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«Published by the SIGMA Project, September 2003 SIGMA Project, 389 Chiswick High Road, London, W4 4AL SUSTAINABILITY ACCOUNTING GUIDE Contents ...»

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• Social benefits of corporate tax This was based on external social benefits that arise out of the tax paid over the project life. The taxes paid were split on a pro rata basis reflecting the UK Government spending patterns (e.g. health, education).

A series of tax multiplier factors were estimated based on the average social benefit arising from tax spend in each category.

• Social benefits of the product Three products are generated from a typical oil and gas field: mobility, heating and oil based products (including pharmaceuticals, plastics and other chemicals). Taking the example of mobility, both positive and negative externalities were identified. The positive impact is measured by the difference between the crude price of oil and the current value that consumers place on mobility (in other words an estimate of the consumer surplus). The negative factor is the social costs of mobility relating to cost of congestion and road accidents (using data drawn from Samson et al 2001).

Forum for the Future has been involved in a study to estimate the social costs of alcohol misuse. Box 2 uses information from public sources to show how the social costs of alcohol misuse can be attributed to a specific product, brand or producer.

Box 2: Alcohol: Estimating External Social Costs Drawing on the work of Alcohol Concern, the quantifiable damage costs of adverse social impact of alcohol abuse arises from a number of causes,


• costs to industry (including absence, unemployment and premature deaths)

• cost of society’s response

• costs of material damage from accidents

• costs of criminal activities.

A range of international studies indicate that alcohol misuse costs between 2% to 5% of a county’s annual gross national product (GNP). Taking the lowest estimate of 2% and a GNP for England of £542,700 million, Alcohol Concern calculated that alcohol misuse costs England between £10.8 billion and £27 billion per year (Alcohol Concern 2001).

The external social costs attributed to any alcohol product, brand or producer can therefore be calculated as the share of the product in the alcoholic drinks market (by alcohol volume) multiplied by the total external social costs to society.

For example, if an alcohol product has 1% of the alcohol market by alcohol

volume, the external social costs attributed to this product is estimated to be:

1% x £10.8 billion (lower value) = £108 million per annum Box 2 shows how it is possible to estimate the social costs of a particular product but it does not tell us whether this downstream impact is the responsibility of the producer or the consumer or some other stakeholder in the demand chain (such as distributors, advertisers, retailers, government).

Therefore the next step is to estimate how social costs relating to a specific product are shared across affected stakeholders in the demand and supply chain. Pearce and Newcombe (1998) have developed a model to describe a complex notion of responsibility based on sharing of the ‘blame’ between producers and consumers across a product chain. Forum for the Future has developed a methodology to establish a social contract between affected stakeholders based on a stakeholder consultation processix.

6.3 External Economic Impacts Traditional corporate financial reports do not detail the wider economic impacts of a company’s activities. These external economic impacts may affect a range of stakeholders in both beneficial and adverse ways. For example, positive impacts on local suppliers and service providers via the economic multiplier and negative economic impacts on the local community from a redundancy programme. The GRI Sustainability Reporting Guidelines also recommend that companies report on their indirect or external economic footprint.

The development, measurement and valuation of the external economic footprint is, perhaps surprisingly, the least developed aspect of sustainability accounting.

Novo Nordisk is one of the few companies that has gone beyond reporting its direct financial impacts to reporting on its wider economic footprint. In 1999 Novo Nordisk began to systematically explore the wider socio-economic aspects of its business, producing case studies of local impacts. In 2000 a case study was undertaken analysing the general economic impact of the Novo Nordisk Insulin plant in Clayton, North Carolina, USA.

The Clayton analysis demonstrates that the local plant has numerous impacts on the local community, employees and suppliers, and is a stimulus to local trade and industry. Furthermore, employee salaries and income to suppliers multiplies as it is spent in the local economy. Novo Nordisk has estimated the financial value of both direct and external economic impacts relating to the Clayton Plant (see Table 6 below).

Table 6: Economic Impact of the Novo Nordisk Insulin plant in Clayton, North Carolina, USA. 2000 Direct (internal) impacts Indirect (external) impacts $000

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7. Assets & Liabilities: The Role of the Balance Sheet

7.1 Sustainability and capitals As noted before, sustainability can be defined in terms of flows and stocks. A sustainable society can be thought of as living off the income generated by capitals (flows) rather than degrading the capitals themselves (stocks).

A sustainability accounting Balance Sheet could theoretically report a snapshot of the stock of each of the Five Capitals which form the resources available for the value creation process. A sustainability P&L would recognise the in- and out- flows of these stocks over time. This has not yet been attempted anywhere in a systematic fashion.

This next section considers some experiments which bring different ‘capitals’ onto the financial balance sheet. Consequently the techniques described below are company specific and are mainly used for internal management purposes. At present few organisations frame their approaches in terms of the Five Capitals used by SIGMA. The approaches we have given below are framed in terms of the individual organisation’s competitive advantage.

Present practice on the Balance Sheet appears to be considering the internal generation of capitals. They are internal measurements of a company’s success in generating assets for its own use.

However, an organisation has an impact on the external capitals, outside its own boundaries. These may include the human capital of its employees at home or after they leave the organisation, the social capital of the communities in which the organisation operates and the natural capital on which it relies. Do the organisation’s activities increase the stock of human happiness? Do they contribute to increasing stocks of natural capital? We have not come across any examples of organisations creating measures of their contribution to external capitals.

