I am enormously grateful to the Chancellor of the Exchequer for coming this afternoon, as I know you have just had to dash here from an important debate in the House of Commons and are returning to it afterwards. Governments and business, and the world economy as a whole, face some unprecedented challenges – although there are also opportunities – and if I may say so, your willingness to be here emphasises the importance of accounting for sustainability and developing the more comprehensive information we all need if we are to make the right decisions.
While on the subject of thanks, I do greatly appreciate the fact that Stephanie Flanders and Min Zhu have very kindly given up their precious time to help us to discuss and consider these important issues.
Now this is, in effect, the fifth annual gathering of my Accounting for Sustainability Project. Some of you have been kind enough – or masochistic enough! – to come on every occasion; but for those of you who have not been before, I would just explain that I established my A4S Project because I was concerned that organisations’ accounts and annual reports were not providing the information we need to tackle the major issues confronting the world economy today. Everything from an increasing global population, to the over-consumption of finite natural resources, from the pollution of land, sea and air, to the cumulative impact of climate change. (I suppose this is an example of what various newspapers refer to as “meddling” whereby, presumably, I wake up in the morning wondering which profession – or organisation – I can annoy most that day; so it’s the architects on Mondays, the medical profession on Tuesdays, the accountants on Wednesdays, educationists on Thursdays and fish on Fridays!).
I must say – though perhaps I shouldn’t – that I am surprised by how successful the Project has been. I suspect it is prospering so well because, at long last, we are all becoming aware just how badly we are damaging and over-consuming the planet’s natural capital. There is a growing recognition that this natural capital is the most important and irreplaceable asset we have. The problem, though, is that much of it does not appear on our balance sheets and its consumption is not recorded in our profit and loss accounts.
Experts tell me that even though over a billion people have no ready access to drinkable water and live on less than a dollar a day, we are still consuming, every year, 50 per cent more of the planet’s natural resources than it can renew. In other words, we are living way beyond the Earth's means. My Accounting for Sustainability Project was established to address this issue – to ensure that we are counting everything that counts and measuring everything that matters.
So I am very pleased to report today that it has been an excellent year. For one thing, we have collaborated with the Global Reporting Initiative and the International Federation of Accountants to establish the International Integrated Reporting Committee. The UK Government has adapted the Project’s integrated reporting guidance for inclusion in the public sector financial reporting manual. Our International Accounting Bodies Network has expanded to an impressive twenty-one members – and I am delighted to see so many of you here today. In addition, the Project has published research into how sustainability has been embedded by eight leading organisations in the public and private sectors.
None of this would have been possible, of course, without our excellent team of secondees, kindly provided by PwC, KPMG, Deloitte and Grant Thornton, or without the very generous financial and in-kind support given by so many of you here today. Your interest and generosity are, I promise you, very much appreciated and I could not be more grateful.
Perhaps the most significant achievement this year has been the establishment of the International Integrated Reporting Committee - the IIRC - I just wish its name was a bit easier to say! It is quite an achievement.
Its membership, as you know better than I, represents a powerful cross-section of the corporate, accounting, securities, regulatory and standard-setting sectors. And its objective is to instigate the creation of a global system for integrated reporting. That is to say, reporting that provides information about an organisation’s financial, governance, social and environmental performance. Not, though, in disparate, disconnected sections, but in an integrated form, so that it reflects the way these elements work and interact in the real world. Financial considerations, corporate governance, and social and environmental concerns are all closely related and inter-dependent. And they all flow from the organisation’s overall strategy.
Integrated reporting will be essential in ensuring that we have the best information to inform decisions as we tackle the combined challenges of climate change, massive loss of biodiversity and over-consumption of finite natural resources. At present we are often doing so with only a tiny fraction of the knowledge needed to make better choices. We account for our income and expenditure, and our financial assets and liabilities with great precision, but our greatest asset, the natural capital on which everyone depends, is not accounted for at all!
For example, how can it seem economically sensible to cut down rainforests to produce palm oil when the ecosystem services lost – for instance water to grow vitally needed food, the storage of vast amounts of carbon and a home for two-thirds of the world’s biodiversity – have, by any rational analysis, far greater value than the palm oil produced on the deforested land?
How have we got ourselves into this illogical situation, more than five hundred years after the development of modern accountancy began with Luca Pacioli in the 15th Century?
I think it has happened, in the main, for three reasons.
Firstly, and most basically, it is because the largest proportion of our natural capital has not been “monetised”... if there is such a word. It has not been properly valued and charged for, because assets like fish in the oceans, water in rivers, rainfall, a clean and temperate atmosphere and communities, have always been thought of as limitless and freely available. It is also, of course, because valuing these things and charging for natural capital can be difficult when the assets do not necessarily belong to a particular individual, organisation or country. In short, providing quantitative figures for qualitative values has proved a somewhat elusive science.
