Budgeting for “the commons” needs business “eco-balance” sheets

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A comprehensive method guiding investors
to compete for profiting the commons

It would not just count profits but also liabilities, in financial terms, using monetized business ESG balance sheets (eco-balance sheets), in combination with normal financial balance sheets.

Then everyone will see the real societal financial costs of making money today, that present or even past investors might well be held responsible for.

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The full application of this principle is “A World SDG“, to provide TRUE MEASURES of sustainability for business, consumer and policy choices, and applying the basic science research for ‘Scope 4’ accounting and the 2011 Systems Energy Assessment (SEA) paper It is still “new science” though, and so demands fresh questions too.  It takes investigating the actual organization of the working systems of our world, looking for regular patters of in the system as a whole, what causes them and how they are change, more than theory.  It’s surprising both how little we notice going on around us, and how much we see but don’t notice what is implies.   A workshop method for opening people’s eyes to what’s really happening all around them can be found in the 3Step Method of Learning to Work with Nature. 

The original version of this proposal was submitted to the Rio+20 Dialogues for comment and voting as: Budgeting for “the commons” needs business “ecobalance” sheets, to compare environmental liabilities and benefits”. See “News of the Commons” for introductions to the vision and the systems thinking needed for a commons based approach to sustainability.  It’s part of my “reality math” series.

It’s proposed as part of the foundation of collaborative free market institutions needed for the health of the competitive free markets, as an element of Helene Finidori’s “Commons-Sense” and the “commons based economic models” she proposed.  Their intent is to solve the global economic crisis by making the commons work for the whole, as a replacement for the paradigm of “prosperity” with ever expanding development.

The proposal would accelerate how the business community is responding to their environmental liabilities. They’re hiring teams of sustainabilty experts, using comprehensive sustainabilty reporting (CSR) to track Environmental, Sustainability and Governance (ESG) factors, following both private and public standards, such as for the Global Reporting Initiative (GRI). The reason business has a new interest in environmental liabilities is that they are driving corporate assessed values, as economic liabilities.

To protect natural resources local stakeholders would still need a say in the use of local resources.   To protect global resources for the future an equitable way to restrain growing economic demand is needed.   World standards for Comprehensive Sustainability Reporting (CSR) wold accurately assess the impacts of business products.  Then Economic Liability Assessments (ELA) of their economic costs to our future, would allow the world to act as a resource commons.   It would provide equitable market constraints on high impacts would, to suppress demand, and fund investment in alternatives.   ELA reports would be the basis of the “Eco-balance sheets” called for below, to be reported in business annual reports and factored into Pigovian taxes/tariffs on their products and services.

The basic scientific methods of doing accurate CSR and ELA assessments are what are discussed below.    The current statistical methods of environmental and economic accounting contain a major systematic inaccuracy. Simply said the error is in relying on tracing individual records rather than assessing whole system requirements,

an inaccuracy caused by not asking who sliced up the pie, to check the accuracy of trying to trace all the crumbs.

a scientific method difference
between economic accounting and systems accounting

Slices of a business energy pie mostly go uncounted when relying on traceable records, leaving out all the energy demands of business services.

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Our Economic Liabilities for Environmental Damage
are direct costs of prior profits for business
that went unaccounted for.

New systems physics (3) would now allow the development of model “eco-balance sheets” to be placed along side normal “financial balance sheets” in annual business reports.   That would provide a clear and quicker way than others for using market forces to correct our systemic problem of unaccountable impacts on our future.

Businesses have long accumulated unaccountable impacts by investing in growing irreversible exploitation, and now accelerating depletion, of what once seemed limitless capacities of people and the earth.   It’s enormously costly for our future.

Investors and business managers can make better investing decisions if ESG measures capture the whole impact.

Those investment strategies incurred very costly economic damage to our future economy, that the businesses that created them were not charged for.   For estimating environmental impact costs like that there are various methods, and some major recent innovations.

One of the kinds of measurable costs is for replacing all our energy systems.   That’s not yet being considered as a charge against businesses for having developed unsustainably.   Business won’t actually make good investment decisions for our future until the value of their decisions is reflected in their bottom line.

Here the method for doing so is to start from the big measurable whole economy costs, and distribute them according to business shares of GDP.  that that is a valid physical measure and method of allocation is part of the new systems physics involved.

By most counts, to maximize short term business profitability the whole economy would need to replace its energy infrastructure more than once, creating is another kind of strategic problem, and large economic liability for short term profits.   We should be transitioning to lasting new systems not temporary systems, to reduce the long term economic burden.   Now is the time to be putting a $ cost on these long term effects, or we’ll just be repeating the mistakes of the past.

