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Over the centuries, accountants have always focused on the economic or financial sphere of a company.
Side effects resulting from economic activities, often referred to as ‘externalities’, were regularly ignored. Externalities presented a challenge because they often had no price attached or could not easily be measured in a way that allowed for including them in financial accounting systems.
Ignoring those externalities was well accepted in a world that focused primarily on economic growth and the wealth of nations. But with a rising global population, side effects of economic productivity such as global climate change can no longer be ignored because the number of people and corporations affected by them has dramatically increased over the last years.
A well-known example of those climate change effects is the drought in summer 2018, which forced the German chemical giant BASF to reduce production because of low water levels at the Rhine river. Other economic damage comes in the form of disruption caused by crises like climate-triggered migration
The Allianz risk barometer 2020 supports this view and lists the effects of climate change as one of the major business risks. Slowly but surely the focus has shifted from a focus on the wealth of nations to a focus on the survival of nations on an increasingly devastated planet.
What is sustainability accounting?
An important consideration in this respect was made in 2004 by HRH The Prince of Wales, who questioned whether the ‘traditional’ accounting tools are still appropriate to meet the new challenges and risks of the 21st century.
Against the background of traditional accounting tools, let us now have a look at the differences in sustainability accounting. The following graphic illustrates the high-level concept.
On first examination, the graphics might remind one of the Balanced Scorecard concept that was introduced in the early 1990s. But the Balanced Scorecard falls short when it comes to incorporating environmental and social aspects that arise primarily outside of a company.
Another factor that becomes transparent from the previous graphics is that the sustainability accounting mindset dictates that it is no longer sufficient to focus on the Economic sphere of corporate actions. The Social and Environmental spheres must be accounted for to ensure the long-term survival of companies, nations, and humankind.
What to account for and report on?
Let us now have a look at what companies have to account for and report on if they want to embrace sustainability accounting.