This February, during the World Economic Forum in Davos, the 2011 Corporate Knights Annual Global 100 Executive Round-Table Dinner focused on “A 21st-century Balance Sheet for Cleaner Capitalism.”
The Davos dinner was a dialogue on how best to lead us toward incorporating natural capital and broader social capital metrics into the key documents used by corporate and government decision makers: profit and loss statements and gross domestic product (GDP). This has been discussed for many years to little avail. With the market cap of corporations globally at $60 trillion – on par with global GDP – the links between corporate and government sustainability have never been more pronounced. The time is right for a move forward with the implementation of a Green GDP and more inclusive forms for corporate valuations. Just as the Great Depression provided the impetus for national income statistics, the financial crisis has given us an opportunity to rethink the myopic metrics that almost led us off a financial cliff and design a broader, more accurate tabulation of national and corporate wealth.
What conclusions did we draw from the dinner as to how a Green GDP and a more integrated approach to corporate accounting should be approached?
There is a growing body of academic and empirical evidence to suggest investors who have access to information on the climate change and water risks that specific companies are exposed to generate better returns. Investors who take the trouble to seek this information out have an enormous advantage in terms of insights into management, adaptability, flexibility and so on. A more integrated approach to corporate valuation models would be advantageous for investors, and they should be vocal advocates for it.
The recent interest in gross national happiness and other happiness indexes, from British Prime Minister David Cameron and French President Nicolas Sarkozy in particular, is promising and should be part of the equation when discussing integrated reporting on a national level. Yet there is reason for caution. A national happiness index does not necessarily mean individual happiness is being measured, as George Soros commented, based on his visit to Bhutan, which uses gross national happiness as its main measure of progress.
One idea floated was to use research and policy institutions with strong connections to the G20 and the UN to move this issue forward, bypassing the bureaucracy. A former G7 deputy cautioned about the ability to significantly impact the G20 agenda and suggested that the outreach effort should be combined with small groups of like-minded countries and clusters of companies getting together to discuss the enactment of integrated reporting. He pointed to recent successful examples of civil society pushing synergistic corporations to get together and pursue sustainability objectives as inspiration.
Even as a Green GDP movement takes shape (15 countries currently have a Green GDP in the works) and corporate valuation models broaden to include natural and social capital factors, it is important that countries continue to enact further disclosure requirements for corporations, for reasons of comparability and standardization. A number of countries have grown more bullish on disclosure over the past several years. In the past, companies that wished to invest in systems that allowed them to report environmental and social results were asked to explain themselves. What we are now seeing progressively is those questions are being asked of those who do not disclose. What is your case for flying blind?
The World Bank takes stock of natural capital
At the most recent Convention on Biological Diversity in Nagoya, Japan, the head of the World Bank, Robert B. Zoellick, announced a firm commitment to include natural capital onto national balance sheets. “The natural wealth of nations should be a capital asset valued in combination with its financial capital, manufactured capital and human capital,” he said. “National accounts need to reflect the vital carbon storage services that forests provide and the coastal protection values that come from coral reefs and mangroves.”
Although this is a long-term project, to support this effort, the World Bank announced the Global Partnership for Ecosystems and Ecosystem Services Valuation and Wealth Accounting. Zoellick added that “biodiversity is not an add-on. Preserving ecosystems and saving species are not luxuries for the rich. Conservation and development can go hand in hand. Our habitat and our planet deserve nothing less.”