Secondly, and forgive me for pointing the finger here, it is also because accountants tend to feel more comfortable perhaps dealing with certainties and recording what has already happened, rather than addressing the less certain, broader and longer-term consequences of our actions.
And thirdly, it is because of our strong emphasis on the short-term. People are largely judged, remunerated and recognised for what they achieve today, rather than on their plans and actions for tomorrow, despite the fact that the way we plan for the future ultimately determines our survival, and is considerably more important.
The new integrated reporting model which the IIRC is helping to develop will address each of these issues – the failure to value and price our natural capital, the narrowness and retrospective emphasis of most accounting information and our disproportionate focus on the short-term.
To develop and provide this more comprehensive information will be hard enough but, tougher still, it also needs to be clear, concise and comprehensible. In other words, the challenge for the IIRC is not just to tackle the gaps in accounting and reporting, but to address the underlying issue that annual reports are often orientated too much towards demonstrating compliance with rules and regulations. This reduces their capacity to be a clear and powerful means of communication.
As I said, my A4S Project’s main achievement in 2010 was helping to establish the IIRC. And I very much hope that one of its main achievements in 2011 will be working out how we can better value natural capital. As soon as possible we have to start putting a price on the multi-trillion dollar contribution that natural capital makes to the world's economy. The problem is time is simply not on our side, but the task is not impossible.
A United Nations initiative called The Economics of Ecosystems and Biodiversity, or TEEB, has been working in this area [led by Pavan Sukhdev who I am delighted to see here today]. This year TEEB published some initial recommendations which included upgrading the present system of accounts so that they report changes in the stocks of natural capital and reflect how the services offered by ecosystems are performing.
TEEB’s report also reiterated something I have long tried to encourage businesses to recognise – that we should not regard this type of valuation and pricing as a tax. We should see it as an incentive for powerful investment for the future; something to be achieved not through imposition and dictum, but through reassessment and realignment of thinking and exchange and discussion.
It is clearly a daunting task to value and price natural capital and to broaden our accounting information and reports to include environmental, social and governance factors, while at the same time making accounts simpler and more comprehensible. But it is a task which cannot be ignored or shirked.
I think it was Lord Stern who said in his seminal report that climate change is a result of the “greatest market failure the world has seen”. He was referring, of course, to markets’ failure to value and price ecosystem services and natural capital. Ladies and gentlemen, if I may say so, if governments, businesses, the accountancy profession, regulators and standard-setters do not address the present limitations in our accounting information and reports, then it will be the greatest accounting failure the world has ever seen.
I don’t need to remind you of the impact of the credit crunch and the ensuing economic recession on people’s lives; but it is no exaggeration to say that this will be nothing compared to the economic damage and human deprivation and misery that will result if we continue to over-consume and abuse our planet’s irreplaceable natural capital. We do not have the option to carry on with business as usual. The 21st Century presents us with very different circumstances and we must cut our cloth accordingly in order to survive.
Perhaps in addition to quantitative easing we should consider the merits of qualitative easing as well? Perhaps also, ladies and gentlemen, in view of the fact that the world seems frozen into futile inaction as a result of sceptics who argue that the wide range of uncertainty about future temperature changes lowers the need to act – perhaps, then, we need to ask ourselves (or accountants and economists need to ask themselves!) what is the cost of lowering CO2 output and having the long-term effect of increasing CO2 turn out to be nominal? I am told – although there may be a room-full of creative accountants here who will disagree! – that the cost appears to be roughly equal to foregoing, once in our life, six months’ to one year’s global growth – 2% to 4% or less. This question really does need to be considered because, of course, the biggest cost of all from global warming is likely to be the accumulated loss of biodiversity – and, as I have said, this features nowhere in economic cost-benefit analysis.
Which is why, ladies and gentlemen, on Saturdays it is the economists that need a spot of meddling with because if we now have Accounting for Sustainability, surely the natural and logical corollary is to start examining the prospects for an “economics for sustainability?” Perhaps this is something the accountants could help the economists to begin to consider?
Make no mistake, they may not seem so, but the decisions you take in the next few years will have a cumulative effect upon humanity’s ability to survive in the long-term. If we don’t take the right decisions now, we will effectively lock our children and grandchildren into a very grim future and throw away the key.
As the Native American proverb says “We do not inherit the Earth from our ancestors, we borrow it from our children.” There is no time for inaction – and who better to take the lead and set an example than the accountancy profession which, in so many respects, is the engine room of the corporate world.
Many people think that accounts and accountancy aren’t important, but information is power. And it is the responsibility of accountants to provide the best systems and information so that acting with the long-term in mind, and serving the best interests of communities and the environment, can also be seen to be the right financial approach. I wish all of you every success with this vital endeavour.