The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2040-8021.htm

Integrating financial, social and Social and

environmental
environmental accounting accounting
Jeremy Andrew Nicholls
Visiting professor of Social Value, Staffordshire University,
Stoke-on-Trent, UK 745
Received 31 January 2019
Revised 17 June 2019
Abstract 1 October 2019
25 November 2019
Purpose – The purpose of this paper is to propose a public policy solution to updating mainstream financial Accepted 25 November 2019
accounting from its nineteenth century roots and make it more relevant and consistent with public policy,
individual investor motivations and global needs as exemplified in the sustainability development goals.
Many approaches to integrating social and environmental accounts with financial accounts are additive; the
two types of accounting information sit alongside each other. The opportunity to revise the basic building
block of financial accounting, information to help investors make economic decisions relating to investments
to increase integration and recognition that this is a public policy decision and not an accounting profession
decision, is rarely considered.
Design/methodology/approach – The approach is a viewpoint on the opportunities for and benefits of
integration of financial, social and environmental accounting.
Findings – The current basis of financial accounting does not reflect private investors’ motivations, and
changing the basis of accounting is a public policy issue.
Research limitations/implications – This is a viewpoint paper. The pros and cons of current
approaches to valuation of social and environmental outcomes are not explored.
Practical implications – Changing policy would require support from asset managers and owners,
accounting bodies, civil society and politicians and would need a plan for transitioning from the existing
approach.
Social implications – This is a possible starting point for formal research that could support policy
changes that could result in resource allocation decisions taking account of social and environmental impacts.
Originality/value – There are several approaches for integrating social environmental and financial
accounting; however, the proposal that integration would result from a change in public policy specifically
clarifying and updating investor motivation provides a possible solution to many of the challenges of
integration.
Keywords Accounting, Environmental, Sustainability, Impact, Social
Paper type Viewpoint

1. Introduction
The purpose of this paper is to propose public policy solutions to incorporating
consideration of social and environmental outcomes in resource allocation decisions.
Section 2 sets out the need for full integration of these outcomes in financial accounts. The
basis for financial accounting and the importance of assumed investor motivations in
Section 3 leads into a review of current approaches to social and environmental accounting
in Section 4. Issues and challenges of these approaches are addressed in Section 5 to propose
an approach to full integration in Section 6 with possible accounting treatments. Section 7
argues that this is a public policy decision and uses the UK Companies Act as an example to Sustainability Accounting,
Management and Policy Journal
explore some of the policy challenges. Vol. 11 No. 4, 2020
pp. 745-769
Social and environmental accounting is generally seen as separate to financial © Emerald Publishing Limited
2040-8021
accounting. Imagine starting again from scratch in a world without an accounting system. It DOI 10.1108/SAMPJ-01-2019-0030
SAMPJ is likely that a fresh approach would take a more holistic approach from the start. This
11,4 paper argues that the separation is an accidental consequence of a historical interpretation
of the purpose of financial accounting. Subsequent, and increasing, recognition of the need
to account for social and environmental effects has not sought to change financial
accounting so much as create social and environmental accounting as a new discipline.
However, it is possible to change the basis of financial accounting and include many of the
746 outcomes that are considered relevant in social and environmental accounting. This is
different from integrated reporting, where information on the other capitals sit alongside
financial accounts.
This paper argues that a higher level of integration is a prerequisite, as society
increasingly wants social and environmental outcomes to be accounted for when making
resource allocation decisions as evidenced, for example, by the United Nations sustainability
development goals (SDGs). Recognising such outcomes will reduce the tendency towards
further wealth inequality before resources are allocated by public and private investors,
rather than trying to deal with the problem of inequality afterwards.
The IASB Conceptual Framework (IASB, 2010; IASB, 2018) states that the primary users
of financial accounts are current and future investors, including creditors, so that they can
make investment decisions to buy, sell or hold equity or debt instruments for financial
return, and to assess how efficiently management has discharged responsibilities in making
economic resource allocation decisions. The investors here are the underlying owners of the
investments although increasingly they work through agents (investment managers) who
make investments on their behalf.
It is assumed that the objective of financial return is an accurate reflection of investors’
motivations. This decision criterion originates from the early development of financial
accounting alongside a neoclassical view of economics (Hopgood and Miller, 1994). This
approach, as it has developed, has led to resource allocation decisions which have not taken
account of wider social and environment impacts and has contributed to increases in
inequality and environmental degradation. There are critiques of this approach, and of
sustainability reporting, because the primary user remains the investor and the reporting
focuses on businesses’ ability to create value for the investor, i.e. provide financial returns.
There are two key issues with the assumption that the objective is financial returns
which highlight the opportunity to change accounting. First, the decision of what motivation
should be used, as the basis for financial accounts is a public policy decision, balancing
individual and community interests. Second, research with investors (Ethex, 2017; Social
Value UK, 2018) has shown that investors motivations are more complex, and the aim is
more commonly to make financial returns subject to some other factors, for example, net
positive social and environmental impact.
If this, or a similar motivation, becomes the basis for financial accounting, then resource
decisions would no longer be directly tied to financial returns, arising from changes in
resources measured, but would include social and environmental effects to provide investors
with the information needed for these decision criteria. There is no reason why monetary
proxies could not continue to be used to recognise social and environmental effects within
accounts and provide comparability with existing financial values. Accounting for these
effects, where negative, would not have an immediate effect on a company’s cash, but it
would reduce a company’s distributable reserves and increase the cost of capital. Investment
in companies with higher negative effects would fall and there would be incentives to start
businesses with lower negative effects (Reporting 3.0, 2018; Nicholls, 2016).
There are an increasing number of approaches that seek to value outcomes using
financial proxies (The Roberts Enterprise Foundation, 1996; Richards and Nicholls, 2017).
There is still an on-going debate on the pros and cons of valuation; however, we are in a Social and
world where resource allocation decisions, which contribute to social and environmental environmental
challenges, are made based on financial value. The test for valuation is the extent to which it
accounting
will contribute to shifting resources to activities which have positive social and
environmental outcomes.

