"Extinction accounting" talks to corporations about the bees and the birds - that is, how to put species survival on their books

By Pablo Delcan, from NYT article

As official politics grinds and shudders away in the UK, it’s been interesting to observe how finance and investors are autonomously responding actively and positively to climate crisis - see examples in our finance category archive.

The nature of a “secure”, long-term investment is certainly and explicitly moving away from an investment in carbon-fuels. We heard this week (a little late, but still) about the European Investment Bank’s ambition that, before the end of 2021, they will stop funding fossil-fuel projects - becoming the world’s biggest climate bank.

Now, from our friend and indefatigable climate correspondent Matthew Green, we hear about another new trend on this line: extinction accounting.

Matthew explains below:

Five years ago, many investors and executives would have politely told Jill Atkins to buzz off.

Now they listen keenly when the British academic presents her work, known as “extinction accounting”, which shows how companies are contributing to the demise of honeybees, as well as other species - and how that could come back to sting them.

“I think people are beginning to get it now,” Atkins, chair in financial management at the University of Sheffield, told Reuters. “The capital markets have contributed to this mess, and they have a responsibility for sorting it out.”

But Atkins is appealing to wallets, not consciences. Her method is one of a series of projects seeking ways to assess a company’s impact on climate change and the natural world in financial and accounting terms, and thus better price risk for the likes of pension funds, banks and insurers.

These initiatives differ widely in methods and scope. But they share a common goal: giving the growing numbers of investors pledging to rebalance their portfolios the insight they need to sort the most sustainable companies from the most destructive.

While groups such as MSCI or Sustainalytics already offer to guide investors by creating ratings systems to rank companies’ environmental, social and governance (ESG) credentials, these approaches take a different tack: aiming to change the way companies report to their shareholders.

Options range from Atkins’ research to encourage companies to provide scientific assessments of their impact on plants and animals, to publishing a “carbon-adjusted earnings per share” figure or putting a monetary value on impacts so misdeeds like plastic pollution can directly affect a company’s valuation.

Given the scale of today’s environmental crisis, some investors and campaigners compare the depth of change needed in corporate reporting with the kind of fundamental reform of accounting seen in the aftermath of the Wall Street Crash.

“In 1929 there was no transparency on profit; companies could pick their own accounting principles and there were no auditors to verify the numbers,” said Ronald Cohen, co-founder of London-based Bridges Fund Management and chairman of the Global Steering Group for Impact Investment advocacy group.

“Today, you could argue we’re at a similar crossroads.”

Change won’t be easy. With so many ideas and tools in play, it will take time for investors, companies and the bodies that set accounting standards to settle on consistent global rules.

And if companies do begin to introduce more sophisticated metrics to assess their impact on nature and society, some investors fear these new numbers will simply present opportunities to game the system in whole new ways.

Atkins, who is collaborating with academics at the University of the Witwatersrand in Johannesburg, believes that requiring companies to introduce “extinction accounting” into annual reports could trigger rapid change.

Companies would have to assess the populations of threatened species living near their operations; work out whether their business puts them at risk; come up with plans to protect them; and explain them to investors.

“This would give investors an entirely new level of insight into the connections between corporate profitability and risks to the natural world,” said Martina Macpherson, president of the Network for Sustainable Financial Markets.

More here. We’ve found the substantial paper on which Jill Atkins work is based, “Integrated extinction accounting and accountability: Building an Ark” (PDF download). Its conclusion is telling:

For some readers our attempt to provide an extinction accounting and accountability framework may be interpreted as one of many efforts to support and strengthen the hegemonic position of financial reporting within the capitalist system.

We, however, see the framework from a different perspective: one of attempting to enhance an accounting system of which we are an integral part and harness its emancipatory potential in order to mitigate the loss of species.

This entails making use of aspects of modern accounting to frame our extinction accounting model, something which may be seen as a limitation by deep ecologists advocating a paradigm shift in corporate reporting.

We agree that radical change is, ultimately, required if we are going to prevent a major loss of species. We are also aware of the need for pragmatism. Deep ecology is unlikely to convince modern organisations to dispense with well-entrenched ideologies.

As a result, grounding the extinction accounting framework in existing accounting practices and systems ensures that it resonates with practitioners and has, at least, some chance of being adopted and applied.

…On one hand, attempting to assign a monetary value to nature poses a number of technical and moral challenges. On the other, the academic community needs to appreciate that companies and investors are unable to consider the environment from a non-financial or non-economic perspective.

By highlighting the costs of a loss of biodiversity, the extinction accounting model is able to make an initial case for preventing extinction and using this to drive a more comprehensive analysis of and reporting on extinction of species.

This can draw on both anthropocentric and deep ecological perspectives on nature. Extinction accounting does not resolve the tensions between these two paradigms; it seeks balanced pragmatism. Arguing for companies to disregard the need to generate financial returns for shareholders is idealism in the extreme. At the same time, not encouraging companies to realise that there are ecological and moral grounds to protect biodiversity is short-sighted.

The extinction accounting framework recognises this by using a narrative reporting format to address both anthropocentric and deep ecological aspects of biodiversity loss. This is done by using an existing integrated reporting approach to formalise a multi-dimensional view on the extinction of species.

The Ark seeks the art of compromise as a solution. Our approach may be seen as false utopianism but if all such attempts fail we will be faced with a dystopian future where business, finance and accounting cease to exist and the ability for humans to deliver radical change may be rendered impotent.