I should say to begin with how delighted and grateful I am to you all for coming here this afternoon. In view of the fact that I am speaking immediately after lunch, I have been particularly careful to choose an exciting and interesting topic and so am going to speak to you about Accountancy - or, to be more specific, about Accountancy and Sustainability. As I have 3 qualified accountants and 3 under training in my Office, I am not exactly short of advice!
I will start, if I may, by explaining why I believe that there is a link between the two which, at first sight, may seem unconnected.
As some of you may know, I am one of those people who has been deeply concerned about climate change and global warming for many years and believe that they are the greatest challenges which face mankind and indeed all the other species that share this planet with us; however, in present company I am sure that I do not need to rehearse the arguments. The evidence and the science about global warming and climate change are now, it seems (and not just to me) indisputable. The report that the Government commissioned from Sir Nicholas Stern has recently added much to our understanding, with his in-depth analysis of the economic consequences.
Twenty years ago concern about climate change, together with issues such as organic farming, local food-sourcing and ethical supply chains, were seen very much as fringe concerns far from the mainstream of political and commercial life (I know, because I was beyond the fringe!). But thankfully, this seems to have changed and what we are doing to our environment is the subject of increasingly urgent and mainstream debate. It is not a moment too soon …
And it is not, of course, just a matter of global warming. The facts about other forms of environmental degradation and the depletion of non-renewable natural resources are now better known and increasingly accepted. We are consuming the resources of our planet at such a rate that we are, in effect, living off credit and living on borrowed time. In other words, we are financing what we in the developed world have today by accumulating a vast environmental and natural-resource debt.
So, it is, of course, our children and grand-children who will have to pay off this debt and we owe it to them – and to ourselves – to do something about it before it is too late. There was a time when our forbears always did think about future generations – the Red Indian tribes of North America, for instance, thought about the 7th unborn generation.
After more than two hundred years of growth, development and prosperity in the industrialized world we are, perhaps, due a moment of reflection to discuss and debate where we want to go next and how we will actually get there. Many people, but of course by no means all, living in the developed world enjoy good housing and health, a good standard of education and huge choices in shopping, traveling, dining, arts and entertainment. It is in many ways the age of the consumer, yet I happen to believe many people are also searching for a deeper meaning in their lives. And along with the almost limitless opportunities to travel, people probably also want to belong to an identifiable community, to have roots, to eat food from local sources, to live through changing seasons and to help others.
For us, today, the questions are: what do we do when we have grown and prospered, when we have much of what we need and more? Do we continue regardless, not asking certain questions in case the answers are too challenging? Do we carry on spending, consuming, often wasting, until there is insufficient left for others in the world who do not have access to our resources? And do we carry on until there is nothing left for those who come after us?
Of course not: and we are starting to reflect on these issues, very much including the Prime Minister, the Bishop of London, Lord Browne and many others of you who have been good enough to come here this afternoon.
Now, I know what you’re all thinking: “I wish he would hurry up and get on to the interesting bit about accountancy”!
I am launching today a new initiative called “Accounting for Sustainability”. This is my own small attempt to consider how we might more accurately, more “truly and fairly” - to use that phrase much favoured by accountants - begin to account for the wider social and environmental costs of our activities. It is a continuation of the work that I commissioned with Sir John Bourn of the National Audit Office, who I am delighted is with us today, a couple of years ago and which resulted in our booklet, “Realizing Aspirations”.
Accounting is often seen as an ancient, even mystical, practice, based on hard facts – an objective craft, embodying long-established principles, telling us the truth about economic activity at a company or national level. But this is misleading.
Accountancy is a changing practice, one which adapts to the culture and circumstances of the time. Much of what we take for granted in terms of the content of our national accounts, for example, was not laid down until after the Second World War. What goes into a profit and loss account is a product of what a particular type of Western society, at a particular point in its history, saw as important at the time. In the nineteenth century, it was natural to place value on industrial plant, labour-intensive processes and the cost of raw materials being transformed into products. It would have been seen as a distraction – and a foolish one at that – to ask about the costs of exhausting what, at the time, were seen as infinite and cheap natural resources. No-one would have been interested in the costs of accumulating waste matter in the atmosphere or, indeed, putting effluents into rivers. These were not culturally or topically relevant.