2. Wealth inequality and why social and environmental value needs to be 747
integrated with financial value
The way in which resources are currently allocated, by those who own the resources
(capital) to generate returns (revenue), further concentrates inequality;
Last year, 82% of wealth created worldwide went to the top 1%. The poorest half saw no increase
at all. All over the world, the economy of the 1% is built on the backs of low paid workers, often
women, who are paid poverty wages and denied basic rights. (Oxfam, 2018)
This concentration also means that access to the social and political systems that societies
put in place to manage the risks of such a concentration also becomes unequal, further
reinforcing inequality. The global approach to financial accounting, based on the needs of
individual wealth maximising for investors has contributed to this inequality since,
historically, inequality has not been seen as creating costs. Furthermore, the costs, even if
recognised, are not considered to be material to this type of investor.
This concentration also makes it possible for individuals to undermine the basic
propositions behind markets in which private gain and social returns are expected to be
closely aligned. Stigliz, in “The Price of Inequality”, (Stiglitz, 2012) provides many examples
of rent seeking, the techniques used by wealthy people to collect rents that would not be
possible in a “fair” market and are therefore rents gained at the expense of others. These are
techniques that, for example, have the potential to undermine competition, support
oligopolies, reduce access to judicial redress and influence tax policy, all increasing the
concentration of wealth and reducing social mobility.
However, the global financial system has been very successful in supporting a general
increase in wealth. Average GDP per head has increased from an average of a few hundred
dollars a day in the eighteenth century to around $17,000 in 2017 (Index Mundi, 2018). This
has significantly increased the quality of life for many millions of people. It has also been
associated with a rapid increase in population, from one billion in 1804 to over seven billion
now. This means that although the proportion of people in extreme poverty, those living on
under $1.9[1] per day, has declined it is more debateable whether the absolute number has
significantly changed. At the same time, there are now over three billion people who, whilst
not in extreme poverty, are still on very low incomes. GDP measures the system’s
effectiveness in creating wealth, but it is also a system that is effective in creating and
sustaining inequality.
There is increasing recognition that the economic system needs to change, from the IMF
and their work on inequality and growth (IMF, 2017) to initiatives like the Coalition for
Inclusive Capitalism. This realisation is not entirely new and the growth in wealth
inequality has gone alongside an ever-increasing range of government interventions
designed to limit wealth inequality at international, national and regional levels. So far, these
have not been successful in reducing inequality or in even maintaining the current level.
Consequently, any intervention will need to be radical and systemic but, to be widely
supported, should not require significant changes to the operation of the current economic
system.
SAMPJ Gray et al. (1996, Chapter 1) argue in “Accounting and Accountability”, that Social and
11,4 Environmental accounting has the potential to expose the tension between pursuing economic
profit and the pursuit of social and environmental objectives. This is true, but it also has the
potential to resolve this tension if the decisions to allocate resources had to take the social
and environmental outcomes of those decisions into account at the same time as considering
the financial outcomes.
748 Reducing inequality is one of the SDGs (SDG10) and progress on most of the SDGs would
contribute to this. Over 50 per cent of carbon is produced by the richest 10 per cent so
reducing inequality is not just about addressing the needs of people who are underserved
but also the behaviours of those that are overserved (Oxfam, 2015) which is also addressed
in other SDGs.
Two of the common solutions to inequality are education (giving people equal
opportunities to succeed) and taxation (society redistributing resources from those who have
benefited within their societies to those who have not). To one extent or other, both occur
after the inequality has arisen and leaves society spending money to reduce the arising
problems. Addressing the SDGs is estimated to require $2.5tn per annum and the tendency
for the system to generate inequality needs to be addressed at the same time. A better
approach would be to reduce the risk of inequality at the point a decision to allocate
resources is being made. Making social and environmental outcomes integral to that
decision is a way of achieving this. This would leave people free to make the investment and
consumption decisions they wish but the range of options for investment and consumption
would change.
There are several ways in which this is theoretically possible. One is to take a multi-
stakeholder approach and have an account that is designed for the needs of different
stakeholders, rejecting the primacy of the shareholder. This would address the criticism of
financial accounting and some approaches to sustainability accounting that retain the
investor as the primary user. Challenges remain, for example, where different stakeholders
have different perceptions of what is material. More importantly, the people who experience
social and environmental accounts are generally not able to hold organisations to account
and not in a position to make decisions based on this information. This means they may not
be considered to be users and their experience may not be considered to be material.
Another approach, promoted by ACCA (2019), would be to rebalance taxation, shifting
from labour to green taxes. This has a direct cash effect and, whilst leaving people free to
make their own consumption and investment decisions, would influence those decisions to
the extent that relative prices had changed. Existing proposals have focussed on green
taxation, but more recently, Prem Sikka (2019) has proposed a tax on inequality.
The other approach would be to change the underlying assumed motivation of the investor
to include an interest in the effects on other people. This would capture many, perhaps most, of
the outcomes included in sustainability accounting. The effect will be to make investors much
closer to citizens and to build an accounting system, similar in principles to financial
accounting but significantly different in result. This would also mean that accounting for these
effects would be as important as financial returns to businesses’ purpose.
Social and environmental outcomes are then intrinsically about inequality, about the
consequences of wealth concentration and the environmental consequences of an economic
system designed to facilitate wealth concentration.

3. The foundations of the economic and financial system

Financial markets lie at the core of an economic system that has facilitated extraordinary
levels of investment over the last 200 years. The limited liability company and the
ecosystem that surrounds it has enabled investors to invest in legal structures, managed by Social and
people that they will never meet, with some confidence that the money will be returned with environmental
interest, or with a dividend.
The joint stock company allowed people to invest in new companies. The development of
accounting
stock markets allowed people to buy a share of those companies in secondary markets and
later sell those shares to others. Limited liability allowed people to limit that risk and invest
in businesses that were established to be going concerns, to continue to exist for the
foreseeable future.
749
This system works because it is based on legislation that protects investors and gives
them the confidence to make investments. It contributed to the view that income is the
change in wealth over time, and to what financial accounting and society consider to be
resources and how the changes in those resources are measured to provide an account of
what investors own. A key part of this legislation is a basic requirement for businesses to
produce financial accounts to show what they have done with investors’ money and to make
sure that investors are not paid so much that the company cannot meet its other liabilities;
that dividends are not paid out of capital.
The idea that people are accountable for how their actions affect other people’s rights,
including ownership, is deeply rooted and is the basis for both common law (being held to
account for what we have agreed to do and for any unintended consequences), and for the
laws of equity (addressing a wider assessment of actions against what is considered
equitable). Financial accounting, famously documented in the fifteenth century by Luca
Pacioli (1494) originated in universities holding the people who “stewarded” their lands to
account in the thirteenth century. The current approach to financial accounting really took
off with the birth of the joint stock company and the protection of investors, including
creditors and especially in the period between the first and second world wars (Hopgood and
Miller, 1994).

3.1 The purpose of accounting

For many people, financial accounting is simply the process of counting how much money a
business has left from an investment after deducting its expenditure from its income; the
profit or loss which could be added to capital and made available to the investors. But
actually financial accounting starts with deciding what should be included in the income
and expenditure and, once included, valuing it (Accounting Tools, 2017). Accounting for the
money a business has in the bank is easy. Other transactions are more difficult especially as
financial accounting often has to make assumptions about the future; for example, what
level of debts are likely to be unpaid. No one can know for sure, but financial accounting
allows businesses to make a reasonable estimate, good enough, with assurance, to inform
investors’ decisions to buy or sell shares in different companies.
Accounting for bad debts may not be easy but accounting for assets, what and when
income can be recognised, and the level of contingent liabilities is much harder. And so
“stated profits”, the amount that can be distributed, without putting the business’ ability to
meet its liabilities and continue to operate at risk, can be heavily influenced by these
estimates. The accounts also inform the value of the company, although the price of a share
is influenced by many factors in which financial accounts explain a relatively small
proportion. The balance sheet is not intended to represent the market value of a company.
Other factors include previous and forecast profits, intangible assets, cash reserves and
wider market conditions. Profits are influenced by estimates of the value of uncertain
transactions and the discount rate but also by the accounting decision of what to include and
SAMPJ exclude and the current and retained profits influence the level of dividend payments to
11,4 investors.
The decision to include or exclude information in an account can be harder than
estimating the values and must be informed by an assumption about the motivations of the
people who will make decisions with these accounts.

750 3.2 True and fair

In the UK, Section 396 of the UK Companies Act (2006) states that accounts should give a
“true and fair view”. True and fair is not defined in law. The Finance Reporting Council’s
(FRC) have a section on the website and a link to a legal opinion from Martin Moore, QC. The
Companies Act accepts compliance with international accounting standards as meeting the
requirements to be considered as true and fair.
Changes in other national regulations will also influence what is true and fair, if the
change has a financial implication. For example, regulations may require mining companies
in one country to return the land to the state it was in prior to opening the mine, but this
regulation may not apply in another country.
Despite variability across different legislations and from various developing standards,
the purpose of accounting continues to be to provide good enough information to support
investors’ decisions. In this context, the decision of what should be included in accounts for
them to be true and fair will require accounts to be complete (where completeness is
informed by the concept of materiality) and that accounts should include information that
matters. The question is as follows: Matters for what and to whom? There is increasing
recognition that this should not be limited to investors interested in only financial value.
This returns to the challenge of who are the users of the accounts and opens the option of
redefining the assumed investor motivation as a solution.

