Show me the money: Why environmentalists and businesses need to speak the same language

By Abrar Chaudhury.

In a recent panel discussion at the World Economic Forum 2014 - “Doing Business the Right Way” an audience member asked Richard Goyder, CEO of Wesfarmer and Australia’s G20 business leader about when businesses could be expected to formally adopt the triple bottom line (TBL) i.e. incorporate the social and environmental bottom lines along with the economic bottom line. His response was that “the only thing in the financial statements that (one) can believe in is the cashflow statement” as profits are somewhat arbitrary.  Without “generating cash you go broke”, he emphasized, so businesses need to survive first before social and environmental responsibility can be demonstrated.

Mr. Goyder is not alone in this line of thinking. The recent financial crisis saw many profitable companies go bankrupt. The main reason being that these companies, while profitable on paper, were cash poor. An external shock meant that they were unable to pay their lenders and creditors. Focusing on profitability alone to estimate the financial health of a business can be misleading. Profits are impacted by many non-cash transactions such as depreciation and amortization.  Further, complexity and subjectivity in interpretation of global accounting standards for calculating profitability makes it challenging to compare profitability across businesses, sectors and geography. Cashflows on the other hand are much more objective and record all the actual inflows and outflows of cash during a reporting period. A language perhaps better understood by many.  

However, over the last decade, the focus of environmental sustainability advocates has been on raising awareness and building capacities of businesses on TBL. This has yielded positive results. Underpinned on this moral advocacy and the ensuing consumer and legislation pressures, companies are increasingly becoming more transparent in their impact reporting. In one example, nearly 6,000 organizations have adopted the Global Reporting Initiative; a voluntary reporting framework for sustainable development and reporting. Mantras such as ‘People, Planet and Profit’ are increasingly making headlines in corporate reporting and communications of global businesses. Further, progress through research and development on proxies and tools for measuring social and environmental impacts is helping businesses understand and incorporate previously hard to measure impacts.  This is an important area of research for the Systemic Integrated Adaptation (SIA) program of  CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) housed within Oxford University's Environmental Change Institute. The SIA team has developed a Rapid Ecosystem Service Assessment Technique (RESAT) toolkit to quantifiably measure a range of ecosystem processes, goods, services and their interrelations. The toolkit can be used to inform decision-making and assess the current and future impact of businesses.

But despite such evident progress in TBL, as Mr. Goyder pointed out, cashflows remain primary and all else is secondary for stakeholders and investors. Are then efforts and focus on TBL somewhat misdirected? Incorporating full social and environmental costs in the bottom line without paying for these appear irrelevant to an astute investor, who would simply ignore the TBL and make decisions based on the cashflows. But there is a silver lining in this distinction. With huge global climate funding deficits, this cash focus presents a strong opportunity for demanding payments from businesses for TBL impacts, rather than simply demanding for full accounting disclosures.

This payment demand, however, opens up further debate. If the economic and social costs need to be paid for, then who should be the recipient? Payment for Ecosystem Services (PES) presents a partial answer, as it offers resource owners (such as farmers and landowners) payments in exchange of providing ecological services. But then not all social and ecosystem services have clear ownership rights.  An example of this is pollination services. There are also concerns around who will benefit and who would lose, and how any PES schemes might deal with property rights issues, particularly in communities, which hold traditional land rights.  One option may be for governments to tax businesses for use of such common ecosystem services for funding national development and climate funds. Whatever the mechanism, full costing without matching payments offers only a partial solution.

While pressure on business to adopt TBL backed by consistent rules, processes and legislation needs to continue to improve widespread adoption and reporting. It is high time that environmentalists and businesses start speaking the same language.  If Mr. Goyder feels that ‘cash is king’ for businesses, it is only fair that environmentalists start demanding businesses to ‘show them the money’.

Abrar Chaudhury is a DPhil Student at the Environmental Change Institute, University of Oxford, and is part of a multidisciplinary Systemic Integrated Adaptation (SIA) project team, leading the financial and institutional lens of the team's research into resilience and adaptive capacity of food systems to climate change.

Photo of bee pollinating lavender by Benet2006.

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