Accounting for Value and the 17 Sustainable Development Goals

This blog was originally posted on the BTeam zone of Guardian Sustainable Business.

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The 17 Global Goals For Sustainable Development are a powerful – and necessary – collection of objectives for our planet and its population over the next 15 years. But if we really hope to
achieve them, we need a more systemic change. Specifically, if we want to reduce inequality – as Goal 10 exhorts – we need to fundamentally change how we account for value.

Across the globe, inequality is increasing and social mobility within countries is decreasing. These trends – long noted by economists like Thomas Picketty and Joseph Stiglitz – are now being investigated by institutions like the OECD and the IMF. And, as this process continues, the social and economic costs of inequality are becoming more obvious. Progressive businesses are starting to recognize that inequality impacts employee morale, productivity and economic stability, and are taking steps to reduce it.

A big part of the problem lies in value and how we account for it. Traditional economics suggests that self-interest is the basis of social value. As Adam Smith wrote in Wealth of Nations, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

This idea, that self-interest is the best way to help society and create value, is a founding principle of our current world economic system. Whether this argument was originally deployed because we believed that it really was best to run the world on the basis of self- interest, or just because it was a convenient argument to justify inequality, we are only now becoming aware of its unintended consequences.

One problem lies in the way the world’s accounting system has modified Smith’s idea: rather than allocating resources based on individual self-interest, it allocates them based on financial self-interest. It ignores externalities, such as the impacts that businesses have or the benefits that they get from other stakeholders. In short, it omits significant sources of value will – and, as such, contributes to inequality.

In the past it has been difficult to argue that business should account for these impacts, not least because accounting’s primary purpose has always been providing relevant information to a company’s investors, not to everyone else. But even if we stick to what is of interest to investors, traditional accounting still misses out significant value because it has a very limited view of investor motivation. The focus on financial interest – and the assumption that making money is the sole interest for investors – is reductive. Many investors, for example, would not be willing to buy shares in a company that took part in child labour practices, for example or had unethical environmental policies. Indeed, the growing number of impact investors demonstrates a thriving interest in investments that have a positive social return. According to a 2010 report by JPMorgan Chase & Co. and the Rockefeller Foundation the impact-investing industry may reach $1 trillion by 2020.

Even Adam Smith hinted at this notion that value is more than dollars and sense. In the Theory of Moral Sentiments, he expanded upon his explanation of self-interest to recognize:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”

This expanded notion of the motivation of investors as “financial self-interest whilst ensuring that there are no adverse effects on the wellbeing of others” points the way toward values-based accounting. If accounting addressed the wider impacts that organizations have on others, in line with Smith’s argument, then it would address the changes in people’s wellbeing caused by business activities.

It’s easy to envision a situation in which businesses would make provisions on their balance sheet for negative impacts and set up deferred assets for positive impacts. The net effect could reduce the money that can be paid to shareholders as dividends, but not the cash available to the business.

This practice would also enable easier impact investing by providing price signals to the market that would help shift capital from organizations with a higher negative social and environmental impact to those with lower negative or positive impacts. And investors could be confident now that those impacts have been accounted for in their returns.

Whatever economists suggest are the causes and solutions to inequality, politicians and businesses try to do to address its consequences, will come to nought if financial accounting continues to drive resource allocation on the basis of individual financial interest. Businesses like Kering, Holcim and others are demonstrating that it is possible to account for and value these effects. We need businesses like these leading by example to drive the development of new accounting standards AND we need investors to call for and consider this information in making investments.

Finally, as well as business and investors, ultimately there must be a call to action for public policy makers. It is public policy that requires companies to produce annual accounts, and public policy that dictates that the content of these accounts is what is relevant to investors. Over the years it has become practice to assume that what is relevant is only financial return. The growth of impact investing and alternative types of accounting suggests this is not the case. Public policy should be changed to reflect this, and to incorporate the motivation of investors for whom accounts are prepared, where the underlying purpose is to create value for all of us.

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Jeremy Nicholls is the CEO of Social Value International, a global membership network for individuals and organisations interested in changing the way the world accounts for value, through the Seven Principles of Social Value. He tweets at @JeremyANicholls, or follow @SocialValueInt.

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