3.3 The invention of the wealth maximising investor

The assumption of a wealth maximising investor that currently underpins financial
accounting has developed over time. For a while, any company seeking limited liability
required a separate Act of Parliament, providing limited liability where the object of the
company would provide a public good by, for example, building railroads or utilities.
Investors could then invest but limit their liability to that investment. The accounts that
governments required for taxation would provide assurance to them that prices were fair
and provide assurance to investors that their investment would be returned. The limited
liability company, which is now an international standard business model, began with an
explicit public purpose and the motivation of the investor was for financial return framed by
a public good.
This requirement changed, first with standard Memorandum and Articles of Association
and then with the ability to make amendments to the standard and, following the Companies
Act (2006), moving the objects clause to the Articles. So financial accounting standards
developed to improve comparability across companies to establish a way for regulators and
courts to know if financial reports were “true”. It would not be possible to prepare different
accounts for the different possible motivations and needs of each investor and so a
standardised investor was required. Influenced by classical economic theory, the image of
the investor as a wealth-maximising, non-moral being emerged, exemplified by Smith (1904,
Book IV, Chapter 2 para 4):
Every individual is continually exerting himself to find out the most advantageous employment
for whatever capital he can command. It is his own advantage, indeed, and not that of the society,
 which he has in view. But the study of his own advantage naturally, or rather necessarily, leads Social and
him to prefer that employment which is most advantageous to the society.
environmental
The assumption is that the “best” allocation of resources for society will follow individual accounting
self-interest and that private and public goals are aligned.
This resulted in the objective of financial accounting as defined in the IASB Conceptual
Framework is:
[. . .] to provide financial information that is useful to users in making decisions relating to 751
providing resources to the entity. Users’ decisions involve decisions about; buying, selling or
holding equity or debt instruments; providing or settling loans and other forms of credit; voting,
or otherwise influencing management’s actions. To make these decisions users assess prospects
for future net cash inflows to the entity and management’s stewardship of the entity’s economic
resources.
In theory, this does not exclude non-financial returns, but in practise, the decision about
what should be recognised as material fundamentally relates to financial returns. Many
approaches to, and definitions of, economics are not limited to production and consumption
of resources but include consideration of the distribution of those resources. Financial
returns are also affected by non- economic resources and by the distribution of all resources.
Within financial markets, economic is often synonymous with financial returns as the
means of accessing physical resources. In the FRC’s recent consultation on Draft
Amendments to Guidance on the Strategic Report (FRC, 2017a, 2017b), the focus is on the
long-term value being created by the company. Again, in theory, non-financial value is not
excluded, but in practise, long-term value means the financial value created for investors,
and other value matters only if it affects financial value.
In practise, it is assumed that an investor only wants information to decide whether to
move their investment to make higher returns and to consider the riskiness of those returns.
This assumption is the hidden foundation of a system that drives inequality. It has been
reinforced by the separation between the owners of the investments and the people who
manage those investments on their behalf and again by the separation between people
making decisions in businesses, assessed by performance expectation of the investment
managers. It has emerged through practise, informed by economic theory, rather than being
specifically stated within legislation. This is not to say that legislation can change the aims
of every individual actual investor but to recognise that accounting has to be based on an
assumed aim, and that this is not defined in legislation but has emerged in practise. The
fundamental assumption about the nature of investors that underpin all financial
accounting is precisely that – an assumption – and it has massive, far-reaching
consequences for how money flows through society.

4. Current approaches to accounting for social and environmental outcomes

There has been considerable progress in the development and use of approaches to
accounting for social and environmental outcomes over recent years. Increasing
international concerns over climate change and inequality have created a backdrop against
which investors, businesses, standard setters, academics and, increasingly, legislators have
responded. These approaches consider recognition, ownership, valuation and reporting of
these outcomes.
Although there is now some legislation relating to reporting, most initiatives are
voluntary. Consequently, there has been a focus on the business case for accounting for, and
reporting on, the social and environmental outcomes, specifically including inequality, for
example World Business Council for Sustainable Development’s (WBCSD) Social and
SAMPJ Human Capital Protocol (WBCSD, 2018), to increase take-up. Convergence on how to
11,4 account for these outcomes and increasing recognition of the importance of some, if not all,
of these for long term shareholder value has helped.
For some years, many companies have been voluntarily preparing sustainability reports,
increasingly in accordance with international frameworks such as the Global Reporting Initiative
(GRI) and Environmental, Social and Governance reports with more focus on reporting relevant
752 risks. In 2013 the International Integrated Reporting Council (<IR>) released a framework for “a
concise communication about how an organisation’s strategy, governance, performance and
prospects lead to the creation of value over the short, medium and long term” (IIRC, 2013, p. 7).
This provides guidance for the narrative portion of the annual report in a manner that, as the
name suggests, integrates social, environmental and economic impacts alongside financial
accounts. This approach focuses on reporting on material issues from the perspective of the
investor but does not integrate valuations of social and environmental outcomes into financial
accounts. <IR> does seek to show the connections between different capitals but without using
valuation to quantify the relative importance of those capitals.
The current trend is towards managing outcomes – the changes caused to people and the
planet by a businesses’ activities – as opposed to non-financial issues raised by
stakeholders, and towards an assessment of the relative importance of the different
outcomes, often using financial proxies to make this assessment, and a shift from
stakeholder reporting to stakeholder accounting to use the taxonomy of corporate reporting
frameworks (Barker and Mayer, 2017).
The Natural Capital Coalition released the Natural Capital Protocol (2016) to harmonise
existing best practice and produce a standardised, generally-accepted, global approach” to
including natural capital in decision-making which includes guidance on how to value
changes to natural capital.
The NCP defined valuation as:
[. . .] the process of estimating the relative importance, worth, or usefulness of natural capital to
people (or to a business), in a particular context. Valuation may involve qualitative, quantitative
or monetary approaches, or a combination of these. Natural Capital Protocol (2016, p. 37)
Reporting 3 is another coalition that has produced blue-prints for future and more integrated
approaches to reporting. Blueprint 2 (Reporting 3.0, 2018) relates to accounting and seeks to
redefine accounting to include financial transactions but also the risks and opportunities
relating to other capitals. The Blueprint recognises that this will need innovative approaches
that include monetisation and alternative forms of profit and loss accounts and balance sheets.
The Impact Management Project (IMP), focussing on impact investors has produced a
convention with an approach based on several dimensions of impact. In the same year, 2017,
the Impact Valuation Working Group, a group of businesses, released the results of a
roundtable discussion as a white paper, in which participants:
[. . .] consider an Impact Valuation assessment as the best approach to measure and value the
effects of business activities on the well-being of people and the planet – in economic,
environmental and social terms. By taking a macro-societal perspective on the business
contribution to society, we believe that Impact Valuation can support companies to ensure long-
term, successful and sustainable value creation for all stakeholders by more comprehensive
reporting, better risk assessment and strategic decision making. Impact Valuation can also
support companies in the adoption of the United Nation’s Sustainable Development Goals.

