Glossary Item

1 - Sustainable cost accounting (SCA)

Sustainable cost accounting (SCA) is a proposed accounting method and reporting framework designed to bring the costs and liabilities of achieving environmental sustainability (most notably net-zero by 2050) into the audited financial statements of an organisation, rather than leaving them in narrative sustainability reporting or voluntary disclosures.

It was created by Richard Murphy. The latest full-length explanation is available here.

At its core, SCA is “a method of accounting for the liabilities that must be incurred” if an entity is to remove all scope 1, 2 and 3 carbon from its supply chain and onwards sales chain and meet its net-zero target, using provisioning and a new Statement of Sustainability to track movements in a sustainability provision, mirrored by a sustainability reserve within equity.

SCA is, at heart, a form of capital maintenance concept. It does not abolish IFRS reporting; it overlays an additional, overarching environmental capital maintenance concept on top of existing financial and physical capital maintenance reporting, and then requires that the consequences of that additional maintenance duty be made visible through specific balance sheet and equity reserve structures.

1- What SCA is trying to fix

SCA starts from the observation that, even after COP26-era commitments, corporate accounts typically under-report or do not report the future costs required to meet net-zero obligations. That omission has a predictable consequence: it allows distributions (dividends, share buybacks, etc.) to continue, while the resources required for future climate investment are depleted. SCA's purpose is therefore twofold:

• truthful accounting (bringing the cost reality implied by climate science into “true and fair” reporting), and the creation of
• behavioural incentives (shifting entities away from distributions and towards investment by making the cost visible now).

3 - The mechanism: provisioning + sustainability reserve + Statement of Sustainability

SCA's core technical move is the mandatory recognition of a sustainability provision for the estimated full cost of delivering the entity's sustainability plan (i.e. achieving net-zero alignment), with a corresponding sustainability reserve within equity. The reserve is designed to reduce distributable reserves: it is intentionally constructed so that recognising the environmental obligation constrains the amounts that management can credibly present as available for distribution to shareholders.

To make this operational and intelligible, SCA adds a new primary statement: the Statement of Sustainability, which reports movements in the sustainability provision (and therefore in the sustainability reserve), in the same way that the income statement and statement of comprehensive income report movements relevant to other capital maintenance concepts.  A set of financial statements with SCA reporting included provides disclosure on compliance with three capital maintenance concepts:

• Financial capital
• Physical capital
• Environmental capital

A key design feature is that SCA seeks not to “break” existing reporting literacy. It separates movements through:

• the income statement (primarily aligned with physical capital maintenance / historic-cost logic),
• the statement of comprehensive income (aligned with financial capital maintenance / fair value logic), and
• the Statement of Sustainability (aligned with environmental capital maintenance via the sustainability provision).

4 - Materiality in SCA: from single materiality to double and dynamic materiality

SCA's materiality concept within its proposed accounting framework is not an optional add-on; it is structurally central.

a. Single materiality is rejected as inadequate for environmental accounting

SCA argues that ISSB-style approaches are “essentially voluntary” in practice because they allow entities to decide whether climate issues are material, often using single materiality tests derived from financial capital maintenance reporting. SCA treats that as inadequate for the scale and temporality of the problem.

b. Double materiality is required

SCA adopts double materiality: the entity must report both:

• the impact of environmental change on the entity (outside-in), and
• the impact of the entity on the climate/environment (inside-out).

Crucially, double materiality is framed as expanding the conventional idea that information is material if it is of use to a narrow investor/creditor user group and replacing it with an obligation to consider materiality in the context of all potential users of financial statements.

c. Dynamic materiality is required

SCA does, in addition, explicitly incorporate dynamic materiality: impacts that are not yet financially material under conventional tests that usually only consider a twelve-month time horizon for risk appraisal may, very obviously, become so over longer periods of time and therefore must be anticipated in financial reporting rather than left to future write-downs or crisis disclosures.  This longer time horizon is defined as dynamic and is not limited in duration.

d. The test is tougher: double reasonableness

SCA's disclosure threshold uses a double reasonableness test. It asks whether a reasonable person might hold the view that disclosure is reasonably required, in the process explicitly raising the hurdle compared to the usual single-reasonableness framing for material disclosures.

e. Prudence becomes a precautionary principle

SCA converts prudence (caution under uncertainty) into an explicit precautionary principle. Practically, this tightens what counts as acceptable evidence in sustainability planning and reporting. As a result, the use of carbon offsets is constrained, and unproven-at-scale technologies cannot be treated as a dependable solution for the delivery of net zero on which a reporting entity might rely. The purpose is both:

• objective: to improve auditability and comparability, and
• subjective: to incentivise earlier action rather than delay.

6 - Temporality: why SCA compounds instead of discounting

SCA identifies a temporal mismatch: conventional accounting commonly discounts future obligations, while ecological costs can be non-linear and escalating. SCA therefore rejects discounting for these liabilities and instead requires compounding of any unexpended sustainability provision balances to reflect the increasing costs of delay, rising harm, and the tightening deadlines as 2050 approaches. It proposes using the higher of 5% or the entity's weighted average cost of capital as the compound rate.

This is not a technical quirk. It is an explicit attempt to align the temporality of accounting judgement with the temporality of environmental risk and policy constraint.

7 - Distributable reserves: making the constraint explicit

SCA treats the ability to distribute as central to going concern appraisal in an environmental capital maintenance world. It therefore requires explicit disclosure of distributable reserves and requires that sustainability liabilities be treated as charges against those distributable sums unless the entity can disclose alternative sources of capital to fund its transition. The intention is direct: if you have to finance adaptation out of retained profit, you cannot simultaneously pretend those same reserves are freely available for dividends and buybacks.

8 - Carbon (environmental) insolvency: a new failure mode

SCA introduces carbon/environmental insolvency as a condition arising when an entity cannot demonstrate how it will command the capital and capability to eliminate adverse environmental impacts by 2050 while still meeting financial liabilities as they fall due in the meantime. This does not necessarily imply immediate cash insolvency; it is a long-horizon going-concern failure revealed by the environmental capital maintenance test. SCA then requires directors to disclose how they will respond to the carbon insolvency of their entity, whether through adaptation, fundraising, diversification, or wind down, because disclosure is itself an obligation under this framework.

9 - Conclusion

SCA is not “sustainability reporting”. It is a proposal to make environmental obligation accounting-real: by redefining materiality in both double and dynamic terms, by redefining temporality (i.e. by compounding and not discounting liabilities for et zero adaptation), and by redefining reserves distributability (by ensuring reserves are constrained by the sustainability provision), it forces the financial statements to reveal whether an entity is truly a going concern in a net-zero world.  That is its importance, and simultaneously the challenge it poses to all large reporting entities to which it might apply. Their denial of the reality of the world in which they are operating is no longer sustainable. Their need to plan for net-zero survival becomes exploit, and disclosable within their financial statements.

---

Related posts:

• Capital
• Capital maintenance concepts
• Financial capital
• Physical  capital
• Human capital
• Social capital
• Environmental capital
• Sustainable cost accounting
• Income

---