the game, in this case. I’d actually go as far as to call them impractical and implausible.
I note you comments. I reply using the same headings.
How do you calculate that number for costing net zero?
You say:
“Most companies do have plans to reduce emissions with a target of net zero. This is not the full story though. Firstly, you specifically disallow offsetting external to the company. Which is how most companies reduce their emissions.”
I d, precisely because no one believes that scale of offsetting is possible, in which case the plans are not plausible and need to be revealed as such,
The you say:
“Secondly, you force the whole cost of transformation onto the balance sheet up front, which is likely to mean most companies are no longer going concerns.”
I do, precisely for that reason. If they cannot become net zero carbon we need to know now.
Third, you say:
“You don’t specify a time period by which a company must become net zero, so either most companies will fail and fold — with the associated effect on the economy — or the accounting standard has no purpose other than to show some exogenous number on the balance sheet as another carried cost, which need never be cleared.’
OK, let’s call it 2040.
What exactly happens if a business can’t achieve zero emissions?
You say:
“I’m not sure you have really done the research here. Without offsetting, basically everything is a net emitter. Does this mean that everything should close? Or does this mean that the standard is pointless?”
This is glaringly obviously not true, so I am not engaging with it.
Then you add:
“Having government involved as a licensing agent also creates a massive barrier to entry, which is bound to cost jobs and reduce the economy. ”
So who else do you think should licence the use of increasingly scarce capacity?
Many businesses and industrial sectors are impossible to be net zero. Should they all be closed down?
You say:
“As I mentioned above, most businesses can only achieve net zero through offsetting. This includes the steel industry. It also includes agriculture, which at the moment produces about 10% of all emissions. In basic terms, the act or manufacture or production almost always involves creation of some byproduct. These almost inevitably include emissions.”
It would seem that the idea of business transformation as a result of a net zero carbon requirement is something that you have not considered. What you are very obviously seeking is the continuation of the world as it is now. That is not possible. The premise of your suggestion is literally meltdown. Mine is survival. I know which I would prefer.
You add:
“Without offsetting, most business would be forced to close. You allow internal offsetting within the company, but this itself has serious flaws — essentially the cost of doing business would revolve around the ability to buy assets which offset emissions, such as fallow land. Which would drive the prices to insane levels, and drive all but the biggest companies out of business.”
If the prices are driven to insane levels it shows three things:
A) There isn’t the capacity to offset as I suggest to be the case;
B) Re-engineering is required instead
C) If not, these businesses are not viable.
So, in fact, you agree with me. Thank you.
You add:
“Economically, it makes no sense. Likewise the inability to discount future costs by interest rates — this would lead to far larger liabilities than in reality and is against accounting best practice.”
But economics and accounting have ignored externalities. How is that best practice? All I am doing is seeking best practice. That means they should embrace the external costs that they create. What is wrong with that?
Why are small businesses excluded?
You say:
“Small business account for around 30% of emissions. If you eliminate the large emmiters, concentrated in energy production, that proportion is even higher.
It also creates a perverse incentive for businesses to stay small, as accounting for these costs could literally wipe them out overnight should they pass the reporting threshold.”
The evidence is that this is not the case, and I have explained why. I have also explained that smaller businesses cannot change unless big business does. I believe I have the priorities right. Let’s hit the real targets, not the unnecessary ones.
Why are only private businesses subjected to this. To be equitable shouldn’t government and individuals also account for their emissions?
You say:
“This makes no sense. If you are asking business to account for the emissions of their consumer, then surely the consumer should also be responsible for their choices and created emissions.”
You really think the consumer has a choice when all a consumer can really do is use what the market offers? Your belief in choice that does not really exist is wrong.
Why is country by country necessary when the effect and distribution of emissions are global?
You say:
“Emissions are global in nature. It doesn’t matter where they are produced. Emissions produced in the UK don’t stay in the UK, etc.”
I have answered this. I am seeking to avoid emissions dumping.
How can you account for emissions created by consumers?