7.2 Current financial accounting practice Financial accounting recognises on the Balance Sheet factors of production where the organisation has sole right to get the benefits of their deployment.

Those economic resources are composed of:

• Fixed Assets – assets which are held for the long term.

• Working Capital – the inventories, debtors, cash and creditors which are used in day-to-day operations.

• Long-term liabilities – liabilities which will fall due in the longer term, including debt which finances the business.

In UK GAAP, assets are rights or other access to future economic benefits controlled by an entity as a result of past transactions or events. Liabilities are obligations of an entity to transfer economic benefits as a result of past

transactions or events. An asset or liability should be recognised when:

1. there is sufficient evidence of the transaction or event and

2. it can be measured with sufficient reliability

7.3 Intangible Assets Equity market value refers to the value of the company as determined by the demand and supply of their equity on the finance markets. Book values refer to the value of the company according to the value of assets and liabilities on the balance sheet.

Even with recent downturns in equity prices, for listed companies there remains a large gap between equity market values and book values. This gap is the market’s valuation of intangible assets not represented on the balance sheet – the capabilities and competencies which make up the organisation’s competitive advantage. The shift from a production to a service economy means that competitive advantage owes more to intangible assets than to plant and machinery. For a fuller discussion see the sections on Financial Accounting and the Service Economy in Appendix 1.

The issue of measuring intangibles is widely discussed in the accounting profession. From a sustainable development point of view, the general reason for trying to measure intangibles is to establish whether the organisation is degrading the five forms of capital or living off the revenues they generate?.

In terms of the Sigma Five Capitals Model, these intangible assets represent the human and social capital on which the organisation relies to generate value. Therefore, the approaches to measuring these intangible assets are considering the internal stock of the organisation.

7.4 Measuring intangible assets As an area which is full of experimentation and innovation many practitioners create their own terms. As with other areas of sustainability accounting, this proliferation of jargon can be confusing. Many authors will use the same words with different meanings, some of which may be contradictory to the meaning in the context used in the SIGMA guidelines. We have decided to use the same terms as the authors so that the reader can further investigate each example.

However, before exploring these examples a note of caution on using monetised measurement as the only way to represent intangible assets.

Professor Edvinsson, the former Director of Intellectual Capital at Skandia and one of the pioneering practitioners, likens describing intangible capitals to describing the weather: to be precise and comparative you need numbers but you also need a narrative, to give context and a frame.

Following Sveiby (2001), measuring intangible assets can be organised into 4 methods.

• Scorecard methods These identify components of intangible assets and assign particular indicators to them. The indicators can be brought into an index or presented as a scorecard.

Examples of indices include, at a community level, the work of Robert Putnam and at an organisational level the New Economics Foundation, particularly their 2001 publication for the ACCA called ‘Investing in Intangibles’.

Some businesses have also experimented with measuring Intellectual Capital (usually meaning an organisation’s intangibles). The Skandia Navigator tries to give the manager (or investor) a systematic description of the company’s ability and potential to transform intellectual capital into financial capital. It does this with a combination of financial and nonfinancial metrics which are presented in a form of Balanced Scorecard.

The Intangible Asset Monitor was created by Karl-Erik Sveiby. The monitor has financial and non-financial metrics which cover the growth, efficiency and stability of different components of an organisation’s intellectual capital.

The scorecard methods do not monetise data and can be hard to interpret.

As with a general Balanced Scorecard, the benefit is derived through designing and implementing a system for intangibles and increasing an organisation’s understanding of how intangibles can be managed.

• Direct methods With Direct Methods a monetised value is assigned to component parts of the intangibles based on either the historic cost to create, the replacement value or the value of the future economic benefits.

One area of focus is brands. Interbrand,the consultancy, produce an annual ranking of brand values. They calculate a brand’s value as its differentiated earnings – the amount it earns above a generic competitor – multiplied by a judgmental score of the brand’s relative strength.

Direct methods do produce monetised information, though with many generalising assumptions.

• Market Capitalisation methods These methods use the difference between the market capitalisation and the organisation’s net asset value to give the value of its intangibles.

In the long-term market valuations give an asset’s intrinsic value but in the short-term they are subject to asset bubbles and over-corrections. As such, market capitalisation methods are a poor guide for managing intangibles.

• Return on Assets methods This method assumes that all returns are the result of either tangible or intangible assets. Therefore, an organisation’s return on tangible assets (ROA) is compared to the industry average. The difference represents the return on the assets not included in the tangible assets, that is the intangible assets. Dividing the return from intangible assets by the

company’s cost of capital derives an estimate of the intangible asset value.

This method has been proposed by Baruch Lev as the most appropriate way to bring forward an organisation’s intangibles. Again, the nature of the generalised assumptions – for instance, how to select an organisation’s peer group – can make it a poor guide for decision-making.

7.5 Liabilities As noted above, as the focus on economic processes moves from growth to sustainable development many impacts which had previously been external to the organisation will be internalised. This was discussed under External Flows, where the externalities are internalised as shadow costs. In the previous section it is noted that there have been few attempts to quantify on a balance sheet the implications of flows from (and occasionally to) external stocks. Two mechanisms which may bridge this gap are shadow liabilities and shadow provisions.

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