Sustainability Accounting

In my previous blog post, I described the history of sustainability accounting as a “fairly engaging tale (that) begins in northern Vermont on a Ben & Jerry’s dairy farm, segues over to the Alaskan shoreline on the doomed Exxon Valdez oil tanker, and then ends in the present with characters as diverse and colorful as former Mayor Michael Bloomberg of New York City and Charles, the Prince of Wales in Great Britain.”

And then what did I do? I segued into another topic! And I never returned to explain why these two places and two people played key roles in the development of sustainability accounting.

Although I can’t honestly say that I heard roars of protest over my segue, I did hear from several readers who expressed curiosity about these places and people. So I thought that I’d explain the references in this follow-up post.

First and foremost, please keep in mind that there is no universal consensus about what we mean by the word sustainability. Nevertheless, Merriam-Webster defines the word sustainable as meaning able to last or continue for a long time, and most other sources agree that it refers to the long term viability of a person, group, or organization. Or, on a very large scale, to the entire planet Earth.

So how did a dairy farm, selling milk to an ice cream producer, factor into the accounting for such a concept? In the business world, many individuals trace the discipline of sustainability accounting to Ben & Jerry’s annual issuance of Social and Environmental Assessment Reports (SEARs). Beginning in the 1980s, the firm has pioneered the process of establishing social and environmental goals and then publicly assessing its progress in achieving them.

Then, in 1989, the Exxon Valdez ran aground on the Alaskan shoreline, spilling massive amounts of crude oil onto pristine ocean beaches. As was the case during the BP Deepwater Horizon spill in the Gulf of Mexico two decades later, the clean-up activities were hampered by uncertainties over which organizations bore responsibility for various crisis management efforts.

The concept of Governance thus joined the concepts of the Environment and Society as key considerations of sustainability. As the operational complexity of the discipline grew more dense, the qualitative measurements of the SEAR reports evolved into more quantitative metrics.

Nevertheless, the two types of sustainability reporting have survived to the present day. Whereas the Ben & Jerry’s qualitative process now tends to be known as Corporate Social Responsibility (CSR) reporting, the Exxon and BP quantitative process now tends to be known as Environmental, Social, and Governance (ESG) reporting. Nevertheless, there is a significant amount of overlap between the two styles.

So where do we stand today? Well, the production of social and environmental metrics to supplement financial (or economic) profit measures has led to the development of Triple Bottom Line (TBL) reporting. Using standards and measurements promulgated by organizations like the Sustainability Accounting Standards Board (SASB), now led by Chairman Michael Bloomberg, a TBL report provides three sets of summary measures that collectively express the holistic performance of an entity.

And what of Prince Charles? He has led an effort to integrate these three distinct bottom line measures into a single integrated framework of holistic performance. His efforts helped launch the Integrated Reporting project, which created a framework called the Six Capitals model.

Here is a pictorial representation of that model. Can you see why it is colloquially called the Octopus framework? There are six tentacles on each side of the proverbial head of the octopus, with each tentacle representing a Capital, i.e. a type of resource that an entity must utilize while conducting its operational activities.

So what will come next in this history? In all honesty, who knows? With climate change causing massive disruptions to global economies, societies, and environments, many other colorful locations and charismatic personalities are sure to enter the story.

Hey, you didn’t know that the history of sustainability accounting is so interesting, did you? And given the volatility of our modern world, it’s a future that hasn’t yet been written.