Abstract
This chapter presents a flexible approach to evaluating the extent to which an organisation has the capacity to be both environmentally and economically sustainable based on financial statements, namely Environmentally Sustainable Residual Income (eSRI). Problematically, despite International Financial Reporting Standards (IFRS) being a key information source for investors and other stakeholders, they give little consideration to natural and social capital in the construction of financial statements. eSRI builds on the approach to financial statement analysis advocated by Penman (Financial statement analysis and security valuation, 5th edn. McGraw-Hill/Irwin, 2012) and others, whereby users make adjustments to financial statements to derive more informative accounts. eSRI is defined as Net Profit less (i) a capital charge to evaluate economic sustainability, and (ii) environmental sustaining costs. Environmental sustaining costs are an estimate of a charge to replace or restore natural capital degraded in earning the income; essentially an opportunity cost generated by the organisation’s activities. The calculation provides a representation (albeit with error) of how much environmental capital has been destroyed in the generation of income. A key advantage of eSRI is that it allows users to combine non-financial information disclosures (such as carbon emissions) with financial indicators in a theory informed manner. eSRI will be of interest to stakeholders with an interest in estimating the extent to which an organisation has the potential to be both economically and environmentally sustainable.
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Notes
- 1.
It is beyond the scope of this chapter to debate the meaning of the word sustainability; hence I adopt one of the most common definitions of sustainability from the oft quoted Our Common Future report (Brundtland Commission 1987: 43): ‘Sustainable development is development that seeks to meet the needs of the present without compromising the ability of future definitions to meet their own needs’.
- 2.
- 3.
La Comptabilité Adaptée au Renouvellement de l’Environnement (CARE) translates as ‘accounting adapted to the renewal of the environnement’.
- 4.
For a recent discussion of employee reporting which addresses key issues in social reporting, see Mäkelä (2013). See Richard (2012) and Rambaud and Richard (2015) for a discussion and analysis of social capital, and how it could be applied in the context of SRI. Richard also locates the development of CARE in the discourse on historical cost versus fair value accounting, a discussion of which is beyond the scope of this chapter.
- 5.
Whilst in this paper I focus on IFRS, the arguments contained herein have application to Generally Accepted Accounting Principles more broadly.
- 6.
Neoliberalism is generally characterised by ‘privatisation of public services; the deregulation of labour and financial markets; the opening of markets to free trade; and the shrinking of governments through tax cuts, austerity measures and reduced regulation’ (Harvey 2005, in Zhang and Andrew 2013).
- 7.
- 8.
See Rambaud and Richard (2015) for a discussion of this point with respect to the triple bottom line concept.
- 9.
- 10.
- 11.
For an informative discussion of the differences between economists and accountants conceptions of income, and some of the controversies, see Lee (1985).
- 12.
See TEEB (2010) for a summary of different approaches.
- 13.
Accordingly, the accounting equation in CARE is recast as: Owners Equity = Assets—Liabilities—Natural Capital—Social Capital.
- 14.
See Almedia and Stearns (1998) for insight into the ethical obligations of organisations responsible for ecological destruction and the tensions between financiers and the communities they affect.
- 15.
To put the size of subsidy into perspective, the gross value added for electricity supply in AU$22.5 billion (BREE 2013), which contrasts to the Kember et al. (2014) estimate of environment sustaining cost of $7–20 billion per year. This comparison must be interpreted with caution as there is insufficient information in Kember et al. (2014) to accurately match their estimates with gross value added or other measures of performance.
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Acknowledgment
I acknowledge the advice and feedback on this chapter from participants of the 2014 CMOS research clinics and Dianne Hiles. All errors and omissions remain the authors.
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Brown, P.J. (2016). Calculation of Environmentally Sustainable Residual Income (eSRI) from IFRS Financial Statements: An Extension of Richard (2012). In: Bensadon, D., Praquin, N. (eds) IFRS in a Global World. Springer, Cham. https://doi.org/10.1007/978-3-319-28225-1_11
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