This week 14 organisations from countries including the United States, the UK, Germany, and Japan (and representing more than 2.5 million accountants worldwide) signed a call to action in response to climate change. Signed as part of The Prince’s Accounting for Sustainability Project (A4S) Accounting Bodies Network they ask accountants across the world to commit to the fight against climate change by:
- Integrating climate change risk into organisational strategy, finance, operations, and communications
- Supporting sustainable decision-making
- Providing sound advice and services
For most companies, interactions with nature are not visualised on a company's profit and loss statement or on their balance sheet. They remain ‘externalities’, or issues without internal consequence and as they do not feedback directly into immediate financial consequences for the entity, they have historically tended to be outside the remit of financial reporting.
So how can these externalities become internalised so that accountants can integrate climate change risk and sustainable decision making into their financial reporting?
A paper co-authored by Professor Brendan O’Dwyer (with Professor Jeffrey Unerman from Royal Holloway and Professor Jan Bebbington from Birmingham) addressed this very question.
In Corporate reporting and accounting for externalities, published in the journal Accounting and Business Research they develop insights into accounting for, and reporting of, externalities that are intended to improve the use of externalities information. The paper also highlights ways in which externalities can progressively become internalised, thereby bringing them more readily within the domain of economically focused financial reporting practices.
Professor O’Dwyer said: “There is limited research on the systematic recording or articulation of the financial impacts of externalities. The few studies into accounting for externalities are fragmented and fail to connect insights across the literature. This has restricted the usefulness of this academic evidence for policymakers. Our paper traces connections between accounting for, and reporting of externalities, theorises the role accounts of externalities can play in corporate reporting, and proposes a research agenda aimed at providing evidence which will motivate effective policy interventions. We argue that an approach which could more rapidly bring many current externalities within the domain of financial reporting is to recognise and capitalise on processes whereby externalities progressively become financially internalised.”
The paper is available to read here https://doi.org/10.1080/00014788.2018.1470155