I have over the years developed a rule of thumb or criterion for assessing the efficacy of sustainability measurement and reporting methods that goes something like this:
If it is possible for an organization to perform “well” according to the principles of a particular measurement and reporting system and yet still be putting vital resources or human wellbeing at risk, then the system itself fails on its face and should be rightly rejected.
The truth is that most of what passes for mainstream practice in sustainability accounting today does not pass this test. One such method is monetization, according to which a monetary value (positive or negative, as the case may be) is placed on the social, economic and environmental impacts of a company. As long as the monetized value of such impacts is positive, an organization is presumed to be performing well – or sustainably.
Monetization as an approach for assessing the sustainability performance of organizations, however, suffers from two serious problems:
- It violates the Sustainability Context Principle
- It commits the ‘Weak Sustainability’ error
Let's investigate these problems further.
Sustainability Context is Missing
The Sustainability Context Principle is perhaps best known in its Global Reporting Initiative (GRI) form, which exhorts organizations to report their sustainability performance “in the context of the limits and demands placed on environmental or social resources at the sector, local, regional or global level” (G4).
Translation? The sustainability of an organization’s social and environmental impacts must be assessed relative to thresholds and limits, respectively. In other words, the sustainability of an organization’s social and environmental impacts depends on whether or not they (the impacts) have the effect of (a) maintaining social resources at required levels (thresholds), or (b) constraining the use of environmental resources to within the limits of their renewability.
Thus, in order for monetization to be viable as a methodology for expressing the sustainability performance of an organization, the existence of social thresholds and environmental limits must somehow be represented in how things are being priced. As the use of finite water resources, for example, approaches the limits of their availability, the incremental cost of use should increase exponentially (see Figure 1 for a theoretical view on how impacts on natural resources should be priced relative to their limits of availability). Indeed, what price should we give to the last gallon of available renewable water as compared to the first? Not the same, of course.
Sticking with water as our example, it is certainly true that some monetization schemes assign higher costs to increased levels of water use than to lower or decreased ones, but no such monetization scheme I have ever seen takes account of finite limits in the availability of water in specific places in the first instance. It’s as if water supplies are assumed to be infinitely available everywhere, only at higher incremental costs the more one uses. This, of course, is not the case, and the absence of such limits (and thresholds, in the case of social impacts) disqualifies monetization as a viable approach for assessing the sustainability performance of organizations.
A "Weak Sustainability" Solution
The sustainability literature has for decades now drawn the distinction between so-called strong versus weak sustainability doctrines, according to which the question of whether or not key resources in the world (capitals) can be substituted for one another. Can the loss of a vital natural resource (a form of natural capital), for example, be compensated for, or offset, by an increase in the supply of another?
The weak doctrine, to one degree or another, answers yes – the loss of one type of resource, or capital, can be offset by an increase in the supply of another. The strong doctrine, by contrast, says no – different types of resources, or capitals, cannot be substituted for one another, as might be the case if, say, one attempted to compensate for the pollution of a body of water (natural capital) by increasing one’s donations to the local fire department (human, social and constructed capital). It is not the total supply of vital capitals that matters, strong proponents say; rather, it is the separate sufficiency of each that does.
Suffice it to say that for a variety of reasons – not least of which are the first and second laws of thermodynamics – I and many others hew to the strong side of the debate. The loss of natural resources, in particular, cannot be compensated for by the increased production of others. The inability to quench one’s thirst with water is hardly offset by the increased production of human, social or other non-water capitals.
Monetization schemes, however, if and when put forward as sustainability accounting systems, are clearly creatures of weak sustainability. By simply assigning a positive monetary value to a positive impact (e.g., a donation to the local fire department), the externalized costs of negative impacts (e.g., polluting a watershed) are ostensibly reversed. All one has to do in order to do “well” in an accounting system of this kind is ensure that the monetary value assigned to positive impacts exceeds the monetary value or costs assigned to negative ones.
But this, of course, makes no sense. All of the donations in the world made to fire stations will do nothing to change the fact that polluted watersheds will still be polluted, much less remediate or restore them. Indeed, while putting a price on the social and environmental impacts of organizations might be appealing as a way of accomplishing integrated reporting (i.e., just put a price on everything and add their values together), the weak sustainability doctrine that comes with it is a non-starter. We live in a world in which unlike capitals are, with few exceptions, non-substitutable, a fact that all monetization schemes I have ever seen seem content to ignore.
Examples of Monetization Schemes
Now, of course, a fair question to ask about all of this is whether or not existing monetization schemes in the world of CSR and sustainability reporting in fact commit the errors I describe above, and the answer is, well, maybe. Apart from actually committing these errors, the makers of such schemes would also have to be claiming that their methodologies are designed for sustainability accounting per se. The question is, do they?
A few specific monetization schemes come rushing to mind here: the Crown Estate’s Total Contribution method, Kering’s Environmental Profit & Loss (EP&L) tool, KPMG’s True Value method, and PwC’s Total Impact Measurement and Management (TIMM) method. Descriptive materials for all four of these methods are ambiguous at best insofar as their treatment of sustainability accounting is concerned. While monetization of impacts may be their primary purpose or intent, they do speak in terms of sustainability performance to one degree or another.
Indeed, the Total Contribution method, for its part, is described by the Crown Estate as a method that supports its quest for “sustainable growth.” Kering, in turn, describes its EP&L tool as one that helps companies “make more sustainable business decisions.” KPMG asserts its True Value method can help companies improve “the sustainability performance” of their products and services. And TIMM is described as a tool that can help an organization “judge the sustainability of its business practices.”
Impact Valuation vs. Sustainability Accounting
Whether or not any of the statements quoted above amount to claims of performing or supporting sustainability accounting per se is debatable, but what is not debatable is that none of the methods involved are context-based, much less creatures of the so-called strong sustainability school. But that, of course, is not a problem in cases where such tools are intended to be used for impact valuation only and not sustainability accounting. Clearly, that is where any of the tools I mention here can work very well.
Here we can make the all-important distinction, then, between sustainability accounting and impact valuation. Valuing impacts, monetarily or otherwise, can certainly be done using any of the tools mentioned above and all four are certainly useful for that purposes. Assessing the sustainability performance of an organization, however, necessarily calls for recognition of social and environmental thresholds and limits, not to mention abandonment of the idea that different kinds of resources or capitals can be freely substituted for one another. And to the extent that a given monetization method fails to adequately address the context and substitution issues I raise here, it arguably fails on its face as a viable solution for sustainability accounting and should be rightly rejected because of it.