Corporate and government accounting will likely reflect environmental profit and loss within a decade, thanks partly to progress made this week at a U.N. conference in Rio de Janeiro, backers of the plan told Reuters on Thursday.
Company accounting and calculations of gross domestic product (GDP) are flawed because they fail to show governments, consumers and managers the true costs of their activities, said Pavan Sukhdev, a board member of U.S. environmental group Conservation International and a former Deutsche Bank AG banker.
The main reason is that accounting practices fail to account for the creation, use and degradation of air, water, trees, and other “natural assets” in the same way they account for factories, credit and other assets, he said.
He estimates that the top 3,000 companies fail to account for $2.1-trillion of charges related to the use or pollution of natural assets - say by releasing carbon dioxide into the air or waste into a river. That figure nearly doubles to $4-trillion, or about 6.7 per cent of global GDP, when the world’s entire corporate sector is included, he said.
“We cannot continue to do business thinking we are adding value to shareholders while at the same time destroying value for stakeholders,” Mr. Sukhdev said. “This is bad management.”
Exchanges worldwide are working on ways to include carbon emissions in the basic information that publicly traded companies must provide shareholders, he said. Common standards for world companies are likely to be ready in three to five years with implementation coming within about seven years.
Such accounting wouldn’t just add to losses, he said.
“You could get 10, 20, 30 per cent extra to your GDP because you’d be finally measuring the services of nature,” Mr. Sukhdev said. “But you’d also get losses because you’d have to account for the natural capital that is lost.”
On Thursday, the World Bank said 57 countries and the European Commission and 86 companies agreed to draw up “natural capital accounting” rules to implement the kind of changes Mr. Sukhdev, who has been working for a decade on such proposals, has called for.
“On this plain, I’m delighted. I’ve been slogging my guts out for over a decade hoping that something would move,” he said, adding that even voluntary use of the accounting changes he backs will help consumers and shareholders make better choices about the true value of companies.
Companies that signed onto the natural capital accounting commitments include Puma, Unilever, Wal-Mart , Woolworths Holdings and Standard Chartered , according to the World Bank and the Natural Capital Accounting group.
Countries include the United States, Britain, France and Germany, but not China, or host Brazil.
Puma, the German athletic footwear and sports equipment company, is attempting to calculate its environmental assets and liabilities, board chairman Jochen Zeitz told Reuters.
To try to add previously unaccounted environmental profit and loss the company has started calculating preliminary, and unofficial, “pro-forma” earnings based on the kind of accounting ideas put forward by Mr. Sukhdev.
In 2010 these unofficial accounts would have cut Puma’s earnings before interest and taxes by €8-million from the officially reported €338-million, Mr. Zeitz said. The figures don’t include estimates for suppliers.
“Once you start measuring things you realize something and start managing for it,” he said, adding that adoption of new rules will require help from governments and assurances that other companies and competitors all play by the same rules.
Mr. Sukhdev, unlike many at the U.N. Rio+20 conference, was much more optimistic about the results of the conference than many environmentalists, many of whom declared the main governmental joint declaration as “weak”.
The critics include some who plan to sign it, including French President Francois Hollande and British Deputy Prime Minister Nick Clegg.
But Peter Seligmann, Conservation International’s chief executive and a major backer of Mr. Sukhdev’s proposals, said the proposal criticized by Mr. Hollande and Mr. Clegg was about the best that the United Nations could get.
“The agreement is fine, but global agreements aren’t going to solve anything. The solutions will only come through the enlightened self interest of countries, companies and individuals,” he said.