The professor – one Louis Chauvin – was a standout in McGill’s Desautels Faculty of Management. Wearing nubbly woolen sweaters and a full grey beard, he started each class with a brief meditation before launching into the subject at hand: the social and environmental devastation wrought by the corporate world the students were clamouring to enter. 

Chauvin framed the most urgent issues facing the planet – climate change, waste, pollution, slave and child labour – as accounting failures. Nowhere did these by-products of economic growth appear on balance sheets. He cited the old accounting adage “What gets measured gets managed” and made it clear that the converse also applies.

As a self-described impact-driven millennial, Keyes experienced a moment of existential panic. How would she reconcile her determination to do good in the world with a system so singularly focused on profit and growth? After receiving her designation as a chartered professional accountant (CPA) in 2013, Keyes entered the profession with one part trepidation, nine parts determination. 

As it turns out, her timing was perfect. Now the CEO of ESG Global Advisors, a boutique management consultancy in Toronto that advises companies and investors on environmental, social and governance (ESG) reporting and strategies, she has seen her team triple in the last year and a half. “I would not have stayed the course in this profession had I not felt that I was making a difference,” she says. 

In the last two decades, accounting has been transformed by the shift in corporate culture that has seen corporate social responsibility move from the margins to centre stage, and sustainability migrate from the marketing office to the banner flying over the entire operation. 

While the scope of work – reporting, auditing, risk assessment and assurances – hasn’t changed, the innards have. Accountants are being asked to measure different things, ask different questions and think in different ways. The bookkeeping that used to form the meat and potatoes of accounting – recording inputs and outputs, tallying profits and losses – now represents a fraction of the work, and the fraction that is doomed to fall, sooner or later, to artificial intelligence. “Integrated” or “sustainability” accounting, as the profession’s more recent iteration is being called, may in fact prove to be its salvation, demanding more nuanced, ambiguous and qualitative thinking: less about accounting for companies’ financials than about demonstrating their accountability – or lack thereof – to all stakeholders, including the planet. 

Of course, sustainability accounting is as prone to manipulation as any other form of the practice. But a survey of the current landscape suggests that there are more dreamers than schemers – and that many of industry’s most ambitious envelope-pushers are women.

For someone like Keyes, the work feels incredibly relevant and exciting. Nonetheless, like many in her profession and despite accolades – in 2022, Keyes was named a fellow by CPA Ontario, as a “trailblazer” in the worlds of ESG and sustainability – she doesn’t want to be called a warrior. 

The rise of activist accountants

The “warrior accountant” moniker has been gaining currency ever since British journalist Gillian Tett suggested, in a 2018 column in the Financial Times, that accountants, once typecast as enablers of capitalist exploitation and tax avoidance, might in fact be climate saviours: that “a new breed of activist warrior accountants could be the biggest revolutionaries of all,” as Tett put it. 

Keyes sees a danger in overstating her profession’s potential impact. “We are one piece of a big puzzle,” she says, estimating that two-thirds of the investment required to achieve net-zero by 2050 will come from the private sector. Accountants can help create transparency and guide decision-making within that sector, but Keyes says the kind of transformational change required to meet climate goals will require all hands – regulators, investors and policy-makers included – on deck.

Susan Todd agrees. A pioneer of sustainability accounting (and living proof that activism in the profession is nothing new), she is impatient to see the practice fully bear fruit. In the “heady” early days, she was convinced that once the best performers were exposed, capital would naturally flow to them. But having worked as a B.C.-based sustainability consultant for the better part of three decades, the president of Solstice Sustainability Works realizes that it’s not that straightforward. 

“You can’t have successful companies in a failed world,” she says, citing a market that lacks “sophistication” and analysts too fixated on short-term financial risks. For her, the term “non-financial disclosures,” often used to describe environmental and social performance, is evidence that the actual value of these factors is still not recognized: that people don’t fully grasp that “these chickens will come home to roost.” 

But there’s no question that things have come a long way since 1997, when Todd was contracted by Vancity to conduct the credit union’s first ever “social audit.” Assessing the co-op’s social responsibility performance, Todd drew on what she had previously considered discrete skill sets – her CPA designation and experience as senior audit manager for KPMG on the one hand and a master’s degree in resource and environmental management from Simon Fraser University on the other.

When I started, I had to explain to companies why they should care about ESG. Now they see reporting as the tail that wags the dog.

