11.
How should we measure environmental and social costs?

11.1 Introduction

What has accounting ever done for the environment?

• Imagine the impact on profit if customers discovered their £200 trainers were made by slaves working in inhumane working conditions, chained to machines for 14 hours a day.
• Imagine how responsible investors would react if a drug company was found guilty of incentivising the prescription of addictive heroin-derived painkillers for medical conditions they could not treat.
• Imagine the potential legal damages if a chemical company suppressed evidence of pollutants associated with birth defects, and kidney and testicular cancers that made its way into public drinking water.
• Imagine the reputational damage to multinational oil companies that extracted billions of dollars from customers if they were lying about their responsibility for the greenhouse gas emissions irreversibly damaging our climate system.

Sadly, none of these cases are fictional, and there are many more examples of organisations intentionally harming others.

Accountants have an ethical duty to ensure that all material social, environmental and financial consequences are appropriately recognised, valued and disclosed to internal and external parties.¹ Accountants must not forget their professional responsibility to make businesses aware of and accountable for past, present and future costs they needlessly inflict on others.

There are many examples of businesses that intentionally or unintentionally inflict social and ecological harm, and suffer negative financial consequences. This can be traced back from the collapse of agricultural systems in ancient Egypt, Easter Island and the US Dust Bowl, to the regulatory backlash against Big Tobacco. While some business models rely on exploitative practices, a combination of regulatory changes and shifting societal values are putting pressure on their future viability. Many companies continue to make huge profits from unethical, corrupt and questionable environmental practices, but is it legitimate for professional accountants to support these practices, hide the full cost of irresponsible business and allow corruption to flourish? Accounting for many social and environmental impacts is already included in company law, governance frameworks, stock exchange listing requirements and financial reporting standards. These disclosures include:

• fines paid for breaking the law
• provisions for future legal liabilities
• the gender mix of employees and the gender pay gap
• greenhouse gas emissions
• material environmental risks
• compliance with modern slavery legislation.

Social and environment accounting has a long tradition, arguably pre-dating financial accounting. Most of the early accounts included physical inventories of food (as demonstrated by Carmona (2007)²), river levels, population demographics, fertile land and measures of societal resilience, rather than financial values. Social and environmental accounting is part of contemporary accounting, and its importance will grow over time, as evidenced by the ground-breaking Corporate Sustainability Reporting Directive.

11.2 Internalising externalities

There are many who argue that financial accounting systems should treat environmental and social impacts as ‘externalities’: unmeasured, unvalued and peripheral to the reporting of financial stability and profitability. This perspective ignores the extent to which profits and financial stability are ultimately dependent on the status of social and environmental systems. Profits are an accumulation of wealth from the many to the few, from natural resources, extracted by humans, transformed and monetised for the benefit of other humans.

Our unsustainable, inequitable world has been the beneficiary of seven cheap things:³ cheap nature, cheap money, cheap work, cheap care, cheap food, cheap energy, cheap lives. These things were cheap because we did not pay others or nature the full cost of what we consumed, and in doing so, eroded the value of natural and social capitals. A pursuit of ‘cheapness’, legitimated by poor accounting systems, avoids recognising negative impacts but does not prevent the catastrophic consequences imposed on other systems. Sugar and cotton were cheap in the nineteenth century because they were produced by slaves – victims of state-sponsored racism – not by workers earning a living wage. Sales revenue and profits need to be reconceptualised as a reward for the positive impact a business makes on social and environmental systems.⁴

Making social and environmental impacts knowable, measurable and valuable is a core function of accounting systems. Only when organisational actions are connected to their social and environmental consequences can they understand their dependency on others, and find the knowledge gaps and information they need to manage their risks and future profitability. Without social and environmental accounts, businesses will continue to incentivise damaging, ultimately unprofitable, behaviours that inflict suffering on themselves and others.

Profits and finance are part of doing business. Businesses need some profit to exist just as humans need to breathe to live. But no one would argue that breathing is the purpose of life. Businesses need to decide what kind of changes they want to have on the world and account, measure and value those things that effect their success, using profits legitimately earned to fulfil those goals. But this needs to be balanced by society, communities and governments specifying what benefits they demand from business and what negative impacts are considered permissible and acceptable.

