Coro’s Blog: On Purpose

Why sustainability accounting systems are like daffodils

Published on February 10, 2011

daffodil_sproutsApologies to those of you buried in snow – here in Vancouver, I see the first signs of spring. As I watch tender green daffodil shoots push up through the cold earth, I am reminded of how difficult it can be to break ground and how important it is to nurture emerging ideas.

The other day I gave a talk to a group of social entrepreneurs from the Ashoka-sponsored Social Finance and Innovation Study Tour in Vancouver. The topic was measuring the impact of mission-driven projects, investments and businesses. This is a very important topic, because success in sustainability is all about impact. An organization’s ability to measure its social or environmental impact (in addition to financial) is directly linked to its ability to innovate, grow and profit. And the field of social and environmental impact measurement is still emerging, much like the daffodils.

In my talk, I looked back to the emergence of our accounting system. It is the foundation on which our economic systems operate. These include the money economy, the carbon economy, the ecosystem economy and ultimately, the social economy (economic activity that generates social benefits).

Our current accounting system evolved from a math book written over 500 years ago by the father of accounting, Italian Luca Pacioli. Over centuries, certain procedures and principles became widely used and ultimately were accepted by businesses and accountants as the “norm”. By the 1930s many accountants argued their accounting methods were “generally accepted accounting principles”, thus was born the GAAP, a universal accounting framework in Western economies. (FYI: in Canada for public companies the GAAP is being replaced by International Financial Reporting Standards this year.)

Today we need to develop new accounting systems to support new sustainable business principles and behaviours. For instance, the carbon economy wasn’t even a thought bubble back when Pacioli was crunching numbers. Today it’s a serious consideration in business risk management.

Carbon accounting has its roots in the 1997 Kyoto Protocol, which established the framework for emissions trading. In 2001 the World Resources Institute and the World Business Council for Sustainable Development published the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard, which detailed a standard for measuring carbon impacts. And now many companies measure their carbon footprint and offset what they can’t reduce. In doing so, they internalize pollution costs.

So it took 500 years to develop the economic / financial accounting system, and about ten years to develop the carbon accounting system. At this rate, it’s likely to take even less time to develop accounting systems for other intangibles.

The social economy is developing systems and standards for measuring social value such as increased jobs and training, reduced poverty and decreased welfare costs. However, the accompanying accounting systems that measure and quantity social impact are still in their infancy.

It is challenging to gain agreement on the core measurement units of social impact. One example of this is found in the foundation sector in Canada.

Last year, I worked on a project for the Community Foundations of Canada and Philanthropic Foundations Canada to study the state of community investing (CI) in nine Canadian foundations. Community or mission investing is an emerging field of interest for foundations. It uses endowment assets to finance social and environmental enterprises and initiatives for at-market or below-market returns. The report concludes that CI is still an embryonic practice in Canada, with limited measurement of impact outcomes.

As foundations and others become more active in community investing, they will look for evidence that their investments are performing both financially and socially. This interest will spur advancements in social-impact accounting.

With patience and perseverance we will win mainstream acceptance for new accounting methods that enable organizations to innovate, grow and profit in a sustainable business model. I see the progress every day as I watch my daffodil shoots push a little further out of the hard winter earth.

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