For the purposes of an Impact Valuation assessment we have started with the premise that a
monetary valuation approach is possible – however we have highlighted in this document certain
 areas where there could be limitations to such an approach. We have also been guided by the Social and
principles of simplicity, practicability, and feasibility. (Impact Valuation Roundtable, 2017, p. 2)
environmental
A growing number of businesses, many involved in this roundtable, have released social accounting
and or environmental profit and loss accounts that recognise and value non-financial
outcomes. Kering in their 2017 environmental profit and loss account reported a “loss” of
e481.6m (Kering, 2017, p. 6).
PwC (2013, p. 5) supports an approach called Total Impact Measurement and 753
Management:
TIMM enables management to develop a better understanding of the social, fiscal, environmental
and economic impacts of their activities, while still, of course, making a profit. This exercise is in
itself, interesting and helps support a business’s licence to operate. But the real benefit to business
is in decision making. TIMM gives management the ability to compare strategies and make
business decisions such as investment choices using quantified data, and evaluate the total
impact of each decision and choice they make. Being able to measure, understand and compare
the trade-offs between different options means decisions can be made with more complete
knowledge of the overall impact they will have and a better understanding of which stakeholders
will be affected by which decisions.
KPMG (2014, p. 5) supports a True Value approach again with a very similar purpose:
Ultimately, we need a standardized approach to measure societal value creation. While there is
still work to be done, I believe we have broken new ground in providing a way for executives to
better understand externalities and the opportunities and risks of internalization and to take more
informed decisions that help build both corporate and societal value.
The World Business Council for Sustainable Development (WBCSD) (WBCSD, 2018) has
been supporting the development of a Social and Human Capital Protocol (Social and
Human Capital Protocol, 2018) and the Social and Human Capital Coalition (2018) was
launched in early 2018. As with the NCP, the focus is on harmonising measurement and
valuation of businesses’ impact on people and society. The SHCP defines valuation as
referring:
[. . .] to the process of estimating the relative importance, worth, or usefulness of social capital to
people, in a particular context. In financial accounting terms, valuation is understood to mean an
estimation or determination of worth in monetary terms, but in welfare/wellbeing economics and
in this Protocol, valuation means more than just monetary valuation. It includes qualitative,
quantitative, and monetary approaches, or a combination of these, which measure the relative
importance of impacts and/or dependencies WBCSD (2018, p. 9).
The Dow Jones Sustainability Index (2017) has introduced impact valuation into the
sustainability index.
Finally, Social Value International (SVI) has supported a principle-based approach to
accounting for social and environmental outcomes since 2007 (Social Value International,
2015). The principles include valuation and, where financial proxies are used for valuation,
the application of the principles is known as Social Return on Investment. The approach is
being used by private, public, charitable and social enterprise sectors and by investors and
investees within these sectors exemplifying the growing interest in the approach. SVI has
also produced guidance on approaches to valuing social outcomes and reviewed approaches
in a discussion document on the Valuation of Social Outcomes (Social Value International,
2016a, 2016b, 2016c).
Harvard Business School are running an impact weighted accounts project to create
financial accounts that reflect a company’s financial, social and environmental performance
SAMPJ and drive investor decisions (Harvard Business School, 2019). The Value Balancing Alliance
11,4 is a business led initiative to create a model for measuring a companies creation of social,
human, environmental and financial value (Value Balancing Alliance, 2019).
None of these approaches integrate this information within financial accounting,
quantifying the value based on standards and critically informed by those who experience
the outcomes, but provide the information alongside. As a result, investment decisions are
754 less likely to be affected by this information, if at all, and investors will not be able to assess
easily the relative importance of what is included in this information or have assurance that
it is materially complete, whether they are making investment decisions for solely financial
return or attempting to take social and environmental issues into account.
Most recently, Reporting 3[2] has issued blueprints for the future of reporting, including
Blue Print 2 Accounting, which argues that wealth signals a quality of health and well-
being and that accounting should reflect broader ideas of value. In this approach, accounting
integrates changes in social and environmental wealth as well as changes in access to
resources.
These approaches to valuation would not be applicable under current accounting
standards, primarily because of the focus on economic resources and financial returns. The
approaches would require assets and liabilities and revenue and expenditure to be defined to
include wider impacts, or through legislation, that required non-financial outcomes to be
included and valued.

5. Issues with current approaches

It is not the purpose of this paper to set out the ways in which outcomes are valued in the
approaches referred to above. Together these approaches are building a body of practice
where the effects of a business’s activities on its stakeholders are identified and valued.
They are increasingly focussing on approaches that can influence management decisions,
though still in the context of investors’ requirements, rather than seeking to attain objective
proof. This approach has much more in common with accounting for financial value than
with social science but depends on accountability and assurance to be fully effective.
Current approaches are voluntary and generally are not assured by auditors acting on
behalf of those affected. This makes it much harder for resulting accounts to drive decisions
and much easier for them to be criticised as subjective, incomplete and inaccurate.

5.1 The user and materiality

Many of the new approaches to reporting retain a focus on the purpose of the business as
being to create value for the investor. The result is that information on social and
environmental outcomes only matters if it affects decisions relating to the interests of
investors, both current and future. This remains the case in the IASB Conceptual
Framework (IASB, 2018) but also in SASB and <IR>.
For example, SASB (SASB, 2019) identifies financially material issues as:
[. . .] “the issues that are reasonably likely to impact the financial condition or operating
performance of a company and therefore are most important to investors”.
In making this assessment, SASB (SASB, 2019, p. 9) refers to the reasonable interests of
stakeholders although it is difficult to ascertain what is reasonable and who decides.
In financial accounting, the materiality judgement is influenced by reference to
international standards, financial thresholds but retains an element of judgements as part of
the audit process. IAS 1 defines materiality as:
 Information is material if omitting, misstating or obscuring it could reasonably be expected to Social and
influence decisions that the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information about a specific reporting environmental
entity. accounting
In addition, the Australian Accounting Standards Board (AASB) adds to this as:
Information is material if omitting it or misstating it could influence decisions that users make on
the basis of financial information about a specific reporting entity. In other words, materiality is 755
an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to
which the information relates in the context of an individual entity’s financial report.
Information is material if omitting, misstating or obscuring it could reasonably be expected
to influence decisions that the primary users of general-purpose financial statements make
on the basis of those financial statements, which provide financial information about a
specific reporting entity.
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the users of general-purpose financial statements make
on the basis of those financial statements, which provide financial information about a
specific rep.
In these approaches, activities with negative outcomes that have little or no financial
implications for the business may fall outside the account.
Other approaches have pursued the alternative of a multi-stakeholder approach
including GRI, SVI and the IMP where information on social and environmental outcomes
matter if it would affect decisions relating to the interests of other stakeholders.
SVl’s perspective, currently being revised (Social Value International, 2012) is that
organisations should be accountable for the effects that their activities have and for the
outcomes that matter to the people effected caused by the organisation (that can be
attributed to it), independent of the debate about investor interests. This is a broad view of
materiality; considering what matters from the perspective of those affected.
SVI have recognised that many of those effected are not in a position to make decisions
based on this information, for example, a community living down river from a polluting
business may neither able to hold the business to account nor be able to relocate.
This has led to a formulation that information matters as if those affected could make
decisions. This, and the approach taken by IMP, bases the assessment on quantification of
the impact by reference to a number of dimensions and base thresholds on public policy and
social norms similarly to Accountability’s approach to determining relevance. Nonetheless,
if what matters is considered in the context of the size of an impact relative to other impacts,
the business will still have a role in determining what matters. Approaches to valuation that
are based on stakeholders ensure that the relativity is not determined by the business.
These alternatives were set out in King III (Institute of Directors in Southern Africa,
2009):
It is recognised that in what is referred to as the “enlightened shareholder” model as well as the
“stakeholder inclusive” model of corporate governance, the board of directors should also
consider the legitimate interests and expectations of stakeholders other than shareholders. The
way in which the legitimate interests and expectations of stakeholders are being treated in
the two approaches is, however, very different. In the “enlightened shareholder” approach the
legitimate interests and expectations of stakeholders only have an instrumental value.
Stakeholders are only considered in as far as it would be in the interests of shareholders to do so.
In the case of the “stakeholder inclusive” approach, the board of directors considers the legitimate
interests and expectations of stakeholders on the basis that this is in the best interests of the
company, and not merely as an instrument to serve the interests of the shareholder.
SAMPJ However, again this is more limited than in SVI as it is limited to what is in the interests of
11,4 shareholders. This approach is supported in other recent developments, for example, the
FRC Corporate Governance Code (FRC, 2018) which states that the directors should:
[. . .] understand the views of the company’s other key stakeholders and describe in the annual
report how their interests and the matters set out in Section 172 of the Companies Act, 2006 have
been considered in board discussions and decision-making.
756 Though this is useful, it has not changed FRC’s investor focus in determining materiality.
Multi-stakeholder approaches could form part of integrated reporting where the financial
accounts retain their focus on the investor and the non-financial information is structured
around the outcomes that matter to other stakeholders. However, the primary purpose of the
IIRC framework is still to support the providers of finance capital.
The approach taken in this paper to reconsider the primary motivation of investors also
provides a potential middle ground. The benefits of a single user are retained but the social
and environmental outcomes that matter to other people affected by the business’s
operations are still included.
If the assumed motivation of the investor is someone with both an interest in financial
returns as well as an interest in the social and environmental outcomes experienced by
others, then the issues matter and will be included. There will be much to debate in
developing standards to account and assure this information, but the starting point would
mean that accounting practise would need to account for these outcomes, and
standardisation would follow.