11.3 Blah, blah, blah or useful accounts?

Greta Thunberg famously dismissed corporate social responsibility and corporate social and environment reporting as ‘blah, blah, blah’, neatly summarising the findings of hundreds of academic studies into problems with business reporting. These reports vary in size, shape, content and the underlying factfulness of their depiction of social and environmental impacts. Despite the existence of documents described as sustainability reporting standards – such as the Global Reporting Initiative, the International Sustainability Standards Board, the Science Based Targets Initiative – with the exception of the Corporate Sustainability Reporting Directive (CSRD), they are only voluntary guidelines. Companies choose which (if any) standard to apply, cherry-pick which elements to adopt, and how much to spend on compliance or independent assurance.

Hardly any social and environmental reports are assured to the same standards as annual financial statements. Before reading any report, check to see which sections have been assured and to what standards. Typically, these reports are subject to limited assurance, which means users cannot rely on disclosures in these reports in any legal disputes. The voluntary, unassured nature of these reports does not mean that all social and environmental disclosures are meaningless, but users do need to exercise critical judgement and scepticism when reading them. Problems with voluntary social and environmental reporting are so widespread they have spawned their own buzzword: greenwashing.

Greenwashing describes a range of reporting practices used by businesses to present their social and environmental performance in a carefully curated way to convince readers they are more sustainable than they actually are.

False or misleading communications about environmental and social impacts can backfire spectacularly, harming a business’s future financial performance. Blatant misrepresentations of business impacts on socio-ecological systems incentivise external groups to produce counter-accounts that challenge these false claims in different political arenas. These counter-accounts can result in persistent collective action to force the business to stop or reduce the harm done, such as that which occurred between British American Tobacco and the health campaigning group Action on Smoking and Health.⁶ Researchers, accountancy bodies, regulators and civil society groups look to professional experts, such as accountants, to call out bad practice and stop greenwashing. These ’greenwashed’ claims can result in investors, financial institutions, consumers, employees, regulators, citizens, government agencies and business leaders falsely believing that they are doing enough to prevent unsustainable social, economic and environmental damage, and thereby perpetuating the myth that they are solving these problems.

The false consciousness generated by greenwashing delays the investments and interventions needed to fix things or incentivises behaviour that makes social, economic and environmental systems worse. For example, many consumers are tricked into buying falsely labelled ‘low-carbon’ or ‘biodegradable’ products that increase greenhouse gases and the feral plastic polluting our land, rivers and oceans. In the UK, greenwashed communications and disclosures have been punished by the Competition and Markets Authority. In addition, the Financial Conduct Authority published new anti-greenwashing rules⁷ and sanctions for businesses lying about their social and environmental impacts.

Steps to hold organisations accountable for their social and environmental reporting

There are five main steps to evaluating the factfulness of any social and environmental report.

1. Ask what should be included in this report, to find any material omissions or gaps.
2. Find out what others are saying about the social and environmental impacts, to fact-check, confirm and verify.
3. Search for greenwashing red flags, comparing with known problematic practices.
4. Discover who will be using this report to decide how relevant the report will be to those parties.
5. Construct your own account using multiple sources.

This process of evaluating the effectiveness of a social and environmental account should also be applied by accountants preparing reports.

A good social and environmental accountant should:

• cover all material impacts from multiple perspectives
• include verifiable evidence from all legitimate sources
• cover the life cycle of all business products and services
• benchmark against external sustainability goals such as Sustainable Development Goals (SDGs) or planetary boundaries
• provide evidence of any claims, awards or performance statements
• be independent
• communicate in a way that is easily understandable and as unambiguous as possible
• report negative as well as positive impacts.