 

– Alyson Slater, head of sustainable investments, Manulife

“They didn’t want it done in a fluffy way,” Todd says of her Vancity employers. She found herself burrowing back into her textbooks, returning to first principles as she tried to come up with a meaningful way to measure social impact. 

Todd wasn’t alone. In the 1990s, progressive economists were pushing for what they called full-cost accounting: a triple bottom line that took profits, people and the planet into consideration. But as admirable and important as the project sounded, the tools were missing. Which factors to measure, and what weight to assign to each one? How to quantify labour practices or policies of diversity and inclusion? What value to put on biodiversity loss or water contamination? 

Sustainability standards have come a long way since then, an evolution that Alyson Slater has witnessed firsthand. In 2001, armed with a master’s degree in environmental studies from the University of British Columbia, she began working for the newly formed Boston-based Global Reporting Initiative (GRI). Founded in the wake of the 1989 Exxon Valdez oil spill, the GRI grew out of conversations between NGOs, labour unions and ethical investors who were determined to hold corporations responsible for their environmental impacts. Slater helped to formulate the second version of the GRI’s sustainability reporting guidelines, published in 2002. 

GRI now produces the most widely used sustainability reporting standards in the world. Over the span of her career, Slater, who has worked on financial-inclusion and poverty-reduction projects in Asia and is now the Toronto-based head of sustainable investments for Manulife, has seen a sea change in attitudes.

“When I started, I had to explain to companies why they should care about ESG,” she says, adding that many had “transparency jitters” about exposing the dark underbellies of their operations. “Now they see reporting as the tail that wags the dog, driving better performance and reducing risk.” 

Slater says that most companies, no longer afraid of standards, are now pushing for better ones. They’re coming. In April, Slater was named to the Canadian Sustainability Standards Board, a national body tasked with ensuring that the new suite of reporting frameworks being developed by the Frankfurt-based International Sustainability Standards Board (ISSB) are adapted to the Canadian economic context. Provincial regulators will adopt the standards, once finalized, and roll them out across the country over the coming years. Unlike the GRI standards, which are voluntary, the new ISSB standards are expected to become a mandatory part of the reporting framework Canadian companies use.  

Minding the audit gap

But standards alone won’t save the day. In the U.K. and Europe, where more rigorous reporting standards are already in place, there’s evidence to suggest that the large tax and accounting firms hired to prepare ESG reports are conflicted; if they’re too rigorous in their assessments and irritate management, they risk losing out on further consulting contracts. Recent reports from the U.K.’s Financial Reporting Council have pointed to widespread disclosure failures, prompting the council to issue a Statement of Intent on ESG that provides further guidance to accountants. Likewise, the European Central Bank recently reported that “banks do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models.”

A damning October 2022 report by the London-based Carbon Tracker think tank found that 98% of 134 companies responsible for 80% of corporate industrial greenhouse gas emissions failed to adequately incorporate climate-related impacts into their financial statements. None of the companies – which are in the high-emissions fossil fuel, mining, manufacturing, automotive and technology sectors – met the measurement requirements of Climate Action 100+, the global investor-led initiative promoting corporate action on climate change. Barbara Davidson, the report’s lead author, attributed the failure to forward-looking assumptions that ignore climate impacts, resulting in statements that “overstated assets, understated liabilities and overstated profits.”

You can’t have successful companies in a failed world.

 

– Susan Todd, president, Solstice Sustainability Works

Net-zero aspirations have also opened up new avenues for creative accounting. Sectors unable to eliminate emissions in the near term will rely on “negative emissions” to deliver what looks like a net-zero balance sheet. In 2021, for instance, oil and gas giant Shell announced that it would be growing its gas business by 20% while still aspiring to climate neutrality: offsetting additional emissions with an expanded network of EV charging stations and carbon capture projects like reforestation. Critics panned the plan, saying it relied on technologies and plantable land that simply don’t exist. 

But overall, the trend in accounting is transformative. Jessica Fries is CEO of Accounting for Sustainability (A4S), an initiative established in 2004 by then–Prince Charles to bring the financial and sustainability communities together to drive change. She has seen it happen before her eyes. While she started her accounting career as a “specialist” in sustainability, Fries now operates in a world where it is part of the day to day. 

It’s a world that she says is in dire need of the hybrid mindset that bridges finance and sustainability and that offers unprecedented leadership opportunities for accountants. Today, Fries says, “accountants can drive sustainability into the heart of organizations.”