You say:
“That is very easy to say, very hard to do in practice. It requires a knowledge of the lifetime and usage of a product, which is not easy to ascertain or measure, on top of a huge number of other variables.”
With respect, that’s just wrong. Entirely reasonable assumptions can always be made.
So I do not agree with this”
“You don’t have the basis for a workable or practical accounting standard here, with what you have presented. The costs and penalties are hugely draconian yet have unnecessary limitations placed on them — specifically the ability to offset emissions externally to the company.”
What I actually have is an accepting standard that you do not like the consequences of. That is very different. But it will work. Indeed, as you say”
“You might be successful in reducing emissions, but at the cost of a hugely disrupted economy, dramatically reduced production of all basic items, including food, and between the government licensing and the few remaining mega-corporations who survive, what would likely be an oligopoly style government.”
Welcome to the disruption that we face and about which we are in denial.
Finally you say:
“I’m not sure any of this is a good idea, and certainly hasn’t been thought through with any care. These things are very complex, and as I mentioned, various organizations with thousands of skilled and talented people have been involved in the process of forming ESG accounting standards. This is over a very long period of time.”
I agree, but as I have noted in articles over the past day Orr two, it is widely accepted that they have failed. You wan to perpetuate their failure. I do not. And that’s the difference between us.
Thanks for replying. I’ll use the same headings in my reply, though cut some of the previous comments out for brevity.
How do you calculate that number for costing net zero?
“I d, precisely because no one believes that scale of offsetting is possible,”
I’m not sure that belief should really play a part in this, but in more general terms, a lot of production is good for humanity as a whole, but may never be net zero as an individual company or industry. I’m not sure this matters, as we care about the whole system being net zero, not each line item. You seem to overlook this important point.
“OK, let’s call it 2040.”
Sounds like you just picked the date out of a hat. Why 2040? Why not 2045? Or other? Technological changes happen over time and are marginal improvements. You are setting a cliff edge by this scheme. Two in fact – one when the scheme is implemented, and another at your arbitrary cutoff.
I’d also like to know how you actually, in practice calculate the cost of a company becoming net zero. It’s a rather pivotal point which you make little or no mention of, going straight to an answer in your example. The reality would not be simple at all, considering you want to include end user/step 3 emissions.
What exactly happens if a business can’t achieve zero emissions?
“This is glaringly obviously not true, so I am not engaging with it.”
I’ll challenge you to name an industry, any industry, or any industrial process which has zero emissions in it’s whole life cycle (including end users) which is net zero without any form of offsetting.
I can’t think of one. Not even agriculture.
“So who else do you think should licence the use of increasingly scarce capacity?”
i think you are missing the point. If some companies in an industry are granted licenses and some are not, then those companies will have a huge competitive advantage, and their competition likely fail. The barrier to entry to that industry would become extremely high, reducing competition and promoting monopolistic behaviour.
If an entire industry is exempted from the licensing requirement, then what is the point.
Many businesses and industrial sectors are impossible to be net zero. Should they all be closed down?
“It would seem that the idea of business transformation as a result of a net zero carbon requirement is something that you have not considered. ”
That is not what I said at all. Basic chemistry means that certain processes produce C02 emissions. This includes the reduction of iron ore (oxide) using carbon to iron and C02 in the steel making process. There is literally no other way of doing it.
Your logic seems to be to say that this process should then be stopped. Mine is to say it’s fine as long as the emissions are offset elsewhere.
“If the prices are driven to insane levels it shows three things:”
No, it just means that anybody with half a brain will buy land as a speculative investment, knowing that demand will be high. Meaning only the biggest companies will survive, massively increasing inequality, poverty and all sorts of other bad things. It would be some horrible neo-feudal society where all power is held in the hands of land owning mega-corporations. Doesn’t sound sensible.
“So, in fact, you agree with me. Thank you.”
No, I really don’t. What you are saying makes no sense at all when offsetting and an emissions tax would be far more efficient and less disruptive.
“But economics and accounting have ignored externalities. How is that best practice? All I am doing is seeking best practice. That means they should embrace the external costs that they create. What is wrong with that?”
