Watching children climbing trees, carrying stones and building huts with branches twice as long as their own bodies gives me a lot of joy. I see how that strengthens their body and mind. To strengthen my own body and mind, I stroll through parks and woods. That gives me the energy I need to keep running in this world and climb to new heights.
Naturally, I want to preserve this precious system. Therefore, I started several years ago to learn more about how to reduce waste and toxins and even started on a journey of helping others do the same. However, the more and more I learn about the topic sustainability, I recognize that not everybody is that passionate about it. Does that mean that nobody cares and would rather live in a world where one weather disaster hunts the next one? I doubt it. It is rather that there are a thousand things that everyone has on their mind.
Therefore, I believe we need a different way. A way that does not require the help of every single individual on the planet, a way that works without prohibition – which I generally hate as a business person – a way that works with the current system and does not require drastically changing it.
So let’s zoom out.
What is our system? Our current system heavily relies on division of labor with companies acting as intermediaries. The major purpose of a company is to generate profit for its shareholders. They do that by using all the resources that are available to them to create a value for their customers who in turn pay them. However, creating this value comes with external effects. Effects that might be positive or negative for our society.
And that is a problem. Because it is those external effects that let our climate go crazy. It is those external effects that employees get burned out while working two or three jobs. External effects are not intended by the company but they just happen as a result of the value creation. And very often, companies are not even aware that they produce those external effects.
Only during the last decade or so, companies are becoming more and more aware of the impact of their own actions. The EU has played a major role in it when introducing the non-financial reporting directive. According to that regulation, big market oriented companies need to create a new report – the sustainability report. In this report, companies are required to show a couple of their external effects. Many companies have used this opportunity to create shiny marketing brochures with 50 to 100 pages targeted at NGOs and alike.
The problem with those reports is that they are quite laborious to create and that they are not actionable. Yes, some companies become a little bit more aware of their problems. And depending on the executives personality and the shareholder pressure it might be that some thoughts go into how to create a more positive impact and mitigate the negative external effects. However, as companies are built to generate profits for their shareholders, the extent to which senior management tackles those issues is limited.
What would be a better way?
A better way would be – again – to work with the current system. As a CEO myself, I have been rewarded by my shareholders for generating profit. Therefore, external effects need to be reflected in those profits. It means that negative external effects need to lead to lower profits while positive external effects need to lead to higher profits.
We can do that by bringing the external effects into the standard accounting system. And a new discipline is created – sustainability accounting. What do we need to do in order to integrate sustainability accounting into the current financial accounting system? Well, there are several options and none has been completely worked out yet but as accounting systems are evolving, standard setters like the IFRS foundation can start integrating it into their standards.
Of course, there are a lot of details that need to be clarified like: Which external effects should be incorporated? How do we value an external effect?
For other issues like, “how to reflect an external effect in a balance sheet” there have already been proposals created. For instance, Knut Henkeln and Jenny Lay-Kumar have proposed to create new assets for positive external effects and new obligations for negative external effects which be resolved into a new equity position “society”. I believe this system is very promising and that this is the future we are heading to.
I dream of a future, where the impact of all the company’s actions including its external effects are incorporated into their prime decision making tool, the accounting system. Companies are held accountable for their actions and make the right decisions to preserve our nature. So that you don’t have to care about sustainability.
In order to make that dream come true, I am committed to research more about the topic and bring answers to the questions that are open. I have an extensive background in valuing intangible assets like brands, customer relationships or patents for financial reporting. And I believe I can bring this know-how into the sustainability community to drive this topic further. In this blog, I will write about my learnings and further ideas how such a sustainability accounting system could look like. If you want to join my journey, please subscribe to my newsletter.