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The recent cabinet shuffle in Ottawa has placed an intensifying focus on a green and caring recovery, one that will likely tie stimulus support and investment to corporations meeting climate goals and contributing to society. This will be a bold move. If there is a time to do it, it’s now. But how can we objectively measure and monitor what companies are doing and give them the incentive to move in the right direction?

For almost 60 years, the core of accounting principles has remained unchanged. Basically, it captures the revenues and costs of a company’s direct economic activity. It does little to account for, in monetary terms, the company’s societal and environmental value contributions and impacts, namely jobs created, wages paid, climate impact, water usage, et cetera. 

At this point, companies disclose these components differently, with varying measures, focus and metrics. To capture the “true” value contribution of business to society, environment and the general economy, this needs to change. Corporate impacts need to be measured and valued using standardized methodologies. Putting a dollar value on impacts on water, air, workers and more (both positive and negative) and stating it in a financial report, would unlock billions in potential sustainable investment. Most importantly, it will make accounting for environmental and societal impacts part of the fiduciary duty of companies’ boards of directors – thereby rewarding measured decision-making, bold actions and accountability.

BASF recently became a founding member of the Value Balancing Alliance (VBA), a non-profit organization whose goal is to change the way company performance is measured and valued. Under the directive of the European Commission, the VBA has been mandated to draft a new set of green accounting principles to support the implementation of the EU Green Deal. More specifically, it will standardize a common method to assess the value a company brings to society, provide a framework for comparability within sectors, enable scalability of adoption, and incentivize a “triangular” approach to business steering and decision making. 

With the convergence of these new management accounting principles, companies will be driven to define and measure their often otherwise abstract statements of purpose and disclose progress on them. These principles will also benefit companies that have had difficulty communicating their positive impact under current financial reporting. This includes energy companies in Canada that are among some of the most innovative and heavily invested in communities and, surprisingly to some, the environment. These new standards will help lure a new generation of investors who will reward companies for considering their total value and impact on society, the environment and the economy, rather than just their profits. 

While many believed that climate change and ESG (environmental, social and governance) metrics would be dismissed during the pandemic-induced downturn, a large number of companies have doubled down on their commitments. COVID-19 has reminded the public and investors what it means to be a company for the good of society. That means protecting and ensuring the safety and jobs of employees, meeting tax responsibilities and responding to crisis with actions, not words, and having purposeful strategies that can weather societal, environmental and business uncertainties.

What’s also clear is that companies that have successfully tied their mission statements to the 2030 UN Sustainable Development Goals agenda have a lot to gain with the transparency that will emerge out of a triangular-shaped recovery.

In the wake of the pandemic, a major reset is coming to all businesses. We need a formal departure from the old ways of accounting. We need companies to work closely with the federal government and international standard setters to align on a new reporting standard that shows a company’s real total contribution to society. Europe has a model that’s worth considering. We should embrace this time of change to leapfrog beyond old norms and adapt quickly to the new challenges we face ahead. It’s time to put numbers where numbers are due, weighing impacts on society and the environment at par with a company’s bottom line. 

The new finance minister may be surprised by how open businesses are to making this change. If it is done in a collaborative way, we may truly see a seismic shift in reporting and decision making that puts Canadian businesses back in the global lead.

Marcelo Lu is president of BASF Canada.

Christian Heller is CEO of Value Balancing Alliance.

The post Building back better will require better ways of measuring corporate impact appeared first on Corporate Knights.

Natalia Moudrak, Director of Climate Resilience, Intact Centre on Climate Adaptation

Robyn Seetal, Principal, IkTaar Sustainability

David Steuerman, Deputy Director, Global Affairs Canada

Mike Puddister, Director, Restoration and Stewardship at Credit Valley Conservation

Roy Brooke, Executive Director, Municipal Natural Assets Initiative

Beyond the immediate health and economic impacts of the COVID-19 crisis, one of the most pressing threats facing Canada and the world is the degradation of nature, incontrovertibly exacerbated by climate change.

The emerging ecological disaster has been matched by an increasingly destabilized global economy and gaping inequality, which have fuelled destructive populist politics that are threatening the core of many established democracies. Our relationship with nature has put civilization on a dangerous path, one that has us testing the limits of our planet. As we recover from the pandemic, we have an opportunity to create a new normal. One fundamental challenge will be ensuring that nature is understood to be of core importance to business models – ­and that its value is properly accounted.