11.4 Determining what should be in a social and environmental account

There is a need to establish what impacts should be included in a social and environmental report. Many tools can help decide what should be in these reports. Some examples include Future-Fit Business, the EU taxonomy for sustainable activities, the World Benchmarking Alliance, and the Responsible Business Map among many others. In this section, we use the UN SDGs to map out the content of a social and environmental report. For more details, see Thomson and Bates (2022),⁸ and Thomson and Farrar (2021)⁹. Figure 11.1 is a checklist to find positive and negative connections between the business and relevant socio-ecological systems. This checklist looks for the possibility of impacts based on the type of business, supply chain, customers, prices and costs, competitors and sources of funding. This exercise shows the connections – particularly negative impacts – that should be included in social and environmental accounts. If these impacts are not included in a report, then it is possible to conclude the report is not complete. And you can use this checklist as an estimate of the completeness of any report.

Check what others are saying about the business

Checking the external opinions of a business involves gathering evidence of social and environmental impact from external sources, such as mass media, activists, governments, regulators, social media, court cases, business press, producer organisations, product certifiers and competitors. This complements the expected content map from the previous exercise by identifying topics and opinions about the business that are in the public domain. This provides some counterfactual points to compare with the information the business chooses to show.

For example, how do you judge the factfulness of claims to make sector-leading ‘environmental’ products with the lowest carbon impact and lowest risk of slavery in its supply chain? Any reader (or professional accountant preparing these reports) needs evidence to support these assertions. In this case, a reader will need to independently research the performance of other companies as well as verify the evidence underpinning the business’s claims. Given the complexity and volume of fact-checking associated with any social and environmental report, which can run to over 200 pages, a prestudy¹⁰ method is recommended.

agency

The capacity of an individual or an institution to choose and affect change in society.

A prestudy is a quick, inquisitive investigation designed to find something new, surprising or shocking about a business from multiple perspectives using sources such as newspaper articles, documentaries, activist videos, citizen journalism, courts or regulators, social media and government inquiries. The focus should be on seeking out potential conflicts and contradictions between the business in question and others (perhaps targeting negative impacts found in the SDG impact exercise). Another strategy starts with the agency possessed by the business, then explore opinions that affected groups express about how the business uses or abuses their power, recognising that businesses can trigger many emotional reactions.

For example, accounting students may view the ‘Big 4’ accounting firms (Deloitte, EY, KPMG and PwC) as desirable organisations in which to build a successful career. Financial regulators and tax authorities may view them as unethical, pushing the boundaries of legality, enabling money laundering and designing questionable tax schemes. Accountancy bodies may consider them persistent breachers of professional standards.¹¹ In this discussion, we are not trying to prove irresponsibility, but rather trying to understand any potential conflicts and threats to the legitimacy of the business that they may encounter in their reports.

However, in a post-truth world, you need to be on guard for fake news from all sources, recognising incentives to spread mistruths and promote doubt. To help evaluate information provided, one should:

• question who benefits from the provision of these ‘facts’
• investigate the author (individual or institution)
• find out more about them
• check what else they have written
• appraise the sources they quote to support their opinion
• review their websites to discover who funds them and what else they have said
• discern patterns in their opinions
• look for corroboration from other sources and how others have interpreted the same facts
• look for helpful pointers such as a named author, author affiliation and publication date.

It’s relatively easy to sound authoritative to non-experts on a study completed 30 years ago and ignore any subsequent studies. No author, no date, no sources and no corroboration equals no usable facts. But whether the information is true or not, a review like this could point to potential risks and future conflicts that may need a response from the business.

The sort of thing you might uncover

A quick search of the UK Competitions and Markets Authority website uncovered evidence of greenwashing by fashion brands that agreed to change to avoid further punitive actions. These changes included the following:

• Environmental statements made about materials must be specific and clear, such as ‘organic’ or ‘recycled’, rather than ambiguous terms like ‘eco’, ‘responsible’ or ‘sustainable’.
• Products must not be marketed or labelled as part of an environmental range unless they meet all relevant criteria.
• ‘Natural’ imagery – such as green leaves – should not be used on logos or icons to suggest a product is more environmentally friendly than it is.
• Any future environmental targets must be supported by clear and verifiable strategy if they are to be communicated to consumers.