5.2 Valuation
Valuations of social and environmental outcomes will need to be relevant to the context,
which means they need to be informed by the relative preferences of those affected to
provide confidence that the decisions made increase the value created. The first issue is that
there is a risk that outcomes are valued using valuations which do not reflect those
preferences and are not ranked correctly. If the preference ranking of those affected is not
the same as the ranking arrived at using third party research, then there is a risk that the
decisions made would not be optimal or most effective in taking social and environmental
outcomes into account. The risk will be higher where the ranking of the outcomes changes.
The second issue with valuation relates to substitution. Using a common measure across
different things mean that, for example, negative values for one outcome could be offset
against positive values from another. Some outcomes relate to resources that, once used,
cannot be replaced. Decision makers will need to understand the nature of the outcomes
when making decisions informed by relative values. If the new motivation was to have, for
example, a financial return subject to net positive, and no significant negative social or
environmental, outcomes then this risk would be reduced.
The third issue is the concern that the values are not commensurate (Espeland and Stevens,
1998; Norman and Macdonald, 2004). Without revisiting this debate, the issue is that resource
allocation decisions will be made despite this challenge and, where social and environmental
outcomes are taken into account and where the choice of allocation has different social and
environmental outcomes for different people, a subjective valuation is unavoidable. The aim of
valuation is therefore not to resolve the challenges but to make this valuation transparent,
informed by the preferences of those affected, and being auditable. In this context SVUK have
produced a discussion document on the Assurance of Valuations (Social Value UK, 2016). At
the same time, to the extent that financial values represent people’s willingness to pay, there
will also be a question of whether these values are commensurate, either because of different
levels of consumer surplus between individuals or because the use of a product at the same Social and
price has different effects on individual’s well-being. Again, the aim is for better decision environmental
making rather than resolution of these challenges.
accounting
5.3 Accuracy
The level of accuracy required in existing approaches should vary with the nature of the decision
being made. Accounting for an investor with a new motivation will standardise the level of 757
accuracy required. This level could though be lower than required in financial accounting,
especially in relation to proving the degree of attribution of an outcome to an economic entity.
This may be more acceptable if the information disclosed does not affect the calculation of profit,
but the question of what level of accuracy is required and what level of likelihood or probability is
necessary for recognition would be open to debate. The investor will now want assurance that the
social and environmental outcomes have been accounted for, that they have been identified,
valued and included, and err on the side of inclusion rather than excluding issues. This approach
is reflected, for example, in CSA staff notice 51-333 (Canadian Securities Administrators, 2010)
which encourages disclosure where there is doubt over materiality.

5.4 Assurance
Judgements are inescapable in materiality decisions, and therefore require independent
assurance of their validity. The assurance provider is, in effect, acting on behalf of those
who have been affected, and assessing whether these judgements are reasonable.
This function is critical for effective accountability. There is a natural human tendency to
exclude information that does not fit with people’s beliefs or intentions, known as cognitive
dissonance. Positive intended outcomes are accepted whilst reasons are found to exclude
unintended negatives, for example, not being caused by, or not the responsibility of
the organisation, or the data being inadequate. People resist change even when the
information would support it (Jermias, 2001) and the assurance provider’s role is to resist
these tendencies at the point that information is produced. In driving financial returns,
competition between businesses ensures that there are then consequences for not making
changes that would better meet investor objectives.
Legislation protects investors by requiring a company to employ auditors who act for
investors to check that the financial statements are prepared in accordance with relevant
legislation and accounting standards. The requirements are set by the IAASB which states
in the International Standard on Auditing 200 (IAASB, 2012):
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. In the case of most general-purpose frameworks, that opinion is on
whether the financial statements are presented fairly, in all material respects, or give a true and
fair view in accordance with the framework.
There is not the same requirement for audit of reports on social and environmental
outcomes. Audit of these reports is generally not required by law although there are a
number of frameworks, for example: Accountability’s AA1000AS; the IAASB’s
International Standard for Assurance Engagements (ISAE) 3000; and SVIs Assurance
Standard and the IAASB has a current project to considering assurance for Extended
External Reporting[3]. Whilst many companies do have their reports independently assured,
the assurance provider is not required to act on behalf of those affected in forming an
opinion about the completeness and accuracy of the report. Lack of appropriate assurance,
SAMPJ both internal and external, increases the risk that users of these reports may subsequently
11,4 not be able to use the information in making their decisions.

6. Is there are better way for organisations to prepare accounts for investors
and society?
Integrating social and environmental value with financial value in the financial statements
758 would address many of these issues. It would then fall under existing company reporting
legislation and there would be an increase in the number of organisations generating
relevant information and dealing with the inevitable judgements. The assurance required
would immediately come under existing legislation to protect investors contributing to rapid
standardisation of the judgements being made around materiality, valuation and accuracy.
From 2004, mining companies have been including estimates of the closure costs of a mine
on their balance sheets (Deloitte, 2007, p. 1). Within a couple of years, the difficult issues of
estimating these future costs, which could include provision for environmental and social
costs, had standardised. The aim was not an accurate statement of these costs, since no one
can know the future, but a reasonable assessment that gave investors a more transparent
understanding of the financial position of the company. Similarly, it is not possible or
helpful to try and prejudge and answer all the issues around accounting for social and
environmental outcomes in advance.
The basic proposition of financial accounting – that transactions for owners should be
kept separate from transactions for the business so that no payments are made to owners
that effect the business ability to meet liabilities and continue as going concern – should be
maintained. Consequently, if the value of social and environmental outcomes is net positive
this cannot increase the amount available to pay to owners. If the value is net negative this
would, however, reduce the amount available. This is the critical implication of a new
motivation: that these outcomes are captured in the price of shares and that, on balance,
investment moves towards businesses with lower negative impacts. The choice of
motivation and the development of standard applications would need to avoid the risk that
businesses only reported net positive impacts. Although reporting only the relative size of
net positive impact could be considered by investment managers and advisors, the effect
will be more significant if dividends are lower and demand and price for those shares falls,
at the same time rewarding innovation in new net positive products and services.
Recognising that wealth maximisation is an assumption that underpins financial
accounting opens the possibility of choice – of choosing to define the investor differently –
as an investor whose desire for financial returns is constrained by other factors. As stated
above, accounting needs a standardised investor, so it must be a matter for public policy to
decide what type of investor this is, reflecting both investor’s wishes and societal concerns.
Given the influence of Adam Smith on the current basis, it is worth considering what the
basis of financial accounting would be if it had been built on what he wrote in “The Theory
of Moral Sentiments”:
How selfish man may be supposed, there are evidently some principles in his nature, which
interest him in the fortune of others, and render their happiness necessary to him, though he
derives nothing from it except the pleasure of seeing it (Smith, 1761: Section 1, chapter 1, para 1).
It should be no surprise that a market driven economic system rooted in an approach that
seeks to maximise individual wealth results in inequality. Most investors do not seek out
investments that have damaging consequences. They would not want their investments to
support child labour, slavery and environmental degradation any more than most people
would employ a child as a domestic worker or routinely dump household rubbish in the local
park. Faced with a choice between two investments, one of which they knew to do these Social and
things and one which they knew did not, most people would prefer to earn their returns after environmental
taking these issues into account.
Most people are not aware that the basis of financial accounting does not take these
accounting
issues into account (Social Value UK, 2018). Or, perhaps, as investors have optimistically or
unrealistically assumed that politicians have identified the limits of corporate action, made
any actions that fall outside society’s ethical bounds illegal and that these laws are
effectively enforced, closing any gap between the consequence of profit maximising 759
behaviour and their ethical position. It is becoming increasingly apparent that this is not the
case, whether it is the effects of business in general on climate change or examples of poor
labour conditions in retail supply chains, conflict minerals in mobile phones or sugar and
fats in food, they cannot rely on legal systems to deal with or even always recognise
legitimate claims. Neither can they currently rely on financial accounts to have included
costs that may be being incurred by people as a result of a business’s operations. The
general response has been to call for more legislation and more company reporting.
Anything done to address inequality that does not change the current foundation of
financial accounting, will mean that resource allocation decisions will continue to contribute
to inequality.

6.1 Alternative motivations

The key point is that the decision of what assumed investor motivation is used to underpin
accounting is a public policy decision. Accountants are the caretakers of financial
accounting, not its owners, and maximising personal financial returns is only one of many
possible motivations. Public policy could, for example, require accounts to provide
information for investors to:
 make financial returns subject to no material social or environmental effects;
 make financial returns subject to net positive social or environmental effects; or
even
 make financial, social and environmental returns.

