To avoid the climate apocalypse, we need a new accounting system
How to turn Garbage Capitalism into Sustainable Capitalism
TLDR: Capitalism at the moment works by extracting valuable resources from nature, transforming and consuming them, before finally throwing them on a giant garbage heap. The cost of destroying nature by resource extraction and garbage has not entered traditional accounting yet. The cost of exploiting workers, and turning young hopefuls into injured and weary individuals has not entered the books either. We believe that this is about to change, due to public and regulatory pressure. Investors can take advantage of this change by investing in sustainable businesses now.
Accounting is the bedrock of capitalism. Had it not been for Luca Pacioli, a monk who in 1495 described the double-entry bookkeeping used by Venetian merchants, our modern corporations might be looking quite different.
Double-entry bookkeeping made possible a focus of many corporations on the “bottom line” and the pursuit of profits — a pursuit that motivates many of the personal and professional activities of modern-day humans. Being able to create value and then taking home some of that value for your personal (or corporate) gain is an incredibly satisfying idea. It is quite likely that humans would not have created this much value over the past few millenia, had they not been able to take one piece of the pie they baked back home.
Many activists point out that this pursuit of profits has also lead to climate change, ecosystem degradations, and terrible working conditions for workers in emerging economies. This, however, is only partially true.
The pursuit of profits certainly accelerated all these negative effects. The root cause for ecological and social disasters, however, cannot be found by scrutinizing the result, but by taking a close look at the equation. Profit, i.e. the end result of an economic activity, is not to blame for burning down the planet. It is the activity itself and how we quantify it — the accounting system of today does not include ESG criteria to a sufficient degree.
The future of accounting is social and green
Much emphasis is put on technological developments like AI and blockchain when the future of accounting is discussed. This is understandable, given the seismic shifts underway in tech. Nevertheless, these arguments are miss the point: They only discuss how accounting will be done in the future. They miss what accountants will be, for lack of a better word, accounting for.
We live in an age that we at Wangari call Garbage Capitalism. This means we are exploiting natural and human resources, transforming them for consumption, before finally spewing them out on giant landfills.
The garbage that we produce often has nothing in common with the initial resource. Plastic bags choke sea animals to death. The deep oil fields that make plastic manufacturing possible do not hurt a fly, as long as some human does not start drilling.
Between living in an oil field and murdering a sea animal, our lonely plastic bag has made some corporations a little bit of profit, and helped a single mum of five carry her groceries home.
The plastic bag has generated some value, namely to the single mum of five and the corporations that manufactured and sold the plastic bag. The single mum of five is willing enough to pay a certain price for the bag because it makes her day a little easier. She profits because having an easier day is worth more to her than the 10 pennies more she spent at the checkout:
mum’s profit = value of an easier day — 10 pennies
The corporations that manufactured and sold the bag also profited because the 10 pennies they sold the bag for are more than the 9 pennies they needed to produce the bag.
These 9 pennies constitute a variety of costs: Extracting oil from a field, transporting that oil to a refinery, refining the oil, transporting the refined oil to a factory, buying additional chemicals needed to make the plastic bag in the factory, maintaining the machines they need to make a plastic bag, paying the workers’ salaries at the factory, transporting the finished plastic bags to the grocery store, and, of course, taxes.
The corporations therefore make a profit, too:
corporations’ profit = 10 pennies — operating costs — taxes
These taxes are important because they account for everything that has not been accounted for elsewhere: Some municipal agent is going to pick up the plastic bag and haul it to a landfill, some teacher has to prepare five kids for their future at a plastic bag factory, and some road worker needs to build and maintain both the corporations’ and the mum’s transport routes.
At this point of the conversation — which the team at Wangari has had with a number of people — attentive listeners usually point out one of two things: Either, that contemporary accounting seems to have considered all the benefits (to the mum and corporations) and costs (to the corporations and, through taxes, to the local community). Or, that one could just circumvent the bad outcomes, i.e., depletion of an oil field and murder of a sea animal, by recycling all plastic bags.
Modern-day accounting does not permit recycling
Here’s the crux: Recycling plastic bags is economically viable to nobody. If we keep counting value in the same way we have done over the past few years, then we will keep chucking 91 percent of all plastic in various landfills, and maybe manage to downcycle the remaining 9 percent if we’re feeling lucky.
To be fair, the outlook is somewhat better for other materials. Around 32 percent of crude steel worldwide is made from recycled materials; however, recycling steel is very energy-consuming. Around 68 percent of paper gets recycled; this, however, still uses enormous amounts of water.
As a society, we are far away from the circular economy. And there is good reason for that.
Recycling materials costs a lot of money and requires different industrial processes than their initial production. It is a logistical nightmare, too, because sorted or unsorted garbage must be collected at each end consumer and be transported to the closest recycling facility.