This finding of greenwashing is sourced from an official regulator that reports the outcome of a robust legal process, corroborated with evidence and the findings accepted by individual businesses. Therefore, this independent evidence can be compared with company disclosures on this aspect of their sustainability performance.

Other independent sources of data and evidence on business performance include leading financial institutions, respected NGOs, international agencies, governments, scientific publications and the Intergovernmental Panel on Climate Change. Without any external evidence, it is very difficult to have trust in claims made by a business.

Hunt for red flags!

A report by the Network for Business Sustainability and the Climate Social Science Network (NBS/CSSN) identified ten red flags associated with greenwashing which vary in their malicious intent from vagueness and jargon intended to confuse all the way to political spin and lies deliberately designed to conceal and mislead. Below we have combined these red flags with well-known greenwashing practices from Planet Tracker’s Greenwashing Hydra to construct a greenwashing risk checklist to evaluate the quality of any business report purporting to be the social and environmental impact of any business. It can be adapted to analyse greenwashing in reports from regulators, NGOs, charities, public service organisations and governments.

The extent of these red flags present in any business communication, report or internal document is a useful guide to their factfulness and how much the information provided can be trusted.

Determining whether greenwashing exists and ultimately whether the information can be trusted is a matter of judgement or personal preference. For example, in a strict interpretation of the checklist, one breach could be taken as ‘proof’ of greenwashing. Alternatively, others may look for several breaches or prioritise specific actions before deciding the information is greenwashing.

Green hushing and selective disclosure

A fast fashion company may make statements about paying a living wage to all employees, but then not report on procurement practices that drive down prices, forcing overseas suppliers to use labour practices that are characterised as modern slavery.

Green hushing

choosing not to report negative actions that are typical of company performance

Selective disclosure

reporting selective activities instead of full transparency of sustainability impacts across the whole value chain; typically, this will focus on ‘good news’ stories, leaving out negative impacts

Inconsistent practices and green-lighting

A supermarket might spotlight one ‘low-carbon’ store, reporting on solar panels and energy-efficient fridges or lighting, but ignore the high-carbon intensity of the majority of their other stores, thereby reporting the exceptional not the normal.

Green-lighting

highlighting positive actions or good news which may be factually correct, but which distract the reader from the full set of positive and negative impacts of a business

Inconsistent organisational practice

not disclosing different sustainability practices associated with all products, all sites or all activities; for example, oil and gas businesses highlighting their decision not to drill any new oil wells in Europe, while not reporting new wells in the Arctic

Misleading symbols and dubious certifications

For example, Ryanair was sanctioned for making the following claim: ‘Everybody knows that when you fly with us you enjoy the lowest fares. But do you know you are travelling on the airline with Europe’s lowest emissions as well?’

Misleading symbols

misuse of symbols, natural images denoting biodegradability, poor graphics, or data visualisations that suggest improvements or hide poor practices; this could include labels such as ‘low carbon’ or ‘100% recyclable’ that have no statutory or legal definitions

Dubious certifications

referencing certifications that are not independently verified or designed to promote positive or prevent negative impacts; this could include a finance industry award for top performer in reducing their climate impact; many certifications only measure relative performance benchmarked against a narrow set of ESG criteria rather than measured against what is necessary to make a difference

No proof, empty statements and green-shifting

Coca-Cola has consistently been named one of the world’s top plastic polluters.

In 2021, Break Free From Plastic ranked Coca-Cola as the number one plastic polluter. Yet in the same year, Coca-Cola reported on their World Without Waste global sustainable packaging platform (launched in 2018) designed to drive systemic change through a circular economy for their packaging.

