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Measuring sustainable growth

Measuring sustainable growth
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First Published: Thu, May 08 2008. 11 08 PM IST

Illustration: Jayachandran/ Mint
Illustration: Jayachandran/ Mint
Updated: Thu, May 08 2008. 11 08 PM IST
The earliest evidence of human counting is seen in a wolf bone with 55 notches carved as tally marks. This bone was found in Czechoslovakia by Karl Absolon and is dated 35,000 years ago. Since then, we have been counting.
Illustration: Jayachandran/ Mint
We progressed from counting when we started using double-entry accounting in the 15th century. Double-entry accounting requires all transactions to be bifurcated. An important by-product was to separate the owner from his business, resulting in the business being considered a distinct entity. Even in a sole proprietorship firm, the business is distinct from the owner. Just as an individual owns a house or a car, he also owns his business.
Money received by the business from the owners was called capital. In the accounting equation, capital was placed alongside loan as a liability. Since this accounting system was developed for commercial enterprises, only financial capital was accounted. Double-entry accounting worked well for commercial ­enterprises.
October 1929 was a defining moment in the 20th century. The US stock markets crashed, leading to a prolonged period of depression. Coming on the back of a sustained bull run in the 1920s, it caught the investors, regulators and the general public off guard. The depression gradually spread across the globe. For the first time, the combined impact of individual business results was felt at an economic level. Aggregate numbers for the economy, which till then had been estimated by individuals and private organizations, were now required by the regulators and government.
After World War II, a new international currency management system was introduced. This was named after the place where it was accepted—Bretton Woods. This system required, for the first time, information on the economic activity in a country. Soon the need to have comparable estimates across countries was felt. This gave birth to the system of national income accounting. The model for commercial enterprises accounting that had evolved over the past five centuries, economic transactions was adopted for?national?income accounting, too.
It was not long before people realized that, given the pace of economic development, natural resources considered free for individual businesses were not free for the economy. First on the list of natural resources on the verge of depletion was petroleum. Escalating oil prices since the 1970s made people realize that national income did not reflect the full picture of an economy. Natural resources, a common property, were being used by individual firms to generate profits. Capital consumed was accounted as income. While this logic at the firm’s level was understandable as it was not the firm’s capital, consolidating the individual units to arrive at national income did pose a problem. At a societal level, economic income was not accurately reported as environment capital consumed to generate economic income depleted the overall societal capital.
This soon led to the call for sustainable development. Though multiple approaches to sustainable development exist, their core idea is one. Development without depleting or degrading the three kinds of capital—economic, social and environmental—is sustainable development.
The idea of sustainable development soon gathered momentum and the?global premier organization, United Nations, along with the European Commission, International Monetary Fund, Organization for Economic Cooperation and Development, and the World Bank jointly published the System of Environmental and Economic Accounting (SEEA 2003) to guide efforts. SEEA wants to become a statistical standard by 2010, linking economic accounting with environmental capital. Probably reflecting pro-capitalist interests, this document consciously does not address social sustainability, citing it a matter of considerable debate and research.
In this new emerging area of environmental accounting, SEEA 2003 provides significant conceptual clarity. Natural capital is segregated into natural resources covering both renewable and non-renewable resources, land and ecosystems. It tracks both the physical and monetary units of capital. This tracking is at the level of both stock and flows. Flows include degradation, depletion, rejuvenation and accretion. This system also prescribes valuing non-market traded assets at net present value of their future income flows. Based on these concepts, the accounts are presented using a matrix National Accounting Matrix and Environmental Accounting (Namea).
The challenge of social capital, ignored by macroeconomists, was accepted by accountants at the turn of the 21st century. Global Reporting Initiative (GRI) is the most accepted form of sustainability accounting for businesses. In addition to the economic and environmental issues, GRI also covers social capital. Adopting GRI requires businesses to report on human rights, labour practices, product responsibility and societal interface.
In contrast to economic capital reported in monetary terms and environmental capital reported in physical units and monetary terms, a social capital report is qualitative. On the human rights front, information on steps to prevent child labour, forced and compulsory labour, freedom for collective bargaining and non-discrimination in employment are reported. On societal interface, practices to prevent corruption and anti-competitive behaviour, influence public policy and the impact of operations on the community are reported.
Transparent financial reporting took centuries for popular acceptance. With sustainability accounting, we do not have the luxury of centuries. In fact, we do not even have decades. We need to act today.
(The first part of this article was published on Thursday.)
Shankar Jaganathan is a consultant with Wipro Ltd. He is the author of a soon-to-be-published book on the history of corporate disclosure from 1553 to 2007. Comment at theirview@livemint.com
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First Published: Thu, May 08 2008. 11 08 PM IST