Regime change: accounting for sustainability

10 Nov 14
The Prince of Wales has challenged accountants to play a wider social role and change the way they work. Are they ready to step up?

By Tony Travers | 10 November 2014

The Prince of Wales has challenged accountants to play a wider social role and change the way they work. Are they ready to step up?

Accountants and economists offer, in their different ways, opportunities for citizens and businesses to understand the flows of resources that surround them. Accountants provide rigorous methods for setting out how money is used in the creation and management of institutions, while economists make it possible to analyse the ways people interact within markets and also how incentives can be used to change behaviour.

The development of international accounting bodies and standards has played a part in ensuring best practice can be spread across an increasingly complex world. Indeed, the proliferation of transnational governance, institutions and regulation has required a move towards global expertise and common standards. One of the most obvious advantages of such international professional development is that it deepens understanding and reduces the risks of conflict. 

There are a number of ways in which the evolution of accounting expertise can offer policymakers a better understanding of the world in which they operate. Reduced corruption, improved efficiency and public transparency are among the many benefits that accountancy can offer the world. Of course, the very ‘ordinariness’ of handling numbers to do with money can make accountancy appear rather less important than it is.

In fact, much of the world’s $75 trillion economy is presented in accounts, generally several times over. National, company and personal accounts explore how resources are used.  For companies and, increasingly, governments their accounts make it possible for outsiders to see how resources are being used, and what assets and liabilities exist. On the basis of these often legally enforced forms of presentation, judgments are made about the resilience and credit-worthiness of the institutions concerned. 

The use of accountancy for measuring sustainability has a similar purpose. Investors can develop an understanding of the changing landscape of commercial risks arising from increasing environmental and social pressures and the response of regulators and investors.  But to do this they need to have universally agreed ways of presenting figures and of discounting for possible future change. It is in this latter sphere that work is required.    

Big companies have big impacts as, for that matter, do big governments. In their use of resources, specifically natural resources, these large institutions impact upon the lives of billions of people today and into the distant future. Academics, non-governmental organisations and businesses all play a part in understanding the impacts of investment decisions. Accountants, similarly, provide some of the tools with which to judge the ways in which resource use will affect the future.

Against this background, The Prince’s Accounting for Sustainability Project is a unique exercise in highlighting the role of accountants and finance teams in the delivery of sustainable development, in particular to enable the relationships between environmental, social and economic outcomes to be made clear and incorporated into financial decision-making.  The purpose of the project is ‘to catalyse action by the finance, accounting and investor community to support a fundamental shift towards resilient business models and a sustainable economy’.

The Prince of Wales, speaking at an Accounting for Sustainability Forum last year, underlined the fundamental relationship between economic success and a sustainable world: ‘All too often the mainstream financial and accounting system focuses on short-term financial results. It does not adequately reflect the dependency of our economic success on the health and stability of our communities and of the natural environment. They are all too often a forgotten part of the equation.’

This observation must be correct. Both private and public organisations are under immense pressure to deliver results within the next quarter or, at best within a year. While balanced books are essential for companies and governments, they, in turn, must be balanced against the need for public buy-in – and a longer-term need to be able to live within our means.  

People need sufficient resources to secure a reasonable standard of living. But beyond a point, happiness is for most people a better objective than simply getting richer. Determining where to strike a balance between immediate gratification and the delayed enjoyment of benefit is one people face every day. For governments and companies, accountants can provide some of the techniques that allow rational judgments to be made about how they can balance short-term and long-term objectives in the use of resources.

Prince Charles has touched on the kind of metrics he believes could be delivered by such techniques. ‘We need to understand the systemic relationships between the depletion of key resources – freshwater, soils and so on – and the volatility of prices in different markets like food and energy,’ he told a recent investor engagement event.  He cited research which suggests ‘companies which have implemented sustainability policies have out-performed their counterparts. They have also enjoyed lower costs of capital and achieved better risk-adjusted returns. What is more, research … demonstrates that responsible businesses become more resistant to share price volatility, which I would have thought is an important consideration if you are a pension fund.’ 

In some ways, Prince Charles is describing elements of ‘due diligence’ of the kind undertaken by companies when they are considering the acquisition of another enterprise. Seen in this way, these factors amount to an understanding of environmental, and other factors, which are likely to affect a business or a state’s future.     

Accountancy can help businesses – or governments – articulate the value of sustainability in a way that enables investors to factor such considerations into their strategies. The capacity to measure costs and benefits in a consistent way is an essential part of improving the long-term viability of organisations. Prince Charles is on record as saying: ‘To that end, for what it is worth, I have felt for many years that the globally accepted ways of measuring success, whether in terms of profit or GDP, are not providing the correct information and signals for governments, businesses and other organisations to take the right decisions, given the immense and unprecedented challenges we face in the 21st century. It is clear to me that if we are to create the sustainable economy we so urgently need – one that provides a better life for all whilst also preserving the planet’s natural capital from which we can draw an income – we need new ways to define and measure success for businesses, governments and the global community. ’

It is true that policymakers in the public and private sector often use relatively narrow ways of measuring economic success and outcomes. But the very simplicity of measures such as Gross Domestic Product or GDP per head means it will inevitably be tempting for national leaders and economists to use them. Sustainability and wellbeing are valid objectives and of the utmost importance, but they are much harder to measure with precision than, say, GDP. International organisations, notably the OECD, produce oft-quoted league tables of countries showing GDP, tax payments and other ‘hard’ measures. 

The key issue for global accountancy is to help in delivering better measures, techniques and more integrated forms of presentation that would deliver the kind of wider understanding the Accounting for Sustainability project is seeking to promote. Accountants are often accused, perhaps unfairly, of publishing accounts in what is, for most people, a foreign language. While international standards in accountancy are beneficial when it comes to allowing people to make fair comparisons from country to country, they rarely assist public comprehension of the broader picture.

In developing better options for public engagement, accountancy has an opportunity that goes beyond its traditional ‘back room’ role. The quality of financial reporting in many governments is slowly starting to improve, with the work of the International Public Sector Accounting Standards Board (IPSASB). But it should also be possible to influence debate about a wide range of issues. 

Perhaps some members of the profession would prefer to stay out of the limelight. But this would risk having no voice in the development of policy.  It would also open the profession to accusations that it was not playing a full role in civil society. Lawyers, doctors and other leading professions have long developed a public policy role. If accountancy accepted a wider role, there would be significant potential advantages for accountants and, indeed, for the quality of debate.

Thus, taking up Prince Charles’s challenge in relation to the environment and sustainability, can the accountancy profession globally find new ways of connecting with a wider public? Are there ways of publishing robust data that can be ‘translated’ into forms which journalists, bloggers and students can more easily access?

Science and history have made major steps in recent years in communicating complex ideas to a wider public. Academics are under ever-greater pressure to achieve public engagement and impact. The new Integrated Reporting Framework has a different, more rounded approach to reporting the broader impacts on organisations. But perhaps accountancy could also use the kind of encouragement provided by high-profile supporters such as Prince Charles to broaden the appeal of their profession.

Everyone with an interest in the environment must worry about the production and presentation of credible statistics about changes in the climate and, in the longer term, about how business investment decisions may be effected. Few spheres of contemporary human activity generate such controversy and, frankly, disagreement. But the stakes are very high. Inappropriate decisions and investments will be made if society does not have the right information presented in a consistent and credible way.

Accountancy across the world has a key role to play in delivering on these objectives. Encouragement from outside the profession can be a valuable catalyst for change.

Tony Travers is chair of the London Finance Commission and professor of government at the London School of Economics

This article appears in the Winter 2014 issue of Public Finance International magazine

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