Innovation & Technology

A Planetisation of Finance:
The Earth as a Going Concern

“We have statesmen and politicians who profess to guide our destinies. Whither are they guiding our destinies?”— H.G WellsValuing continuing existenceIn recent decades considerable effort has been invested into describing and identifying the planet’s natural environment in terms that can be appreciated and integrated into the language of economics and finance.

By Joss Tantram | Published 9 years ago | About a 10 minute read

“We have statesmen and politicians who profess to guide our destinies. Whither are they guiding our destinies?”

— H.G Wells

Valuing continuing existence

In recent decades considerable effort has been invested into describing and identifying the planet’s natural environment in terms that can be appreciated and integrated into the language of economics and finance.

From the 1997 work of Robert Constanza, et al onwards, the TEEB coalition and the Natural Capital Coalition, to the multi-capitals approaches to accounting and reporting that are forming part of efforts by organisations such as SASB (Sustainability Accounting Standards Board) and the IIRC (International Integrated Reporting Council). Each is seeking to quantify and therefore consider the value of natural systems and their outputs in comparable financial terms.

I have written extensively on these approaches — mostly from the perspective of a critical friend rather than a wide-eyed fan, mostly because I feel that the conceptualisation of natural and social capital into economic terms will lead to a commodification of nature (a financialisation of the planet) unless there is radical change to the nature and purpose of global markets (the planetisation of finance).

In order to move beyond a critical analysis of the pros and cons of the multi-capitals approach it seems to me that there is a simpler pre-existing conceptual vehicle that could be adopted to provide a forward looking perspective on the value of the planet and its assets (natural, human, built and otherwise).

This is the concept of going concern, an accounting approach to assessing the value of an enterprise based upon its potential for continuing existence. It is at the heart of our thought experiment to explore an IPO for the Earth, a finalist in the ICAEW/ Accounting for Sustainability Finance for the Future Awards 2014.

Opportunity costs … and benefits

Approaches to the valuation of currently under-represented/underpriced sources of capital (those which are not pure financial capital) predominantly focus upon two aspects of value, of capital stocks and capital flows. A simple metaphor for these two categories is that of a bank account — where the stock is the money in the account and the flow is the interest that is generated by the capital.

I would argue that there is a more significant area worthy of attention — to focus upon the going concern value that the existence of healthy stocks and flows gives rise to. This is not a value of the stock or flow itself — but is derived from the opportunities that become possible because of the existence of the stocks and flows.

When viewed through this lens, natural capital becomes most powerful not when it is used to give rise to an asset value (“what would we get if we sell it?”) calculation, but a going concern value — “what does the asset’s continued existence and health allow us to do and how valuable is that?”

This distinction between asset price and the value of the opportunities that arise from the asset, is partially reflected in the concept of stocks and flows — but the idea of a going concern value goes beyond a flow valuation. An example of these category differences for a company such as Google would be as follows:

Asset value — the market capitalisation of the company — what it would fetch if it were sold.
Asset flow value — the yearly revenue of the company.
Going concern value — in addition to the categories above, the value of all the things that exist because Google provides and facilitates fertile ground for a huge range of activity.

Valuing our planet as a going concern

If the motivation behind approaches to valuing natural, social and other capitals is to highlight their value to the economy rather than leave them as either economic externalities or considered as effectively free goods, shouldn’t we take a more creative approach to using the accounting techniques that already exist?

Wouldn’t it be far more productive to focus upon the value of the planet as a going concern — as a place to do sustainable business over the long term?

Luckily, there is a well-established approach to doing just that. Accountants do it all the time — all we need to do is expand its scope and scale somewhat, from the going concern value of a specific entity to the going (common) concern of the planet as a whole.

In accountancy, the going concern principle is “the assumption that an entity will remain in business for the foreseeable future.” If it can be assumed that a business will remain viable over time, it can be considered to be valuable because of its capacity to sustain economic activity: “the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits” (Accounting Tools).

Going for how long?

While it may seem perverse to say so, in cold, mechanistic terms the Earth’s value to humans lies in it providing us with the means to carry on doing stuff — not in either its inherent value (what we would pay to keep it) or in its value when broken up and traded (what we would get if we sold it).

The idea of planetary going concern value is too often ignored, partly because it asks us to project value into the future. In accounting terms, going concern assessments/judgments focus upon a consideration of “the foreseeable future,” but this is only judged using a one-year-forward time horizon (aligned to annual accounting and reporting).