You are conflating discounting with externalities. Estimating the size of a future cash flow for a specific function is different to present valuing/discounting that resultant value.
Why are small businesses excluded?
“The evidence is that this is not the case, and I have explained why. I have also explained that smaller businesses cannot change unless big business does.”
The evidence available shows that small businesses are responsible for significant emissions. I see no explanation from you otherwise. This also doesn’t deal with the problem about incentives. Small businesses will not be able to grow past a point, bigger businesses will be forced to fail or shrink, unless they are the dominant company in the marketplace. It massively warps the economic landscape in a hugely detrimental way.
Why are only private businesses subjected to this. To be equitable shouldn’t government and individuals also account for their emissions?
“You really think the consumer has a choice when all a consumer can really do is use what the market offers? Your belief in choice that does not really exist is wrong.”
Yes, I do actually. It’s called substitution in economics. I do think that people should be responsible for their own actions, and can make choices. This means maybe using the product or alternative with the lowest emissions, or changing their own consumption behaviour in some way. This can be encouraged with the careful implementation of emissions taxes, to guide people’s choices simply through the prices they pay. Companies would be incentivized to reduce emissions simply to stay competitive.
This is to me infinitely preferable than your suggestion of removing responsibility from end users and placing it all on the company. As mentioned before, the net result is that many companies will fail, reducing competition, whilst the consumer is given less choice not more. The likely end state would be near monopoly, which I hope you would agree is a bad thing.
Why is country by country necessary when the effect and distribution of emissions are global?
“I have answered this. I am seeking to avoid emissions dumping.”
That may be the case, but then you haven’t answered the point I raised. Companies would be forced out of most export markets, and certain countries relying on imports, particularly small countries, would suffer hugely. This doesn’t seem like a good solution to the problem.
How can you account for emissions created by consumers?
“With respect, that’s just wrong. Entirely reasonable assumptions can always be made.”
This is not easy to do at all. I’d love to see some evidence or ideally a worked example of how you would do this, because it is not at all trivial.
“What I actually have is an accepting standard that you do not like the consequences of. That is very different. But it will work. Indeed, as you say”
Well, you don’t really have a standard. You have a very vague series of rules, with no real indication of how they would be practically applied. The idea of this being accepted as an accounting standard is slim, and to say it would work in achieving the outcome of net zero is basically only achievable by using accounting to take us back to pre-industrial times. Which is not a good thing.
“Welcome to the disruption that we face and about which we are in denial.”
We are already massively reducing emissions. Things could move faster, but my point is there seem to be far better ways to do it – namely through a simple emissions tax – which would achieve the goal without the financial and economic Armageddon that your plan would entail.
“I agree, but as I have noted in articles over the past day Orr two, it is widely accepted that they have failed. You wan to perpetuate their failure.”
I’m not sure who is saying current standards have failed, maybe just you and a few others? Are current standards perfect? No, for sure. That is why a huge amount of effort is going in to improving them. I’m not really sure your 11 pages, which have gaping holes in both explanation, implementation and outcomes really count as a standard, to be quite honest. I wouldn’t even say you have enough detail for a proposal. So I think you have got ahead of yourself quite a lot to say that what you have put forward could even be a solution.
It’s clear you do not like this
It’s also clear that you have no idea about what is being said on current proposals e.g those from the IFRS and TCFD
It’s also apparent that you think climate change can be tackled without anything changing
And i’s clear you have never read an accounting standard
And it seems you think a tax – which would be massively regressive and impose no cost on business since all would be passed to the end consumer – would solve the [robnlem
I disagree
Let’s leave it there
You are correct. I don’t like your proposal.
You said it was a worked example, but in reality it is anything but. Having looked at some of the other literature you have written on this, all you have done is add in a paragraph where you assume a cost for transformation, but not explain how that cost was reached. Which is the important part. Then you amortize it, which again tells us nothing about how this idea is supposed to function.
Where the detail is needed, you leave us guess.
