NFU Blog

Sustainable accounting

I was made aware of a very interesting piece of work recently, that got me to thinking: How can we get the financial sector to take underlying but unacknowledged sources of capital – social and human – into account? Sources of capital that are lost in financial accounting and analysis, but that nonetheless are necessary for a company’s value creation? Is there a way to make shareholders aware that short-term gains often come at the expense of long-term results when externality costs are not accounted for?

What I came across was a recent initiative in the US that can provide some inspiration. The Sustainable Accounting Standards Board (SASB) was launched in 2011 on the basis of research done by the Initiative for Responsible Investment at Harvard University. A study was made to identify the key factors that inform us about the social and environmental effects and costs related to companies’ behavior. By disclosing data with an impact on sustainability, not only investors but customers, employees and citizens can contribute together to make companies more responsive to the needs of the wider economy and society.

The motto is simply: what gets measured, gets managed.

Corporate Social Responsibility (CSR) is a widespread method for companies to address sustainability issues such as the social costs of its operations. But CSR schemes are non-binding and often result in nothing more than lip service. And they do not put a price on the cost of externalities, resulting in an incorrect view of performance. Strict financial performance is still the only factor that really matters in the end.

We apparently need an instrument that makes it possible for corporations, investors and society to measure performance against sustainability objectives and their associated long-term costs.

It is here that SASB’s work comes into the picture. Global resource constraints and management of social and human issues, they rightly say, are integral to the long term success and sustainable value creation of companies. Governments are also less and less able to regulate the complex interactions, dependencies and impacts of companies on society. From NFU’s perspective this can be seen in the massive and complex regulation of the financial sector that has been adopted by the EU in the last five years. Complexity is met with more complexity – and no one has the big picture. Will we see more sustainable behaviour by financial institutions as a result? Who knows.

Instead, industries and investors can be given their own tools to account for the social costs of their operations. SASB creates accounting standards that make it possible to improve performance on social and governance factors that affect long-term value creation and are in the public interest. Thereby, sustainability issues can move from being a compliance burden for companies into factors that are actively managed or even competed on.

It remains to be seen how effective the SASB initiative will be in getting companies to change from a one-eyed focus on financial capital to a broader and more long-term management of human, social and environmental capital. But if the financial industry can be given the means to do this in a better way by itself, it would be a crucial addition to good and well-designed financial regulation. Maybe we should start working on a system for sustainable accounting also in Europe?

Arvid Ahrin, General Secretary
@ahrinNFU

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