Current measures of GDP are often distorting. Economic activity, whether productive or destructive, is seen as a positive and encouraged. Our approach to our personal bank accounts is quite different: money comes in (salary, benefits, other income) and money goes out (taxes, rent, food, etc). If the latter consistently exceeds the former, the account is depleted and we risk spiralling into debt and bankruptcy. Shift that framing to a global model, replace bankruptcy with ecosystem, societal and economic collapse, and we get a clearer picture of the value of green accounting.

A lot of groundwork has already been laid.

NGOs and numerous other organizations have emerged to provide guidance to reporting organizations and users, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Corporate Reporting Dialogue and the International Integrated Reporting Council (IIRC). These organizations have developed environmental reporting standards for the calculation and disclosure of environmental metrics.

Additionally, there has been significant documentation of the process for gathering data, converting company-level results to impacts and dependencies, and selecting prices by, among others, the Capitals Coalition, ISO 14007 and 14008 protocols, and the Impact Institute.

There are also many examples of financial institutions (Impax, ASN, Manulife, etc.) and companies (Kering, BASF, etc.) that have begun piloting valuation and integrating natural capital into decision making.

A number of Canadian municipalities have begun the shift to a new normal, one that recognizes that nature is our most vital asset. They are measuring, valuing, investing in and ultimately managing natural assets such as forests, wetlands and foreshores for the vital municipal service-delivery benefits they offer, such as storm water management, drinking water filtration and coastal zone protection. A key organization driving this effort is the Municipal Natural Assets Initiative (MNAI), which helps local governments understand and manage natural assets within their core financial and asset systems just as they would with critical engineered alternatives.

MNAI’s findings are particularly illustrative of the value that natural assets offer for climate resilience. It has found, for instance, that a seven-kilometre riverbank in the Oshawa Creek watershed in Ontario provides $18.9 million of stormwater conveyance benefit to nearby communities that would otherwise require an engineered solution. Naturally occurring ponds in White Tower Park in Gibsons, B.C., provide $3.5 to $4 million of stormwater storage services annually.

MNAI works directly with municipal governments, creating norms and tools that allow natural asset management to become mainstream practice for local governments across Canada.

Clearly, natural infrastructure assets play a role in climate resilience, and their contributions can be quantified in dollars and cents. In 2016, a framework was established by the Intact Centre on Climate Adaptation (University of Waterloo), Insurance Bureau of Canada and the International Institute for Sustainable Development to help assess this contribution.
Public sector financial statements, however, have not yet recognized natural infrastructure as a valuable asset. A prohibition in the CPA Canada Public Sector Accounting Handbook (Financial Statement Concepts, Section PS 1000, Paragraph .57), states:

“Purchased natural resources and Crown lands are recognized in government financial statements. However, when natural resources and Crown lands have been inherited by the government in right of the Crown and have not been purchased, they are not given accounting recognition as assets in government financial statements. These items are not recognized as assets because the costs, benefits and economic value of such items cannot be reasonably and verifiably quantified using existing methods.”

While this exclusion results in conservative financial reporting, it also means that financial statement users have no way of knowing the extent or value of natural infrastructure assets, and how they might contribute to a public sector entity’s future ability to provide services. Financial statement users also have no transparency concerning any potential changes in the value of these natural assets. This creates a dichotomy in public sector financial reporting.

If, for instance, a municipality has vast natural resources, such as wetlands, forests and ponds, it’s prohibited from reflecting those as an asset on its financial statements. The municipality is also not required to report in its financial statements whether those natural resources have been damaged by pollution. This lack of transparency ultimately results in less accountability for safeguarding natural resources.
Recent statistics suggest that the loss of natural infrastructure in Canada is already a pressing problem. In southern Ontario, an estimated 72% of the original wetlands have been lost to development (e.g., agriculture, urban sprawl and other land conversion). In Alberta, approximately 64% of the original wetlands in settled areas no longer exist. In B.C., more than 70% of the original wetlands have disappeared in the lower Fraser Valley and parts of Vancouver Island, and an 85% wetland loss has been documented in the South Okanagan.

Conversely, allowing public sector entities to account for natural assets would make financial statements more transparent and would improve accountability on preserving the natural infrastructure that society and businesses rely on.