I also don’t like the idea because it spectacularly misses the point. We don’t need individual businesses to be emissions neutral. Some processes, as I have pointed out, can never be thanks to basic chemistry. What is important is that the world as a whole becomes carbon neutral.
By preventing offsetting you make this impossible. Then fuel the fire of the problem by making the business environment unmanageable. By punishing large business so hard, let alone your licensing idea only very few will survive. The ones that do will be immensely powerful, more likely than not monopoly providers. This has terrible consequences for competition, growth and politics. Small companies wold never be able to compete. It would be an economic disaster.
“It’s also clear that you have no idea about what is being said on current proposals e.g those from the IFRS and TCFD”
I have an idea. I also think you misunderstand what accounts are and should be used for. They are reports. You seem to be treating them as a political tool, with which to shape entire economies. I prefer, as does much of the world it seems, to view them as statements of position, and leave the shaping of policy and the economy to democratic governments.
“It’s also apparent that you think climate change can be tackled without anything changing”
This I never said. Quite the opposite in fact. We have already made huge progress in reducing emissions. I think a carbon tax, graduated over time, giving industry and consumers a chance to change and react – and importantly innovate – will solve most of the problem.
It will do it with less fanfare than you want, and it will be a market based solution, but those tend to work best in practice. Certainly it has significantly more chance to success than your proposal. Which let us be quite honest, will never happen, because nobody in their right minds would vote to destroy their economy in the manner. I would have thought a political economist would have acknowledged this at least.
“And it seems you think a tax — which would be massively regressive and impose no cost on business since all would be passed to the end consumer — would solve the [robnlem”
Yes, it probably would solve the problem. The evidence we have so far is that it is. As emissions taxes have risen slowly, emissions have fallen. Much faster than expected in fact.
There are challenges regarding the nature of taxes, though I’m not sure they would be massively regressive (do you have evidence for this claim?) given the ones we have now seem not to be. Indeed, some of the cost has been passed to consumers as well.
What I don’t understand though, is why you think a carbon tax will be passed on to consumers but the massive costs imposed on companies by your idea won’t be. Do you think that prices won’t change if you suddenly make almost every company bankrupt, and the few remaining running as a monopoly? I’d guess actually that prices will rise a lot faster and be far more regressive under your scheme. Though with the economy destroyed, I’m not sure this would be the first problem people face.
At least with marginal increases in emissions taxation competition and innovation still operates to reduce prices for the consumer.
So no, I don’t agree with you. I think it’s a terrible idea, which you have done an even poorer job explaining. I would be it goes nowhere fast, as other people will surely be able to detect the many fatal flaws within it – much as I suspect you are aware of but are unable to admit.
What we are seeing here is a clash of world views.
Let’s start with accounting. Nothing in a set of accounts is neutral. Nor can a set of accounts ever just be a report. Accounting is always about providing decision useful information. And the framing that accounting supplies is of course determined by the decision that we want to make.
It is my suggestion to you that there is no chance that many businesses will survive in their existing form in thirty years time. That’s not really very surprising. Just think back thirty years and imagine just how different things are now. But, and there is a massive but in this case, that change has now to be directed to ensure we reach net zero carbon. We cannot rely on random change any more, when so often this has been bad for the planet.
That, necessarily, requires that direction be given. It requires engagement by government. And precisely because I use the word ‘net’ to preface zero carbon I recognise that offset is going to happen, because of course it is. But your own commentary shows that this is not going to succeed without regulation: there is no chance that all those claiming they will offset can do so. My suggestion on this issue is in this case recognition of a necessity.
But so too is the fact that I suggest that the need for reform be recognised now, and so upfront, a necessity. The fact that this will indicate that many businesses will not survive is inevitable. Over thirty years that is what happens. But we have never lived in an age where understanding who might have the capacity to survive that process of change has been more important.