At a planetary scale, an annual going concern perspective wouldn’t get us very far — we need to be thinking about how to project the value of a going concern much further, say to 2050.

Such projections happen for smaller things happen all the time. The world is full of news stories and analysis saying “the market for X could be worth $10 billion by 2025” or “sales of Y set to grow by 200 percent over the next 10 years.” All such projections assume a continuation of certain elements of business as usual (i.e. a reasonably similarly functioning market to today) and certain elements of change (e.g. increased disposable income, increased urbanization, etc) that are interpreted from various trend analyses and forward predictions.

At the planetary scale, a going concern calculation could be done for a range of scenarios — e.g. where no significant strategic response is made to evolve to meet the challenges of resources, consumption increase, reduction in soil fertility, increased pollution and climate uncertainty, as opposed to the planetary enterprise that would be possible if we made the transition to a sustainable economy fit for 9 billion interdependent citizens, all capable of making sovereign social and economic decisions.

It seems clear that the former would, by its nature, be less valuable than the latter.

Not under current management …

Accountants judge a going concern according to range of criteria that could easily be adapted to apply to the planet as a whole.

The Financial Reporting Council’s Statement of Auditing Standards on the issue in 1994 states that for financial audits seeking to judge whether an entity is a going concern, they should take the following into consideration:

“Whether the period to which the directors have paid particular attention in assessing going concern is reasonable in the entity ’s circumstances and in the light of the need for the directors to consider the ability of the entity to continue in operational existence for the foreseeable future;
The systems, or other means (formal or informal), for timely identification of warnings of future risks and uncertainties the entity might face;
Budget and/or forecast information (cash flow information in particular) produced by the entity;
Whether the key assumptions underlying the budgets and/or forecasts appear appropriate in the circumstances;
The sensitivity of budgets and/or forecasts to variable factors both within the control of the directors and outside their control
The existence, adequacy and terms of borrowing facilities, and supplier credit; and
The directors’ plans for resolving any matters giving rise to the concern (if any) about the appropriateness of the going concern basis. In particular, the auditors may need to consider whether the plans are realistic, whether there is a reasonable expectation that the plans are likely to resolve any problems foreseen and whether the directors are likely to put the plans into practice effectively.”

(The text above is mildly summarised in the interests of space; the full text is available in paragraph 23 of this document.)

If a planetary-scale auditor used the criteria noted above to assess the current de facto administration of the planet (our economic and market systems), would they judge the Earth to be a going concern, and if so, for how long?

Is the simple but frightening answer that the Earth is not capable of being considered as a going concern over the coming decades under current management?

Towards a planetisation of finance

“The twelfth law is that such things as cannot be divided, be enjoyed in common…”

— Thomas Hobbes’ 12th Law

The vast majority of approaches to bring underpriced or unpriced capitals within financial domains tend to do so by treating them as adjustments to existing prices (e.g. as carbon taxes, etc), rather than focusing upon and questioning the origination of their price in the first place.

Externalities should not be priced per se. However, price must reflect them (they shouldn’t really be externalities at all, just a fundamental aspect of costs that should be naturally recognised) if any approach to building a sustainable economy is to succeed.

The point of exploring the planetary going concern concept is to provide another driver towards the more innate consideration of sustainability as a defining aspect of financial success over the long term. The planet can only be considered as a going concern if such fundamental dependencies are integrated into the heart of decision making, not considered after the fact as most current approaches to “pricing externalities” currently require.

Without a fundamental reconsideration of what actually constitutes sustainable value, and an effort to align the origination of money (and price) against that, we are just building ever more rickety structures upon the already unsteady foundations of current economic and market processes.

Valuing the planet in economic terms runs the risk of financialising, commodifying and privatising nature. The task in front of us is not to tinker with the methods, but to reverse this concept, moving from the financialisation of the planet to the planetisation of finance.

Economics and markets based upon the value of the planet as a going concern might be a powerful and positive step towards aligning financial value with the physical facts of life on this planet — the only place we have (as yet) do to business.

My profuse thanks go to Jane Gleeson-White for her feedback and comments on a draft of this piece. Any errors of logic or hyperbole are unquestionably mine. Her book, Six Capitals: The revolution capitalism has to have — or can accountants save the planet?, is a must-read for anyone keen to explore how we might meaningfully value the priceless.

This post first appeared on the Terrafiniti blog on May 29, 2015.