People think I count beans, but I like to think I’m solving the world’s problems. I use accounting to make companies more sustainable. How do I do this? Let me demonstrate with a story.
Imagine a surgeon decades ago showing up to operate on his many patients who arrive to have tumours from their lungs removed. This doctor is having a positive, practical impact on these individuals’ lives by performing surgery and removing these tumours. But let’s say this doctor, after years of performing the same surgeries, becomes frustrated. It seems that no matter how many surgeries he performs, there are always more waiting. He wonders: why are all these people getting these tumours in the first place?
This is where theory comes in. Could it be that the tumours are all caused from chemicals in their environments? Or from a particular gene they all share? Or could it be caused by the cigarettes and cigars they smoke? In posing these questions, the doctor is trying to get at the root of the problem and theory can help him do this. Having a theory puts forth an idea about how or why something happens. Why might cigarettes and cigars cause tumours? Perhaps the chemicals in the cigarettes damage the cells causing tumours to form? How can we test this?
Now for the research. The doctor could study two groups of people, one that smokes cigarettes and one that doesn’t to see if there are differences in who gets cancer. He’ll need to be careful to rule out other possible explanations and make sure the two groups are similar. For example, if the group who smokes is from an area with a high level of pollution and is older than the other group then we may not be sure that cigarettes are causing the tumours, it could be the pollution or their age. But by having two identical groups in identical circumstances with the only difference being that one group smokes and the other does not we can begin to research our question: does smoking cause tumours?
Using our crystal ball…with science
Now we can make some predictions based on our theory. If the theory is correct, that chemicals in the cigarettes damage the cells, then we should see that the group that smokes should have higher levels of cancer than the group that doesn’t smoke. This research can be repeated until we see that the results are the same again and again: cigarettes cause cancer. While this research was conducted years ago, we now accept its results as commonplace: cigarettes cause cancer. But without theory and research we would still be wondering why these people were getting tumours in their lungs.
But solving the world's problems? With accounting?
First, I think it’s important to understand what accounting is. Most people think it’s tracking money for businesses to figure out how much profit they made last year, but in fact, it’s so much more. If you think about it, accounting is to provide an account of something, communicating what happened or what will happen. Typically, this is thought of in terms of where money went, how it was spent, how much was earned or in terms of where money might go in the future. But really, at its basis, accounting is telling the story of something. While this has traditionally applied to money, today it also applies to other aspects of business. What impact is the business having? How does it handle the resources it uses to make it products or provide its services?
Are all companies created equal?
Think about two companies that appear similar financially: Company A & Company B. They both have profits of $100 million per year. Are they the same? Which one should you invest in? Which one should your pension invest in? What if I told you that more information was available? Sustainability accounting involves the communication of additional information beyond just the financial. This requires that accountants and other members of the organization track, measure and communicate non-financial information about the operations of the company. Does this sound valuable?
What if I told you that Company A made its profits paying a living wage (one that provides a normal standard of living), treated the communities where it operates well and respected the environment through recycling initiatives and energy reduction programs? Does this matter to you? What if Company B did provide the information and you found out that it provided the legally required minimum for wages to its workers and complied with the relevant environmental regulations? It is following the law but doing nothing beyond what is required. Do you find this information useful? Would you invest in Company A or Company B? These are just a few examples of how sustainability accounting communicates information about how companies operate.
During the course of my studies, I read a lot about how companies are implementing new initiatives to become more sustainable. It turns out that about 40% of the largest firms in the U.S. (on the S&P 500) give bonuses to its executives using various sustainability goals (I refer to these as sustainability incentives). For example, a company might say to the CEO that it will give her a bonus if the company reduces its greenhouse gas emissions or increases the diversity of the management team to include more women or minorities. I was curious as to why this was happening. Could it be greedy executives who negotiate to get bigger bonuses by making it look like they are doing good things for the environment and society while really just making more money for themselves? Or could it be that pension funds and other investors want companies to behave better and are pushing for better sustainability performance and the companies are putting these goals in place as a result? There are theories that predict either could be correct so I’ve designed a study to address these questions. I am also studying what effect these sustainability incentives have on the sustainability performance of the firm and how companies can do a better job in providing them.
I believe this will have practical implications for all of us. By understanding sustainability incentives, we will be able to better understand these companies, which ones are ‘good’ and which ones we’d like to avoid. This can help you spend your money with companies that match your values. This knowledge can also help make better investing decisions. In fact, we know that companies that have better social and environmental performance tend to do better financially than those that ignore these issues. Finally, those companies that want to do better can use this research to improve their use of sustainability incentives. How these companies behave can improve our communities or hurt them; help the environment or hurt it. Their decisions affect our lives.
We are living in an age where theory, research and science in general are being questioned for their value. Facts matter. Theory matters. Research matters. Doing good quality research is hard but finding truth in the chaos is important and affects our day-to-day lives in many ways. For those of us committed to sorting through the noise, we need to continue to communicate the value of what we do and why thoughtful, impactful, evidence-based research is important.