In the twentieth century, accountancy made a number of modifications to include new costs which had begun to take on more significance in modern business and, for example, pensions costs are now included, as are the costs of foreign exchange trading.
In our current century, we appear to have reached a point when further costs need to be measured and accounted for. The value of dwindling natural resources, and the cost of increasing atmospheric pollution, should surely be included in the price we are all paying for what we buy and consume? At the moment, these costs often do not appear in anyone’s books. Apparently, therefore, the cost of draining a wetland or destroying a rain-forest is zero. If a company exhausts an oil field, it appears to cost the planet “nothing”. The cost of pumping tons of carbon into the atmosphere can be – depending where you are in the world – zero. All of these costs, for which future generations will pay dearly, are given nil values in company accounts. Yet they are real, they are being incurred now and, in a relatively short time, the damage being caused may be beyond remedy.
Few accountants and business decision-makers ask, “How much of our critical natural resource is left? How many miles of polar ice-cap has our business helped melt this year? By how many inches have we raised sea-levels? How many species have we put at risk? How many homes will be flooded; how many people will die of thirst or starvation because of our activities? These are not comfortable questions – but, by God, they need to be asked.
At one level, it appears that no-one is accounting for these costs. Yet, at another level – and this is increasingly understood – we are all paying for them. The human race is paying. We are accumulating a liability for future generations, and for poorer countries, which may soon become impossible to pay-off. To put it another way, we are running up the biggest global credit card debt in history, but with little or no thought for how the bill will ever be paid.
The Accounting for Sustainability project, which I am launching today, has been established to try to help address this issue. A small team of six or seven people based in my Charities Office is making a start in developing a practical management tool to enable sustainability to become embedded more effectively in decision-making, resource allocation and accounting, in both the public and private sectors. The project team has already completed an initial review of work and practice in this area, to ensure that we are not actually reinventing the wheel and are building on existing thought and initiatives. This review and its conclusions are available on our Accounting for Sustainability website for those of you who might like to see them.
Our main accounting for sustainability conclusions may well encompass a variety of approaches. It may be possible, for example, to take forward some elements of what I understand is referred to as “full-cost accounting” and incorporate key environmental costs in published audited accounts. We intend to commission research from the Said Business School, in Oxford, into how this might be done, and I am delighted that Professor Anthony Hopwood, who is leading this work, is here this afternoon. A more standardized approach to disclosing information about carbon emissions, eco-footprints, energy usage and so forth – perhaps in standard satellite accounts which are independently audited – will also be considered, as will computer-aided decision-support tools, to help management take climate change and sustainability issues into account more effectively in decision-making. The project team will also consider what the role of markets might be, following the early success of the sulphur and carbon rationing and trading schemes.
To focus our thinking, the project team will carry out a number of detailed case studies in companies, large and small, and in the public sector to identify examples of best practice and to test emerging recommendations. The aim will be to find out what works now, and what might work in the future, so that we can, hopefully, disseminate best practice and encourage others to adopt systems of decision-making, process analysis and accounting which help to embed sustainability into people’s operations. In my view, this will become essential for businesses as more and more consumers demand it. It is simply good business sense. To me, sustainability and profitability need not be mutually exclusive.
A crucial issue in changing the behaviour of companies is persuading or requiring them to give more information to consumers about key environmental and social issues, such as the greenhouse-gas cost of their products and services. It is, perhaps, only through consumers and shareholders having access to such information that organizations will come under real pressure to change.