There are many other options. Research has shown (Social Value UK, 2018) that investors,
the people who own the assets, do not want financial returns without some consideration of
other impacts, and as a single motivation is required for comparability, it is only necessary
that policy should choose one that more closely reflects this. The question of what is
included in a set of accounts would change to include non-financial outcomes and recognise
the social cost of widening inequality, whilst not having to make significant changes to
other parts of the system – not withstanding society may want to make other changes.
Active participation of economically disenfranchised people would then be hardwired into
the economic system.
This is not entirely new. Islamic accounting originally based the decision on what to
include on the interests of the community rather than on the interests of private investors
and included a sense of fair and just transactions between people (Harahap, 2014; Kamla and
Haque, 2017). Alternative approaches are possible and the approach in this paper to retain
the focus on investors though recognising they have a wider interest is a middle ground in
comparison. However, the original position for Islamic accounting has been changing as
both the Islamic Financial Services Board in Malaysia and the Accounting and Auditing
Organisations for Islamic Financial Institutions (AAOIFI) have moved to align with IFRS
and a separation of religion from financial accounting standards.
SAMPJ Ironically at the same time as accounting standards have been moving towards a
11,4 traditional neoclassical formulation, corporates and sustainability organisations have been
striving for new ways of reporting a more holistic account. Although King IV is the latest
iteration and focuses on integrated reporting rather than financial accounting, the
importance of community was recognised in the King III report (Institute of Directors in
Southern Africa, 2009, p. 4). In the second paragraph of the introduction:
760 We have endeavoured, as with King I and King II, to be at the forefront of governance
internationally. We believe this has been achieved because of the focus on the importance of
conducting business reporting annually in an integrated manner i.e. putting the financial results
in perspective by also reporting on: how a company has, both positively and negatively, impacted
on the economic life of the community in which it operated during the year under review; and how
the company intends to enhance those positive aspects and eradicate or ameliorate the negative
aspects in the year ahead.
One of the principles of financial accounting is to use money as a common measure.
Redefining the motivation does not mean this has to change, and, as discussed in Section 4,
there is a growing body of theory and practice on how to use financial proxies to value social
and environmental outcomes (Richards and Nicholls, 2017). Profit is still accounted for but
becomes a performance measure for creating both financial and social value, therefore
changing business behaviour.
Redefining the underlying motivation would also help address one of the other
challenges in financial accounting that relates to the recognition of transactions. Negative
social and environmental outcomes do result in material financial consequences, but these
are rarely recognised in the accounts because of difficulties in estimation and attribution. It
would be possible to change the approach to estimating uncertainty with an IFRS
Interpretations Committee (IFRIC) interpretation as has been done, for example, in relation
to uncertainty over tax treatments[4].
These alternative motivations do not necessarily require the same level of reliability for
the inclusion and valuation of social and environmental outcomes. The investor’s interest in
these outcomes errs on the side of inclusion rather than exclusion to give them comfort
about the impact of their investments.

6.2 Changing investment decisions

There are different ways that information on social and environmental outcomes can, and
are, included in the information that is used by investors. However, if society wants
investment managers to change their decisions, we need to go further than including
information that may influence long-term shareholder value alongside financial accounts. It
needs to be included in the calculation of profit.
Basing financial accounting on one of these new basic motivations would mean that:
 Information on material social and environmental outcomes would be included even
if these outcomes did not affect the enterprise’s ability to create financial value, i.e.
they are now material to investors.
 The value of these outcomes would be included in the assessment of what can be
distributed to owners, reducing the share price and increasing cost of capital for
those businesses that have a higher negative impact.
 The primary user would remain the same although their interest now includes the
effects on other stakeholders.
In the UK, the recent changes to the Corporate Governance Code require directors to show how Social and
they have considered the interests of other stakeholders. However, directors owe their duty to environmental
the company which is currently required to prepare accounts which only reflect the interest of a
wealth maximising investor. A change in the basis of financial accounting would change the
accounting
company’s responsibilities and behaviours and align these with directors’ responsibilities.

6.3 Comparing financial accounting principles for current and proposed motivations 761
Table I provides a comparison of the effect on principles of different motivations. The
principles can stay the same, but their application would be different. If the motivation has
two parts, financial returns and social and environmental returns, each part may require a
different approach to determining reliability but will still be commensurate.
In relation to traditional principles, if revenue recognition is treated as analogous to
outcome recognition, standards for well-defined outcomes would be required. In relation to
the economic entity principles, outcomes will need an assessment of reasonable attribution
to different organisations.
There are also two other issues that relate to social and environmental accounting that
need to be added: counterfactual and stakeholder involvement.
6.3.1 Counterfactual. An assessment of the extent to which outcomes would have
occurred without the activity is important to avoid overclaiming positive outcomes and
under-reporting negative outcomes, caused by an intervention, as both would lead to
inefficient resource allocation. However, this should not allow organisations to argue that
other organisations would take their place and that therefore any negative outcomes would
have happened anyway. This relates to the principle of the economic entity and of the
decision of when to recognise a transaction or an outcome.
6.3.2 Stakeholder involvement. In economics, a monetary payment is taken as
representing the relative value of the preferences of the person paying. In social and
environmental outcomes, stakeholders will need to be involved to determine both the
outcomes and their preferences.

6.4 Reporting options

There are several ways of presenting this new information. It is not the intention of this
paper to provide detailed analysis of possible treatments but to highlight some options that
would all require further development, for example, Reporting 3’s Accounting Blueprint 2
includes proposals for Statements of Value and Full Comprehensive Income which are
closest but a considerable expansion (Table II).

Implication for investors with interest in social and

Characteristic environmental outcomes

Relevance/Materiality, Information that, if not Information would be material to decisions as

included, might have altered the decision of a user
making investment decisions
Faithful representation - completeness, neutrality,
freedom from error
Comparability, timeliness, understandability
Verifiability
investors would now have an interest in these effects,
acting in the interest of all those affected
Where there is a trade-off between accuracy and
Table I.
completeness, the decision to include information
would possibly err on completeness Implications for
The same qualitative
Assurance would be for investors acting in their characteristics of
interests and in the interests of those affected financial information
SAMPJ The examples below are indicative to show how reporting could look. The first two options
11,4 provide additional information without full integration. The following three have full
integration with different levels of detail. These have both a P&L and a balance sheet effect.
Net negative impacts would reduce distributable reserves. Net positive impacts would need
to be treated as a restricted reserve in order that increasing reserves did not result in paying
dividends out of financial capital.
762
6.5 Statement as part of management commentary
The EU non-financial reporting directive requires reporting on social and environmental
impacts. In 2010, the IFRS (2010) published a practise statement on a non-binding approach
to presenting a management commentary relating to the financial statements and in 2017
started the process to revise this. An exposure draft is expected in 2020 which could include
guidance on how sustainability issues could be reflected in the commentary. It would be
possible to expand the management commentary for the discussion to cover the approach to
materiality and assurance, consequent limitations for users, together with estimations of the
value of the impacts and any limitations to these valuations.
This treatment would have a lower effect on investment as there is no link to financial
reserves.

6.6 Additional note to accounts

It would be possible to include the valuations as a note to the accounts with or without any
detailed analysis. At its simplest, this could be as in Table II.
This would be associated with a short commentary linking results to accounting policy
on recognition and valuation and/or to a separate sustainability report. Alternatively, this
could be broken down to provide more detail using standardised categories.
This treatment would also have a low effect on the demand for shares, as there is no link
to financial reserves.

6.7 Inclusion as a movement on reserves in the balance sheet

Including the valuations as a movement on reserves would integrate values. Net negative
social and environmental values would reduce distributable reserves but net positive values
could not increase distributable reserves (Table III).
In this example, the current year’s positive social and environmental impact is sufficient
to make the reserves positive, but this has no effect on retained earnings available for
distribution. In the prior year, the net negative impact reduces retained earnings available
for distribution. This treatment does not provide any analysis of the positive and negative
outcomes.