One can start with the simplest techniques and build from that solid foundation.  The cost of CO2 associated with a business’s energy use could be priced as equal to the present cost of secure carbon sequestration(1).   The cost reporting and estimating standards needed would have to include lots of decisions about practicality and accuracy.

One would need to choose how businesses would report their implied environmental costs on their balance sheets :

  1. as accumulative totals, for being at the end of their supply chain, the easiest thing,
  2. for only the impacts of their value added to the product they sell, or
  3. only for fuel producers, to be then be reported to their purchasers and passed along as a cost would be.

The most important principle for converting environmental liabilities to economic costs is that using a common proxy measure is **always** more accurate than counting the costs as “zero”, as we now do.

For some resources like energy use, which is a highly liquid resource used, traded and priced globally, it’s very easy.  There also seem to be quite good scientific reasons to consider the aggregate enegy use of a business and its whole supply chain as equal to its global average cost per $GDP.  That is close to 8000btu/$ and .47kgCO2/$gdp (2). The reason to do it that way is more than any proxy measure being more accurate than “zero”.

It’s been shown to also be far more accurate than the best available methods of tracing individual energy uses.   Because we can’t trace individual energy uses throughout the economy needed for any given business to operate, energy impact metrics have been leaving out the great majority. Tracing individual energy uses is so inaccurate that virtually all estimates doing it that way make those business appear to have *far below average* energy impacts.

For the wind farm case study that served to point out the systemic lack of traceable enery use data that causes it, the implied share of world energy use was five times what was traceable.(3,4) This would, of course, involve a substial research effort, but you’d start with the easy parts.   Perhaps people haven’t done it not wanting to break the tradition of thinking of the environment as cost free.  It probably would have been a bad legal choice to accept any financial liability for one’s impacts.  It might reduce profits.

I think it wasn’t done also because of the “funny math” involved, having to put “soft estimates” and “hard data” side by side, and interpret them. Now we’re beginning to see how critical the information is for decision making, though, and that there are some fairly easy places to start.   It’s simply not sensible to count them all as “zero”, which is what we do presently, for not having hard figures.

It would be fairly simple, for example, to introduced them into financial planning at every level, by the very rational scheme of starting with “average” per share of the economy represented.   One could readily make the rational assumption that every business uses the whole commons, as it actually does in reality.

There are fairly sound measures for many kinds of environmental damages and resource depletions. There are measures for the global accumulation of toxic chemical pools, for deforestation.

You could accurately estimate the sea level rise, and loss of coast line due to climate change, as a cost per $GDP.   There are the measurable costs of environmentally associated medical expenses, and lots of other things, as forseeable added costs for someone other than those who profited from them.

They’re all real items on the financial budget of the commons.

If every dollar were assigned one equal share, keeping the list of things short at first, it would provide a highly informative proxy measure of our hidden liabilities.  It would be a motive to spend more of our money learning how to know what the other choices are.

To be reported on a balance sheet the Ecobalance Table would show each line item in the general business balance sheet, with columns for “average” and “adjusted” eco-costs.  It would be in any business’s annual report, comparing financial and environmental balances, and be linked from their product labels for public view.

Without this kind of tool, the now quite obvious looming real financial costs to the commons are completely undefinable.  We need to know there’s a cost to things like our using ever lower quality and higher cost fossil fuels, for example.   We’ll continue to expanding our economy’s dependence on them, not gain our independence from them, without proper accounting.

We’ll keep our outmoded technologies and use of ever depleting resources.   Both of those have potentially crippling future economic effects.

1) – Gray N. 2009. Using charcoal to fix the price of carbon emissions. Sustainability: Science, Practice, & Policy 5(2):1-3. Published online Dec 02, 2009. http://sspp.proquest.com/archives/vol5iss2/editorial.gray.html

2) Henshaw, J.L., “Estimating your DollarShadow” url http://www.synapse9.com/design/dollarshadow.htm

3) Henshaw, P.H.  System Energy Assessment (SEA), Defining EROI for Energy Businesses as Whole Systems, Sustainability, 20113(10), 1908-1943; doi:10.3390/su3101908 –  url http://www.mdpi.com/2071-1050/3/10/1908/

4) Henshaw, J. L., “Our curious missmeasure of impacts (and silver linings)

5) Henshaw, J. L., “Shining Light on “Dark Energy” in New Measures of Sustainability, Sustainable Brands Nov 2012

 

jlh

ed 12/5/13 – heading & spelling

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