No proof

describing actions and changes without robust, independent, easily accessible evidence to back up claims

Green-shifting

denying the responsibility for negative impacts; shifting the responsibility to others for negative impacts, blaming consumers for littering, plastic producers not producing enough sustainable plastic, blaming regulators for preventing innovation, or complaining about a lack of recycling infrastructure

Empty statements

exaggerating achievements and marketing of future policies, setting targets without clear plans to achieve them

Political spin, green-crowding and green-rinsing

ExxonMobil, along with other major oil companies, were found to have misled governments, regulators and the public about their knowledge of what was driving climate change by promoting doubt about climate science that contradicted their own research.¹²

Political spin

statements that contradict other activities, for example, private lobbying against laws/regulations; there are many examples documented of this ‘speaking with two tongues’ by the oil, pharmaceutical and tobacco industries

Green-crowding

using collective inaction in a sector to reframe company performance, stressing the need for collective action or new regulations; being rewarded for being the best in a sector does not translate into doing enough, particularly if the overall performance of the whole sector is unsatisfactory

Green-rinsing

distracting from not meeting self-imposed targets by setting new targets, often over a longer timeframe, giving the impression of progress while obscuring the non-achievement of existing targets and performance trend analysis

Vagueness, jargon, lies and irrelevancies

British American Tobacco stated, ‘It might surprise you that as the biggest vaping manufacturer based in the UK, we want more vaping regulation, not less. Read more about the five critical steps we believe the UK government needs to take to help realise our collective smoke-free ambitions from 2030.’

In reality, the Advertising Standards Authority investigated this company for its marketing actions and activists argue this company has a systematic approach to promoting e-cigarettes contrary to guidance in the Tobacco and Related Products Regulations 2016.

Vagueness

making poorly defined claims using unclear terms that may or may not apply to all products, with no supporting evidence.

Jargon

using technical or expert terminology that suggests ‘scientific’ approaches to sustainability that are often misinterpreted by readers (for example, cutting down ancient forests and replacing with single species tree plantations becomes a ‘regenerative biodiversity programme’); all a company’s products are ‘recyclable’ even though no facilities exist to recycle them; consumers often confuse terms such as ‘100% recyclable’ with ‘100% recycled’

Lies, distractions and irrelevancies

misleading, deliberate misreporting that contradicts the latest science (for example, in the past, tobacco companies publicly declared there was no conclusive evidence that smoking caused lung cancer, while in possession of research that proved strong epidemiological evidence of this link; they also called for more research into the causes and cures for different type of cancer, while funding thinktanks and charities to promote the idea that banning smoking is an infringement of individual freedoms)

Information generated by using the checklist can be presented in a greenwashing summary format.

Fill in the gaps, correct the facts and expose the mistruths

If you find that the reports prepared by an organisation are unreliable, you need to use any disclosures with care. You might want to prepare your own account, extracting useful evidence (there is likely to be some good information), integrating material from external sources, exposing flaws and searching for missing data. This is a well-established social and environmental accounting practice, initially developed by activists but emerging as a technique used by regulators and financial institutions frustrated with the incompleteness and unreliability of self-disclosed business data. For more detail, see Hardyment (2024).¹³

This account should include the connections made in the SDG checklist, address any lack of completeness, conflict or contradictions, and only include company self-reported data that you do not consider greenwashing.

This report can be tailored for different use cases. It can help many of those responsible for businesses, those impacted on by businesses and those responsible for regulating businesses to decide on:

• whether to continue to do business with this company as a customer or supplier
• how to evaluate legal risks for past or ongoing harms
• investing or divesting
• lending more money
• offering insurance
• community campaigning
• changing regulations
• product or service redesign
• product pricing
• effective engagement with external organisations.

These are just some of the decisions that can be improved with the provision of robust, reliable and comprehensive social and environmental accounts. They are decisions that lie at the heart of the long-term success (or existence) of any organisation.

11.5 Summary

• Accountants have an ethical duty to ensure that all material social, environmental and financial consequences are appropriately recognised, valued and disclosed to internal and external parties.
• This unit has provided several examples of significant business social and environmental impacts that cannot be categorised as ‘fake news’ and justify inclusion in business accounting systems.
• Ignoring positive and negative impacts will cost the organisation.
• Professional accounting ethics suggest that accountants have a responsibility to work with others to prevent social, economic and ecological harm, by measuring and incentivising inclusive, socially just and regenerative business practices.
• The tools introduced in this unit can help critically evaluate an organisation’s social and environmental claims.