Social and environmental impacts 20xx 20xy

Positive x x
Negative (x) (x)

Net x x
Table II.
Note to the accounts Note: X: Social and environmental impacts
6.8 Additional detail to movement on reserves through a social and environmental profit Social and
and loss account environmental
A good example of what a more detailed analysis might look like is BASF’s Value to Society
Report (BASF, 2019) in Figure 1.
accounting
Another example is Kering’s environmental profit and loss account (Kering, 2017). In
2017, the account included the environmental cost of Kering’s activities (no positive effects
were included) valued at e481.6m and covers six environmental impacts down to tier four in
the supply chain. 763
These approaches would result two profit and loss accounts as summarised in Table IV.

Reserves 20xx 20xy

Retained earnings x x
Profit for the period x x
Retained earnings x x
Net negative social and environmental (x)
Retained earnings for distribution x x
Social and environmental reserves x (x)
Positive for period x x
Negative for period (x) (x) Table III.
Net for period x (x) Movement on
Social and environmental reserves x (x) reserves

Figure 1.
BASF value to
society 2018

Financial profit and loss Social and environmental P&L

Income x Positive impact x

Expenditure (x) Negative impact (x)

Net profit x Net impact x Table IV.

Two profit and loss
Note: Movement on reserves would then be as set out in Table II accounts
SAMPJ 6.9 Inclusion of positive and negative social and environmental values as liabilities and
11,4 assets within the balance sheet supported by analysis
Finally, instead of showing these as a movement on reserves, it would be possible, though
would either need national governments to recognise accounting treatments that were not
consistent with IASB or a change to, for example, IAS 1, to integrate within the balance
sheet as set out in Table V.
764 There is no immediate cash implication arising from inclusion of social and
environmental value in these approaches but in the last three profitability and distributable
reserves may be reduced. The business has an incentive to reduce a net negative position
and the investor has confidence that the business will do so. Businesses with lower net
negative position become, on balance, more profitable and attract more capital and their cost
of capital falls. This could give rise to substantial cash balance which would then make the
business more at risk of takeover.
The investment decision is based on a mix of factors of which expected dividends,
informed by previous dividends and dividend policy and retained earnings, is one factor.
Other factors would include capital growth and risk. Nonetheless, the assumption is that
this would have a more direct influence of those decisions than any supplementary
information on social and environmental impact.

7. Changing legislation and transition

Company legislation continues to change over time. It was only in the late nineteenth
century that some businesses were required to make balance sheets public, in part to protect
suppliers. This was not popular at the time, with one commentator forecasting the end of the
joint stock company. Over time society has continued to require higher levels of
accountability from company directors especially as the global impact of business has
increased. In general, this has improved information available for investors and continued to
support increasing investment.
The Reporting Exchange, an initiative supported by WBCSD, is a regularly updated
repository of sustainability legislation, which highlights the increasing level of legislative
requirements around the world covering areas such as climate change, payments to
governments, extractive industries, executive compensation, equal opportunity, diversity,
and human rights. However, the extent to which managers have discretion on what is
actually reported means that there is some inconsistency between voluntary and mandatory
requirements (Schneider et al., 2017). For example, the EU Non-Financial Reporting

Balance sheet 20xx 20xy

Fixed Assets x x
Current Assets x x
Current Liabilities x x
Net current assets x x
Social &Environmental Asset x x
Long term liabilities (x) (x)
Social and Environmental Liability (x) (x)
Net assets x x
Financed by
Table V. Brought forward x x
Values included in Movement in period x x
the balance sheet Carried forward x x
Directive (European Commission, 2014, Article 19a) introduced the requirement to consider Social and
impact: environmental
Large undertakings which are public-interest entities exceeding on their balance sheet dates the accounting
criterion of the average number of 500 employees during the financial year shall include in the
management report a non-financial statement containing information to the extent necessary for
an understanding of the undertaking’s development, performance, position and impact of its
activity.
765
Nonetheless, the trend in financial accounting has been towards more international
consistency. It is unlikely that every country would independently change legislation on the
basis discussed above. On the other hand, if a small number of countries changed legislation
then the reporting requirements for multi-national companies would vary, requiring these
companies to produce different accounts and a potentially a reconciliation between the two.
More significantly if reported profits are lower under one accounting regime than another, this
could contribute to a company changing the country in which it was registered. Transition
would be more likely in countries whose stock exchanges are less exposed to this risk.
It would also be possible to open up a wider discussion with the IASB on nature of
investor motivation and the way in which “economic” is being used in relation to investor
decisions.
Transition would require a mix of support from public, accounting and investor bodies,
companies and civil society organisations as well as more research to set out the pros and
cons of different approaches to transition.

8. Conclusion
This paper set out to argue that the separation of social and environmental information from
financial information was not specifically the intent of early legislation and the assumption
of investor motivations arose as accounting practise developed. In the absence of clear
legislation, the accounting profession had to make an assumption to produce consistent
accounts which has become embedded overtime within accounting standards.
The solution to incorporating consideration of social and environmental outcomes in
resource allocation decisions is:
 to reconsider the basis of financial accounting so that social and environmental
outcomes are integrated with financial outcomes; and
 to recognise that this is a policy issue rather than an accounting issue.

Changes to policy would require accounting standards that ensured good enough
information to inform investor decisions where “useful” would depend on a new basis for
investor motivations. This would have investors interested in both financial and social and
environmental outcomes. The challenge of multi-stakeholder accounting and reporting as
opposed to accounting for long-term shareholder value is finessed by this expanded investor
interest, retaining the primary user but expanding their interest.
In this approach, private ownership continues to be the primary organising driver but
now with a communal interest. It is impossible to predict how this would affect the balance
between private, public and common ownership or the impact on company structure,
purpose and performance. Nonetheless, at a time when the limitations and challenges of
capitalism are widely recognised, attempting to change the wider economy whilst basing
societies accounting system on a nineteenth-century model of shareholder interest is
inconsistent and reflects neither many countries public policies nor individual investors
interests.
SAMPJ This paper has raised the issues, but more research would be required to consider the
11,4 implications for transition, for the accounting treatment in practise, implications for taxation
and group accounts. However, if the United Nations’ Sustainability Development Goals
(SDGs) are going to be achieved, leaving financial accounting as it is, based on nineteenth
century thinking, is not an option.

766 Notes
1. The poverty headcount ratio—also referred to as the extreme poverty rate—is the share of the
population living on less than $1.90 a day in 2011 purchasing power parity terms.
2. Reporting 3 is a multi-stakeholder initiative to ‘to catalyse the trigger-function of reporting to
spur the emergence of a regenerative and inclusive global economy’.
3. This project is the IAASB’s response to the comments received on a paper on Supporting
Credibility and Trust in Emerging Forms of External Reporting.
4. www.ifrs.org/projects/2017/uncertainty-over-income-tax-treatment/#final-stage

