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Global warming: Can the accounting industry please do its job?

Rolling Stones recently published an article entitled “Global Warming’s Terrifying New Math.”  In this incisive article, the author says that “… the planet does indeed have an enemy – one far more committed to action than governments or individuals. Given this hard math, we need to view the fossil-fuel industry in a new light. It has become a rogue industry, reckless like no other force on Earth. It is Public Enemy Number One to the survival of our planetary civilization”.

The analysis in the article was forceful, correct and clear. In terms of prescriptions, the author notes that “the fossil-fuel industry is allowed to dump its main waste, carbon dioxide, for free,” and that “putting a price on carbon would reduce the profitability of the fossil-fuel industry” and therefore relieve the relentless pressure on the planet engineered by an industry whose very existence is about destroying the planet.  The author however notes that “it’s not clear, of course, that the power of the fossil-fuel industry can be broken” and anticipates that moral outrage may spark a transformative challenge to fossil fuel.

Clearly, governments could solve the problem, but haven’t.  Putting the correct price on the usage of natural capital by corporations (for example, via market-based rules such as global and local carbon and water markets; taxes; and efficiency standards) would relieve the pressure our planet is under. This is because if priced correctly, many companies (beginning with the fossil fuel industry) would show losses instead of profits, and capital would then migrate to finance sustainable businesses instead of destructive ones.  As Rolling Stones says, “If you told Exxon or Lukoil that, in order to avoid wrecking the climate, they couldn’t pump out their reserves, the value of their companies would plummet”.

However, our leaders are suffering from an inability to get things done because of a constant attention to shifting political winds and because of lobbying from the very same industries that stand to lose their artificial profitability.

There is a straightforward private sector solution however, if accountants only did their jobs correctly.

The financial statements of corporations are simply incorrect and misleading.  Under current accounting rules, a company is “profitable” if it is polluting clean air, clean water, destroying eco-systems and forests, and affecting the health and safety of thousands, even millions of people. That’s because “profitability” is computed without regard to natural capital.  As I argued in a previous comment, this is simply astounding and it is incomprehensible why the accounting profession is ignoring its own “true and fair value” standards.  Some “profitable” companies (and “growing” economies) are in fact monsters greedily ignoring the needs of future generations, instead of the success stories they are commonly thought to be.  The fossil fuel industry is top of this list, but it is not alone.

Accountants should apply correct accounting standards to present the true and fair value of economic activity and financial transactions.  Quoting Rolling Stones, “you can have a healthy fossil-fuel balance sheet, or a relatively healthy planet – but now that we know the numbers, it looks like you can’t have both”.  But we have both today.  The reason we have both is that the accountants are preparing non-sensical financial statements:  Exxon’s market value takes into account its oil and gas reserves without any regard for their impact, when extracted, on the planet, on health, on safety.  Instead of ascribing a positive value to these reserves, “true and fair value” accounting should have them appear as a liability.  The market value of the fossil fuel industry should shrink as a result, and its access to capital should be significantly impaired:  the entire industry would be shown as significantly loss-making if its destruction of natural capital were to be taken into account.

Current accounting standards, which completely ignore the use (and mis-use) of natural capital are perpetuating artificial corporate profitability and artificial balance sheets and are mis-leading shareholders, investors, the markets and the citizenship at large.

Assaad Razzouk is Group CEO of Sindicatum Sustainable Resources, a global sustainable resources company headquartered in Singapore.

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