We are, for example, in my own small charitable food company, Duchy Originals, now I’m glad to say getting a little bigger here and there, beginning to quantify how much carbon and other greenhouse gas is emitted in growing, processing and distributing products and, if possible and if it does not result in additional packaging, we should like to give this information to consumers so that people know the cost of their food in greenhouse gas terms as well as in terms of pounds and pence. Local organic farming can play a crucial and key role in addressing climate change because it does not use nitrogen fertiliser, which I understand is the largest source of nitrous oxide emissions globally, and because organic farming maintains and builds up soil carbon levels. I will be delighted if Duchy Originals can not only be a champion of good organic food, but also show the way in helping to address our environmental challenges.
In taking all this forward it will be important that we draw on work that others have done or are doing already, so we can learn from and contribute to them, and vice versa. I should say, therefore, that none of this work would be possible without the interest and support of the National Audit Office and a number of others such as BP, KPMG and HSBC who have helped us with this project from the start, and Standard Chartered, Aviva, Camelot and PricewaterhouseCoopers, among others who are more recent, generous supporters of the project. I should also like to thank Mark Thompson, the Director General of the BBC, who helped us with our films today. Senior representatives of most of these organizations are with us this afternoon and I look forward to your asking them some questions later.
Accounting for Sustainability is thus an ambitious project and if any of you here today who are not already helping, but would like to do so, then I should, of course, be delighted and enormously grateful for your support.
This new project does not stand alone. There are clear relationships with corporate social responsibility, better reporting and the Global Reporting Initiative; with the Carbon Disclosure Project, with ethical investing and responsible supply-chain management; with eco-labelling and carbon off-setting and with accreditation and benchmarking. Business in the Community, of which I have been President for the last 21 years, has done pioneering work in the field of environmental indices and league tables and my Business and the Environment Programme has, among other things, established the Corporate Leaders Group on Climate Change which has, I am pleased to say, quickly become a respected channel of communication between business and Government – and, I hope, of particular help to the Prime Minister.
We are here today as representatives of perhaps seven different aspects of society. I hesitate to suggest that we quite constitute the Seven Pillars of Wisdom, but we have leaders from Government and politics, the charitable and not-for-profit sector, faith leaders, business leaders, opinion formers in the media, young people who have already shown that they personally care enough to take a stand and make a difference and, finally, all of us as consumers and individuals in this great country of ours who can actually make a difference if we wish to.
At our best, we can inspire and lead. Governments can grip the issue and take bold steps to tackle energy inefficiency and carbon emissions. Businesses can be enterprising, seeking longer-term sustainable profits, developing eco-efficient products and innovating to meet consumer demands. The media can educate and inform, give the public a voice, encourage informed debate, challenge complacency and hold vested interests to account. Non governmental organizations can continue to challenge and point their spotlight at good and bad practice. Faith leaders and the voluntary sector can lead by example, and can remind us of our more enlightened and altruistic impulses. Young people can be a model to their elders with their energy, idealism and zest for life. And, with increased business transparency, we as individuals and consumers can pick the products that last the longest, that have been produced at minimum carbon rates, that have enriched a poor community and that have sustained a forest or a fishery rather than helped to exhaust it.
It is not too late to take action. Those of you who have seen Al Gore’s film may remember the graph showing how the level of carbon emissions in the United States could be reduced, rather than continuing to increase, by the combined impact of six new policies. As Mr. Gore said, it is not that we lack the technology to reduce carbon emissions significantly. We just need to change our approach. If we go on with “business as usual” then, yes, we will certainly face the tragic consequences of increasing global warming. But with more energy-efficient heating, better building design so that new buildings use far less energy, cars which use alternative fuels, increased public transport and more efficient vehicles, more use of renewable energy and, finally, reduced pollution from coal-fired power stations – the six actions mentioned by Al Gore – carbon emissions can come down to below 1970s levels. And all of these steps can be taken now.
There was a time when we could say that there was either a complete lack of knowledge, or at least room for doubt, about the consequences for our planet of our actions. That time has gone. We now know all too clearly what we are actually doing – that’s the problem, that we know now - and that we need to do something about it urgently. Better accounting must be part of that process.
We will all have to account for our actions to our children and grand-children, and if we don’t get this right, how will they ever forgive us?