Let us imagine that a good and ethical new leader in the plastic bag corporation would like to invest in recycling. Instead of paying a bit more taxes to the municipality that drives all plastic bags to a landfill, the corporation must now invest in recuperation and recycling networks. Instead of having all citizens contribute to dealing with the waste the corporation produces, it has to foot the whole bill themselves — and it will be higher, too, because recycling is a little more complicated than operating a landfill.
Without pressure from lawmakers, consumers, employees, shareholders, or other actors within reach of the corporation, recycling will just not be economically viable.
Such shifts in public sentiment are happening. If history is a good indicator, those shifts will likely not be enough.
Capitalism got us to this place. A place where single mothers accidentally murder sea animals while trying to provide for their children the best they can.
The good news is this: capitalism can get us out of this place again. And for this to happen, we do not need to give up our precious comforts in life and go back to living in caves.
Accounting 2.0: Changing point of view
There is nothing fundamentally wrong with the equations we presented above. They all represent profit that the single mum and the corporations make from a plastic bag.
The fundamental flaw is the point of view. We are treating mum like she exists in a vacuum (well, apart from the corporation and her plastic bag), and likewise the corporation like it only exists because of customers like our single mum.
What about the point of view of the world? The whole planet? The profit equation for the planet would look something like this:
world’s profit = profit by oil fields + profit by corporation + profit by single mum + profit by sea animal
Depending on how highly you value oil field depletion and the life value of a sea animal, you might end up with a net profit or a net loss of a plastic bag on the world. The point is, however, that from the world’s point of view, it is not clear whether a plastic bag is a benefit — despite the fact that the corporation and the single mum really seem to like it.
Accounting frameworks that quantify the benefit of a product from the world’s point of view are currently being developed. At Wangari, we call this approach World-View Accounting. Such new frameworks are necessary because we all are part of the world, and exist because of the world.
If we light the world on fire, we might huddle in its warmth for a minute or two. But then we’ll be searching for a fire extinguisher. It turns out that good business isn’t possible in an inferno.
An inferno we a currently facing: the climate is getting moody, biodiversity is decreasing at an alarming pace, nature is being degraded, poverty has still not been wiped out, too many workers are still laboring in inhumane conditions while not earning a livable salary, wars aren’t exactly making peoples’ lives easier, and bad leaders are helming many important countries and corporations.
The upside of all of this is that, overall, poverty has massively decreased over the last few decades, leadership has matured, and solutions to mitigate climate change have multiplied.
The world is becoming more and more collaborative. As a result, the inferno is slowly shrinking.
But to stop it, we will still need a fire extinguisher.
The lucky news is that this fire extinguisher is relatively simple: An accounting reform will do (yes, really!). Good accounting will make all positive developments for humanity economically viable.
Factoring in world-related costs
When scrutinizing the equation for the world’s profit off plastic bags, we can see that traditional accounting misses two crucial points: natural and human resources. Natural resources are explicitly in the equation, relating to resource depletion and the effects of pollution.
Human resources figure in the equation above, too, albeit indirectly: The corporation would be able to make more profits from healthy, more efficient workers, that do not eat sick or murdered sea animals for lunch because they have nothing else. The single mum would profit from great teachers for her children, and from a helpful neighbor to help her carry the groceries. Coastal populations would profit from healthy sea animals in their waters, and communities near oil fields would see their property value go up if the likelihood of oil spills went down.
Working out the world’s profit from producing each good or service on the planet, and how any product or service influences the profit of any other product or service is a gargantuan task. It requires advanced skills in accounting and financial modeling. It also requires a healthy dose of knowledge in natural and social sciences.
Nevertheless it is necessary.
The world is becoming more and more collaborative. This is necessary to deal with all the crises that we are collectively facing.
Financial markets are slowly waking up to this new reality. It is no secret that sustainable businesses — i.e., businesses that add value to the whole planet through their goods and services — fare better financially.
Traditional accounting is not fully capturing this picture. Based on traditional accounting practices, investors are making wrongful financial forecasts that undervalue sustainable firms and overvalue unsustainable firms.
The market is not turning back. Sustainable businesses have their value.
Investors need to change their ways to keep up with these market changes, or else they will miss out on precious returns.
At Wangari, we aim to build financial models that help investors keep up with these changing times. Before you ask, yes, World-View Accounting, as described above, is part of our recipe.
World-View Accounting is the superpower which will show corporations, regulators, employees, shareholders, and customers that Garbage Capitalism quite literally belongs on the garbage heap.
Traditional accounting was the bedrock of Garbage Capitalism.
World-View Accounting will become the bedrock of Sustainable Capitalism. The best part of this is that lighting the world on fire will no longer be part of the equation.