That is because of the scale of financialisation within our economy. That is not a strength in my opinion, but is a weakness. We have over invested in intangible financial wealth and not real capital. The consequence is that we have to know with some reliability in which financialised product we should have confidence over another. To put it bluntly, we need to know which shares might have the likelihood of long term value, and which do not. The intention of my work is in no small part to assist investment decision making. It’s at the core of one of the purposes of accounting. All I am suggesting is that be made plain. How can you object to that?
Another purpose of accounting is to influence management behaviour. For example, the focus on profit is not by chance: it is to direct management.
Again, the focus on tangible assets is a historical legacy, recognising that these represented realisable capital in the event of insolvency. Intangibles have always been of more dubious use for this purpose, and so have been, until, very recently of lower significance.
The refusal to recognise human capital has its own significance.
As was the assumption that externalities were of no consequence – and so therefore unpriced. The choice within accounting was to permit and encourage the plunder of nature for profit by assuming it was there to be used. To pretend that accounting is neutral when this is the case is just wrong.
In my opinion the climate (and biodiversity) crisis that we are facing is of immense proportion. Governments do at least pay lip service to that. But lip service or not, they are also making it clear that transformation is required. The demand that we cease producing petrol and diesel cars is obvious indication of that. But it is, very clearly the case that the transformation must be faster than many contemplate, and more comprehensive.
The issue implicit in what I propose (which despite your claims is more than adequate for an accounting standard, which are always principles based) is that accounting has to be integral, in itself, in that process of change. You can disagree with that, but what I propose is wholly consistent with the long term goal of much of accounting.
Accounting’s aim, as stated by the International Financial Reporting Standards Foundation is to direct capital to those most likely to be able to use it to best effect on behalf of society. All I am seeking to do is aid that process by targeting attention on those best able to use capital as we go through a period of great change.
That change will require radical business re-engineering. Since accounting is, by necessity, a forward looking discipline since the going concern concept requires that, what objection can you have to the focus of that forward looking dimension on the issue of greatest importance now in determining whether or not an entity might survive, which is its ability to work within a net zero carbon framework?
What I am suggesting is wholly consistent with best accounting practice. The uncomfortable fact that you do not like is that it will expose the lack of preparedness in many businesses for what is to come. But what would you rather? That we have accounts that face the truth, or that we stick our heads in the sand?
Richard,
I have a friend who owns a business (which I used to be involved in) making small and specialist machine tools. Most are sold to small businesses, a lot to hobbyists but some go to very specialized users. He’s got quite a few university departments and a couple of F1 teams as customers!
I know the turnover of his business is around the £25m mark and I wouldn’t be surprised if the balance sheet was around the £12.9 needed to classify it as a large business. Certainly in some good years, the turnover has been far more than £25m. The business has been generally profitable but it doesn’t make millions and millions.
Now here’s the problem. From what you are saying, if that business steps over the boundary to be called a large business, then it has to account for all of it’s emissions, and all of it’s customers ones as well. Or it can find a way to become net zero, or be declacred carbon insolvent and go under.
I’m sure you aren’t an expert in the tooling trade, but I can tell you that there is literally no way of making it carbon neutral. Producing, joining and working metals always create emissions, and that’s before you talk about the power needed to do all three.
Then on top of that they would have to know how much those machines are being used by their customers. Some probably get used every day. Some probably only a few times a year. For every machine or tool they’ve ever sold, over 20+ years, some of which may still be in use and some may not. It’s an impossible task, not to mention the costs of doing so. Then add that into the cost of everything they sell, which might make the whole business unprofitable as well.
So by your rules, they could only go bankrupt. Or buy a lot of land to plant trees. Which makes no sense for the business and would also put the company into financial difficulties if it has to use a lot of it’s limited working capital to buy up a lot of land, and probably make it unprofitable to continue.
Or they could just cut down the size of the business to avoid all of the carbon accounting stuff, but that means never growing the company past a certain point, and probably shutting down some business lines and reducing staff. That’s assuming the business they do have isn’t sunk byadding all their customers emissions to their own as well.
You are basically giving him the choice of shutting down a successful business or scaling it down to avoid the rules.
Neither sounds very sensible to me. In fact it looks like a massive problem.
