Jeremy Nicholls is an accountant and advisor to Social Value International, a membership organisation that supports principles and standards in accounting for social and environmental value. At a recent Juncture seminar, he spoke about the need to fundamentally change how businesses calculate profit.
You’ve argued that the world needs a more sustainable approach to financial accounting, that better captures the consequences of a business’ operation. In simple terms, what does this involve?
Financial accounting primarily recognises costs where an obligation to pay is legally enforceable. But it also allows for obligations to be ‘constructed’. If a business has let other people know that it will accept responsibilities for specific costs, for example, because of its past practice, or because it has published policies or made a sufficiently specific current statement, then an obligation is constructed. This is currently up to the company, but it could be a societal expectation, enforced by regulation, that companies accept responsibilities for costs relating to its impacts and dependencies, for example the impact of emitting carbon, or a dependence on unpaid or enforced labour in its supply chain.
You’ve highlighted that investors can hold companies accountable, but people who experience social and environmental impacts often can’t. How can we shift this power dynamic and make organisations more accountable to the communities and environments they affect?
If companies had to accept responsibilities for these costs, then they would still be accountable to investors. But if we recognised that investors expected financial returns without doing harm, so that any harm had to be compensated, we would create a link to the people experiencing the social and environmental impacts.
You’ve spoken about this idea of ‘constructive obligations’ and how they could be used to align financial value with the public interest. Can you elaborate here?
It is not really in the public interest for investments to generate financial returns that do not account for these costs. All that happens is the financial system will allocate resources to activities that generate these costs, which ramp up until they threaten the fabric of our society. Climate change and loss of biodiversity are the common examples, but I think we are now seeing what happens with ever widening wealth inequality. If one group gains financial returns and other people have costs imposed on them, this will only drive inequality.
You’ve also spoken of the difference between ‘social measurement’ and ‘social value’. Can you explain this, and why you believe simply measuring impact isn’t enough to drive real change?
The easiest way to explain this is to think of something with both positive and negative consequences. Measurement is simply counting those things. For instance, you could be considering a decision where, as a result of your decision, you forecast that carbon emissions will go down, and you have a way of measuring this that forecasts a reduction of, let’s say, ten , and also forecast that inequality will go up, and you have a different way of measuring this and forecast an increase of, let’s say five.
The question of whether you go ahead is a question of valuation – where you decide if you value the positive change more highly than the negative. Does a reduction of 10 carbon on one scale justify an increase of 5 on another scale. When you make a decision you are, inescapably, valuing different things, despite the challenges, even if you don’t think about it. If you do you can start to recognise it, you then have to consider who should be deciding that the trade off is justified. Perhaps the people experiencing these impacts? And then you will have to consider whether there is a minimum difference between positive and negative that justifies the decision, and whether you should compensate those experiencing the negative impact, and by how much. Valuation is implicit and recognising it is the start of a process of being held to account. Which is perhaps why it is sometimes unpopular.
This idea of valuing social and environmental outcomes is one of the most challenging aspects of impact accounting. How can we put a value on these things without commodifying them?
If we accept that we are already valuing things in all our decisions, then the question is not how do we put a value on them as we already are. The question is how can we value them in ways which improve the decisions we make.
There is an argument that says it’s impossible to do these interpersonal comparisons of utility – that is, who is to say your positive is better than my negative? But despite this, we do it anyway, all the time when we make these trade- offs. Our argument isn’t that there may not be a right answer to this, but that there needs to be a recognition that it’s happening, and a need to be transparent about it.
If you bring transparency to these trade-offs, we can start to have a more socialised, shared view about when it’s okay to do that and when it’s not. And how we should be compensating for any harm we do. But I don’t believe this necessarily leads to commodification. The risks of commodifying value come when you are not trying to make better decisions that lead to more positive impacts and fewer negative impacts on people’s lives. When you are not being held to account for the consequences of your decisions.
Do the people experiencing the impacts play a role in this process?
Yes, the people experiencing the impacts absolutely play a role in this process, otherwise those with power are making decisions where they decide whether to recognise impacts or not, how important different impacts are, whether trade-offs are justified and whether to compensate for negative impacts.
In the UN Guiding Principles for Business and Human Rights, people need to be able to voice their grievances and any abuse of their human rights should be remedied. They must have a voice in telling you what happened and how important that is to them. This would inform those constructive obligations we started talking about earlier.
In the context of what we have discussed, what is the single most important change you believe we need to see in the next five years to get the world back on track toward meeting the Sustainable Development Goals (SDGs)?
I think the biggest issue is that we need to have a much broader public conversation about our accounting system and how costs are recognised or not in a business’s accounts.
Our current system is not helping us achieve SDGs because it allows companies to generate costs that undermine the SDGs faster than we can make progress. We do things that move us forward a bit, but we’re continually ‘dumping’ all these costs, which means we go backwards at the same time.
The big issue is raising awareness among the public, regulators and accounting standard-setters about the consequences of a system that accounts for one type of cost but not another. Moving from the current system to one where more of those costs were included would need to be managed and there would need to be a transition. Not all these costs can be recognised but we can make a start, and accounting is very good at developing processes that involve judgement and uncertainty but provide useful, comparable information. If we had a financial system that allocated resources to businesses that did not generate these costs, these externalities, surely that would make a lot more sense.
About Jeremy Nicholls
Jeremy Nicholls is an accountant and an advisor with Social Value International (SVI). His work and writing focuses on how mainstream financial accounting is contributing to climate change, nature loss and inequality and on how this can be reversed. He is an honorary research fellow in accounting at the University of Liverpool, a member of A4S’s expert panel, GRI’s due process oversight committee and ICAEW’s non-financial assurance committee. Until the end of 2024 he was working with the UNDP on the SDG Impact Standards, responsible for developing a third-party assurance framework. He is also involved in ISO standard development; he chaired the committee that developed ISO37005, was involved in the first joint ISO/UNDP standard, 53001/2 on SDG Management.
He originally qualified as a chartered accountant, including time as the Finance Director for Tanzania Railways. After four years as a house parent, he became involved in social enterprise, sustainability and regeneration, and was one of the founders and then CEO of SVI.
Read more about Jeremy Nicholls
The opinions expressed in this article reflect the views of the author and are not necessarily the views of Waipapa Taumata Rau, the University of Auckland.