As Canada advances its climate commitments made under the Paris Agreement, the United Nations’ Sendai Framework for Disaster Risk Reduction, and the Pan-Canadian Framework on Clean Growth and Climate Change, it needs to revise its accounting rules to enable public sector entities to use natural infrastructure for climate change mitigation and adaptation. If it does not change its internal accounting rules, Canada’s natural assets will continue to degrade and disappear – and the costs of climate catastrophes will continue to climb.

Nevertheless, most companies are in the dark when it comes to accounting for their impacts and dependencies on the environment, and investors struggle to compare what little disclosure there is in a meaningful way.

Many businesses look at this as a form of corporate social responsibility (CSR) rather than as central to their way of operating. As a result, they make only cosmetic changes or apply green accounting to side projects – but don’t touch their core enterprise management systems. In addition, many of these changes don’t extend to supply chains, which are responsible for most of the impacts. Even when they do, the generally small to medium-sized enterprises on the lower tier of the supply chain will be ill-equipped to take meaningful action. A mixture of economic and technical support and meaningful regulations will be necessary to encourage and enable the changes needed. This will also require some degree of cooperation at the international level, to establish universal standards (an exercise for the UN, the World Trade Organization and various regional trade forums to work on).

How do we close the gap?

The Capitals Coalition is a global group – encompassing many larger companies, governments, international organizations and standards bodies – that shares knowledge from around the world, establishes global standards and advocates to convince the various players to synchronize their efforts. It has also developed a series of protocols that combine current thinking from different organizations.

There is a strong interest in getting Canadian governments, companies and standards bodies more deeply involved in the work of the Capitals Coalition. To this end, a series of roundtables in Ottawa and Toronto are being planned to bring together stakeholders to share information and best practices. Ideally, this will result in the development of a Canadian chapter of the coalition, which will allow for more regular sharing of information and ensure that Canada is represented in the work of the Capitals Coalition globally.

The Value Balancing Alliance (VBA, a new business-led non-profit) is standardizing the process of integrating business into society and nature for better decision-making, as part of the work being done by the Capitals Coalition. In line with the European Green Deal, the VBA has been tasked by the European Commission to develop generally accepted accounting principles and guidelines around environmental impacts for business. This is expected to soon lead to a common standard (which consolidates numerous other initiatives) for measuring and valuing environmental impacts in monetary terms.

This summer, the VBA will make public an early version of a methodological tool for companies to measure their impacts on society: environmental boundaries, social stability and inclusion, and economic prosperity. This will be followed in September by a version that integrates public reporting tools to assess an enterprise’s value more comprehensively, including additions for social capital, human capital, natural capital and governance.

Working closely with the Capitals Coalition is the Impact Management Project, helping investors measure and report the impacts of their investments.

What would it take to create a new normal in which the economic subsystem operates in symbiosis with the larger planetary and societal system that makes life on Earth possible?

1. A few things are required for this to happen within the market system:

Redefine prosperity and adapt our measures of success

• We must view ourselves as part of nature and part of a world that depends on nature.
• We must address the blind spots that are not covered by GDP, the main metric for prosperity, by incorporating comprehensive wealth, or a capitals approach to measuring, valuing and reporting on prosperity and success.

2. Update our accounting standards and develop related guidance

We need tools for accountants to value nature so it can be properly accounted for in income statements and balance sheets, starting with large corporations and governments all the way down to small businesses and individuals. Practically, this will require major accounting standard-setting bodies (critically the International Accounting Standards Board and the Financial Accounting Standards Board) to adopt accounting-for-nature principles and detailed guidance to enable implementation.

3. Establish supporting regulations

We need governments to establish the rules to close the gap between a company’s environmental profit and loss (EP&L) account and actual profit and loss, perhaps through regulatory support of integrated reporting.

4. Re-allocate capital

We need to incentivize investors to re-allocate investments in companies, taking multi-capitals into account and providing a net-positive value to nature, society and the economy.

As Peter Drucker famously said, “What gets measured, gets managed.” Let’s get on with measuring the one asset on which all other assets rely upon.

Watch our Valuing Nature roundtable, recorded May 22, 2020.

 Other relevant initiatives working on more holistic measurement of business value and impact:

● Impact-Weighted Accounts initiative out of Harvard Business School
● European Commission sustainable taxonomy
● World Economic Forum initiative to come up with common metrics for reporting sustainable value creation
● Accounting for Sustainability, a program of The Prince of Wales’s Charitable Foundation (PWCF)
● The Canadian Public Sector Accounting Board has convened a technical working group to address the exclusion of natural assets

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