Now answer me these questions
Do you want to beat climate change?
Do you want there to be a world safe for our children and grandchildren?
Do you think we may have to re-engineer how we live as a result?
Why do you think this business shouldn’t be required to re-engineer as a result?
I’m not the one saying I have all the answers and that the world should use the accounting method I created.
So you should be prepared for people to ask you tough questions. Like how it will affect their businesses and livelihoods. Or if it is practical, or even makes sense. There are better ways to reduce emissions than bankrupting every company that meets a certain threshold and preventing the rest from growing. I googled emissions and found thsi:
https://www.carbonbrief.org/analysis-uks-co2-emissions-have-fallen-29-per-cent-over-the-past-decade
Which says emissions were already down to levels last seen in 1888. Looks like what we are already doing seems to be working. So why do we need to radically change how things are done, to a system it’s creator won’t or can’t answer questions about, when we could keep doing what we have been doing, which we know works, maybe increasing the pace a bit?
If you can’t tell us how your scheme works in reality, like the real example I asked you about why should anyone take you seriously?
Especially when someone asks you a serious question, like I did, and you come back at me by asking me questions instead of answering the ones put to you. SOme people might even think you were deflecting and trying to avoid difficult questions about the holes in your idea.
Now, if you would be so kind, could you answer the questions I put to you in the first place?
If you are going to post an argument as absurd as that one – which simply reflects carbon dumping – then I am n ot going to answer your questions
Questions need to be asked in good faith to be worth answering
I think asking how your proposals will affect real business is in perfectly good faith.
Now how about a proper answer.
See what I have said to another commentator
I’ve read the other posts. You aren’t exactly giving anyone a straight answer.
How do you expect people to take this seriously if you can’t answer a simple question honestly about what will happen?
In this case, my friend’s company, he will either be bankrupted by your plan, or be forced to shut down some of the business to avoid being caught by it. Both will cost people jobs and hurt the economy as a whole.
Why can’t you be honest about that?
You say you care about the environment and also about poverty, but you seem to be happy enough to push a plan that will cause a lot of the latter by sending industry back to medieval times.
I suppose you don’t really care that much as long as you can signal your virtue, it doesn’t affect you personally and you can still get paid for writing this sort of tripe – and nobody notices that what you are suggesting flies directly in the face of how deeply you care about poverty.
I am entirely honest
And very open
If your friends business can not adapt it is going to have to close
Rather like petrol car manufacturing is going to have to close
And much else will
This is how change happens
And this change is essential
Bit let’s also be clear, your final comment says it all.
“Do you think we may have to re-engineer how we live as a result?”
This is the crux of your suggestion. Realistically very few businesses will survive using your criteria. We will revert to a fairly primitive and localised existence..motorised transport should cease so does the transportation of goods and also many services (given the carbon imprint of online communication). I think the accounting definitions you mention can only be discussed with the subsequent lifestyle implications. Why not get that out on the open?
This is complete nonsense
No one thinks that is the case
And you do realise that if we do not commit to zero carbon it’s much worse, don’t you?
“No one thinks that is the case”
You are joking..nobody really knows what zero carbon really means so how do you or anyone else know? Why don’t you or your associates sketch out what you think the future will look like under your assumptions? Without that there can be no understanding of how society would need to evolve.
With respect, that ha been done
And there is agreement that zero carbon must be achieved
That debate is resolved
Just out of interest, what level of C02 concentrations in the atmosphere do you think we as a planet should be targetting?
That is for others to decide
So why go ‘net zero’ at some point between now and some date given by Extinction Rebellion? No international bodies are advocating it.
So if we’re going to leave it to others to decide (e.g. the CCP) can we take it that the current 420 ppm of CO2 give a take a little either way is on the low side.
Personally I’d go for 900 ppm of CO2 as optimal as that reflects the ratio of Carbon on earth itself. If I can persuade a plurality of my fellows of this argument, and we get there gradually, can I get to be involved in the decision making?
You realise you are adding nothing to the debate?
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