IMGCAP(1)]To many, “sustainability accounting” sounds like an oxymoron.
I’m here to tell you that “sustainability accounting” is not an oxymoron. Instead, it’s a new type of accounting that’s critical to the efficiency of the capital markets.
Let me explain.
As “the language of business,” accounting facilitates the transfer of trustworthy information that informs corporate management decisions and investor decisions to buy, sell or hold. To confidently allocate capital, investors need full and fair disclosure.
Over time, the U.S. capital markets have evolved to ensure the disclosure of trustworthy information. The passage of the Securities Exchange Acts of 1933 and 1934 and the creation of the Financial Accounting Standards Board in 1973 both occurred when investor confidence was plummeting. The creation of the SEC, and later the FASB, helped provide investors with the information they needed to make decisions with conviction.
Traditionally, accountants have answered investors’ questions with financial statements. However, the world has changed. Access to financial capital is no longer the primary constraint on a company’s ability to create value. The ratio of net assets to enterprise value has declined dramatically since the creation of the FASB. Intangible assets—including key sustainability factors—now account for roughly 80 percent of the market cap of the S&P 500.
In today’s world, sustainability factors increasingly impact corporate success. For example, beverage companies must consider the sourcing of clean water. Auto companies must meet growing demand for fuel-efficient cars. Software companies must consider the recruitment of skilled talent.
While sustainability factors impact business outcomes, conventional accounting is not designed to capture these effects. Conventional accounting does not treat non-financial resources—things like human, social and natural capital—as assets, even though they represent sources of future value. As a result, investors and companies may lack complete information on all the significant forces creating and sustaining long-term value, as well as potential sources of risk.
This is why we need sustainability accounting.
Sustainability accounting consists of defining metrics—both qualitative and quantitative—that express a fair representation or “account for” company performance on material sustainability topics, and ensure that reasonable investors have access to decision-useful information in their decision making process. It’s a management strategy that can be used by companies to improve their performance as well as their disclosures.
While there is growing demand from investors and shareholders for companies to practice sustainability accounting, there are no sustainability accounting standards to guide this practice. This is why I started a new organization, the Sustainability Accounting Standards Board, which is filling this void. By focusing on the sustainability topics most likely to have material impacts on companies in an industry, SASB standards provide accounting metrics that are useful to both managers and investors when making decisions.
Although many companies already address sustainability issues in their SEC filings, they rarely do so in a decision-useful way. SASB research shows that 70 percent of SASB disclosure topics are already being addressed in companies’ 10-K filings. Of those disclosures, however, 37 percent consist of boilerplate information, which doesn’t help investors evaluate (or companies manage) performance. Only 10 percent of those disclosures use metrics. Sustainability accounting standards can help improve the effectiveness of sustainability disclosure.
The ultimate externality for companies is the impact(s) of today’s decisions on tomorrow’s profits. By accounting for—and internalizing—those impacts, a company can more effectively focus on long-term value creation.
It’s time for the language of business to evolve once again. To make informed decisions, investors need relevant, reliable, comparable data on all forms of capital. In short, they need sustainability accounting. The efficiency of our capital markets depends on it.
Dr. Jean Rogers is founder and CEO of the
