All hail accountants!
The green eyeshadow business stocks have risen recently as companies seek to address their sustainability challenges. The auditor’s ability to translate risks and opportunities into numbers, the theory goes, will enable the rest of us to evaluate the financial consequences and assess the resilience of a given product, brand or company.
And by integrating climate-related risks into strategy and operations, companies can make the kind of meaningful shifts needed to address the climate crisis, biodiversity crisis and everything else.
The past year or so has experienced an insane amount of activity that apparently supports this theory. The four major audit firms – Deloitte, PwC, Ernst & Young and KPMG – have increased their audit departments with ESG security services, while investing countless millions in employee training on these issues. There is a cacophony of standards developed by groups such as the Sustainability Accounting Standards Board (now the Value Reporting Foundation), the Global Reporting Initiative, the International Integrated Reporting Council, the Climate Disclosure Standards Board and the CDP. There is an alluring perspective for these groups to adjust their standards through a proposed global consortium led by the International Financial Reporting Standards Foundation and the International Accounting Standards Board.
The idea of converting all kinds of influence into dollars, euros, yen or other currencies is alluring. But it does not add up.
Not to mention the growing push for companies to perform carbon accounting or the trillions of assets managed by institutional investors that now require portfolio companies to reveal a small mountain of environmental, social and management data.
As International Dance of Accountants CEO Kevin Dancey recently put it: “Auditors need to translate risks and opportunities into numbers. Without quantification of risks and opportunities, companies will have great difficulty in assessing the economic impact and resilience of the business. ”
If it all comes together, the theory goes, accountants will become a key point in these and other efforts by taking different environmental and social data and harmonizing them in financial metrics – dollars, euros, yen, yuan, etc. It would enable them to more easily assess and compare how companies and other institutions respond to today’s challenges – and presumably help them move forward, faster. Along the way, number crunchers would become game changers.
Impossible and dangerous
The reality is much more complex.
Consider a recent article on the subject in the Stanford Social Innovation Review. Entitled “Heroic Accounting,” it suggests that efforts to monetize companies’ effects are “attractive, impossible, and dangerous.”
The article – by Andrew A. King, professor at Boston University’s Questrom School of Business, and Kenneth P. Pucker, associate professor at Fletcher School at Tufts University and former CEO of Timberland – addresses “impact accounting” in which companies try to put a monetary value on a wide range of both tangible and intangible impacts.
It seeks, writes King and Pucker, to “tabulate all the ways in which individual companies affect the welfare of the planet – including economic profit, employment, social justice, biodiversity and climate – and translate all of these into a single measure of impact, represented in dollars and øre. ”
A large number of interests seem to be in line with the potential of the effect accounts, they note. The European Union, the World Business Council for Sustainable Development and a consortium of multinational companies are developing all impact assessment methods, as is the Capital Coalition, a group of 380 entities, including the World Bank, Walmart and the United Nations Environment Program. Several consulting firms – led by KPMG, BCG and PWC – have developed their own methods for assessing a company’s overall impact. And a research initiative from Harvard University focusing on Impact Weighted Accounting has an advisory committee that includes senior executives from asset management, banking, law, philanthropy and academia. ”
But it’s not connected, King and Pucker say. The danger, they write, comes when advocates of impact accounting “propose translating social, human and environmental impacts into dollar values to raise hitherto minimized effects.” The complexity, not to mention the subjectivity that designers impose on framework for effect accounting, can lead to a wide range of undesirable results.
Consider air travel, which the Harvard project considers a luxury. But note King and Pucker, “a single plane includes people traveling for many reasons: for a larger family event, to care for a sick person, to interview for a job, or to take a ‘luxury’ vacation.” Making assessments about the social and environmental impacts of aircraft based on such criteria can at best seem arbitrary, regardless of assessing countless thousands of other products and services and the millions of ingredients that go into them.
The co-authors write:
Creating valuations of any impact for each company will require the work of many people to measure, validate and value the company’s impacts. It seems likely that tens of thousands, perhaps hundreds of thousands of analysts would be needed to create these measures. It is clear that they would participate in activities that affect the public interest.
How would they be selected and managed? If they are selected by private interests, then what gives them the right to make value judgments about things ranging from trans fat to weapons to air travel? If they are selected by a democratic process, the scope and scope of government must increase dramatically; officials had to decide the value of everything for everyone.
They conclude: “Unfortunately, impact accounting is likely to create more problems than it solves.”
It is certainly disturbing, but also a little comforting: that these proposed frameworks, which aim to transform the global economy to deal with climate change and a myriad of other issues, are being appropriately examined. Even though we may not like all the answers.
After all, the basic idea remains attractive: Company A has an economic surplus of X, but has externalities that can be calculated to cost Y. Creating a simple, comparable measure across sectors and borders can be a boon for investors, regulators and consumers.
Again, that’s the theory. In a conversation last week, Ken Pucker pointed out that such noble pursuits do not always deliver. Eg. Has the 2002 US law, known as Sarbanes-Oxley, which required companies to report on the relationship between salaries to managers and average workers, not closed this gap; it has actually gotten worse. And the federal law that requires certain chain restaurants to disclose calorie and nutrition information has not exactly dampened obesity.
To be clear, neither King nor Pucker say that these frameworks are unnecessary or that their proponents are not well-meaning.
“I would love it if we changed what the real price of water was, what the real price of carbon was, and the auditors actually incorporated those prices into our P & Ls,” Pucker told me. “We wanted to speed up the transition to renewable energy, we wanted to speed up the transition to storage, we wanted to remove fossil fuels faster.”
Speaking of his and King’s article, he added: “I hope it leads to an honest discussion of these things. We have limited time and we need to find solutions with maximum leverage. I would rather focus a conversation more on things that I think will have more leverage than this. ”
We did not have time to immerse ourselves in what these things with higher leverage can be. For now, I gladly take the honest discussion – whose value is certainly unmanageable.
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