References
ACCA (2019), Taxation as a Force for Good, ACCA, London.
Accounting Tools (2017), “Basic accounting principles”, available at: www.accountingtools.com/
articles/2017/5/15/basic-accounting-principles (accessed 30 April 2018).
Barker, B. and Mayer, M. (2017), How Should a “Sustainable Corporation” account for Natural Capital?
Said Business School, University of Oxford, Oxford.
BASF (2019), “Value to society report”, BASF, available at: www.basf.com/global/en/who-we-are/
sustainability/we-drive-sustainable-solutions/quantifying-sustainability/we-create-value/impact-
categories.html (accessed 13 September 2019).
Canadian Securities Administrators (2010), “CSA Staff Notice 51-333 Environmental Reporting
Guidance”, Canadian Securities Administrators.
Companies Act (2006), “Companies Act”, The Stationery Office, London.
Deloitte (2007), A Deeper Level of Detail, Improving the Reporting of Mine Closure Liabilities, Deloitte,
New York, NY.
Deloitte (2018), “IAS 1”, available at: www.iasplus.com/en/standards/ias/ias1
Dow Jones Sustainability Index (2017), “Sample Questionnaire diversified consumer services, section
5.1 Impact Valuation”, Dow Jones Sustainability Index.
Espeland, W. and Stevens, M. (1998), “Commensuration as a social process”, Annual Review of
Sociology, Vol. 24 No. 1, pp. 313-343, doi: 10.1146/annurev.soc.24.1.313.
Ethex (2017), “Understanding the positive investor”, Ethex.
European Commission (2014), “Directive 2014/95/EU of the European Parliament and of the Council of 22
October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity
information by certain large undertakings and groups”, Article 19a, European Commission.
FRC. (2016), “International Standard on Auditing (UK) 200”, FRC (accessed June 2016).
FRC (2017a), “Proposed Revisions to the UK Corporate Governance Code”, FRC.
FRC (2017b), “Draft amendments to Guidance on the Strategic Report Non-financial reporting”, FRC.
FRC (2018), “The UK Corporate Governance Code”, FRC.
Gray, R.H., Owen, D.L. and Adams, C. (1996), Accounting and Accountability: Changes and Challenges in
Corporate Social and Environmental Reporting, Prentice Hall, London.
Harahap, S. (2014), “The differences of Islamic and conventional accounting”, available at: www. Social and
slideshare.net/waqas092/islamic-accounting-system
environmental
Harvard Business School (2019), “The conceptual framework for financial reporting project summary”,
available at: www.hbs.edu/impact-weighted-accounts/Pages/default.aspx
accounting
Hopgood, A. and Miller, P. (1994), Accounting as Social and Institutional Practice, Cambridge University
Press, Cambridge.
IAASB (2012), 2012 Handbook of International Quality Control, Auditing, Review, Other Assurance, 767
and Related Services Pronouncements, IAASB, New York, NY.
IASB (2010), “The Conceptual Framework for Financial Reporting 2010”, para OB2 and OB3, IASB.
IASB (2018), “The conceptual framework for financial reporting project summary”, available at: www.
ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary (accessed 21 June
2018).
IFRS (2010), “IFRS Practise Statement 1: Management Commentary”, IFRS.
IIRC (2013), “The International IR Framework”, IIRC.
IMF (2017), available at: www.imf.org/external/np/fad/inequality/
Impact Valuation Roundtable (2017), “Operationalizing impact valuation experiences and
recommendations by participants of the impact valuation roundtable”, available at: https://
lanxess.com/corporate/corporate-responsibility/societal-added-value/impact-valuation/
Index Mundi (2018), “World GDP per capita”, available at: www.indexmundi.com/world/
gdp_per_capita_(ppp).html (accessed 22 May 2018).
Institute of Directors in Southern Africa (2009), “King report on governance for South Africa, 2009
Islamic accounting”, available at: http://slideplayer.com/slide/4593857/ (accessed 11 May 2018).
Jermias, J. (2001), “Cognitive dissonance and resistance to change: the influence of commitment
confirmation and feedback on judgment usefulness of accounting systems”, Accounting
Organisations and Society, Vol. 26 No. 2, pp. 141-160.
Kamla, R. and Haque, F. (2017), “Islamic accounting, neo-imperialism and identity staging: the
accounting and auditing organization for Islamic financial institutions”, Critical Perspectives on
Accounting, Vol. 63, p. 102000.
Kering (2017), “Environmental profit and loss 2017 group results”, p. 4, available at: https://
keringcorporate.dam.kering.com/m/08af8fea0ef3060f/original/kering_EN_developpement
durable_publishes_2017_group_epl_results-pdf.pdf
KPMG (2014), “A new vision of value: connecting corporate and societal value creation”, p. 5, available at:
https://assets.kpmg.com/content/dam/kpmg/pdf/2014/10/a-new-vision-of-value-v1.pdf
Natural Capital Protocol (2016), “The path towards the Natural Capital Protocol”, Natural Capital
Coallition.
Nicholls, J. (2016), Investment: The Ethical Perspective, ICAEW, London.
Norman, W. and MacDonald, C. (2004), “Getting to the bottom of triple bottom line”, Business Ethics
Quarterly, Vol. 14 No. 2, pp. 243-262, doi: 10.5840/beq200414211.
Oxfam (2015), “Extreme carbon inequality”, available at: www-cdn.oxfam.org/s3fs-public/
file_attachments/mb-extreme-carbon-inequality-021215-en.pdf
Oxfam (2018), “Get involved”, available at: www.oxfam.org.uk/get-involved/campaign-with-us/
inequality-and-poverty
Pacioli, L. (1494), “Summa de arithmetica, geometria, proportioni et proportionalità”, Paganino de
Paganini (Venice; 1494).
PwC (2013), “Measuring and managing total impact: a new language for business decisions”, p. 5,
available at: www.pwc.com/gx/en/sustainability/publications/total-impact-measurement-
management/assets/pwc-timm-report.pdf
SAMPJ Reporting 3.0 (2018), “Platform blueprint series blueprint 2: accounting”, available at: www.reporting3.
org (accessed 21 June 2018).
11,4
Richards, A. and Nicholls, J. (2017), “A discussion document on the valuation of social outcomes”, SVI.
SASB (2019), “Why is financial materiality important”, available at: www.sasb.org/standards-
overview/materiality-map/ (accessed 11 April 2019).
Schneider, T., Michelon, G. and Maier, M. (2017), “Environmental liabilities and diversity in practice
768 under international financial reporting standards”, Accounting, Auditing and Accountability
Journal, Vol. 30 No. 2, pp. 378-403.
Sikka, P. (2019), “How an ‘inequality tax’ could restore some fairness to Britain, left foot forward”, available
at: https://leftfootforward.org/2019/08/how-an-inequality-tax-could-restore-some-fairness-to-britain/
Smith, A. (1904), The Theory of Moral Sentiments, 2nd ed., in Millar, Kincaid and Bell (Eds), Strand and
Edinburgh.
Social and Human Capital Coalition (2018), “Social capital protocol”, available at: www.wbcsd.org/
Clusters/Social-Impact/Social-and-Human-Capital-Protocol
Social Value International (2012), “Supplementary guidance on materiality”, available at: www.socialvalueuk.
org/app/uploads/2016/03/Supplementary%20Guidance%20on%20Materiality%20(PDF).pdf
Social Value International (2015), “The seven principles of social value”, available at: www.
socialvalueuk.org/app/uploads/2016/03/Principles%20of%20Social%20Value_Pages.pdf
Social Value International (2016a), “A discussion document on the Valuation of Social Outcomes”, SVI.
Social Value International (2016b), “Report assurance standard”, available at: www.socialvalueuk.org/
app/uploads/2016/07/Assurance-Criteria-2016_17.pdf
Social Value International (2016c), “Supplementary guidance for principle 2, understand what changes,
part one, creating well defined outcomes”, available at: www.socialvalueuk.org/app/uploads/
2016/08/Supplementary-Guidance-for-Principle-2-Understand-hat-changes-Part-one.pdf
Social Value UK (2018), “Research on investor motivations”, SVUK.
Social Value UK (2016), “Discussion document on the assurance of valuations”, SVUK.
Stiglitz, J. (2012), “The price of inequality”, Penguin.
The Roberts Enterprise Foundation (1996), “New social entrepreneurs: the success, challenge and
lessons of non-profit enterprise creation”, available at: http://community-wealth.org/sites/clone.
community-wealth.org/files/downloads/report-redf96-intro.pdf
WBCSD (2018), “The Social and Human Capital Protocol”, WBCSD.

Further reading
AccountAbility (2003), “Redefining materiality: practice and public policy for effective corporate
governance”, available at: www.accountability.org/images/content/0/8/085/Redefining%
20Materiality%20-%20Full%20Report.pdf
AccountAbility (2008a), “AA1000 Account ability principles standard 2008”, available at: www.
accountability.org/images/content/0/7/074/AA1000APS%202008.pdf
AccountAbility (2008b), “AA1000 Account ability assurance standard 2008”, available at: www.
accountability.org/images/content/0/5/056/AA1000AS%202008.pdf
Australian Accounting Standards Board (2017), “Accounting Practise Standard 2, Making Materiality
Judgements”, Australian Accounting Standards Board.
Bakker, P. (2013), “Accountants will save the world”, Harvard Business Review, Vol. 5.
Camfferman, K. and Zeff, S. (2007), Financial Reporting and Global Capital Markets: A History of the
International Accounting Standards Committee, 1973-2000, Oxford University Press, Oxford.
Christopher, N. and Robert, P. (2004), Comparative International Accounting 8e, Prentice Hall, Upper
Saddle River.
Coalition for Inclusive Capitalism (2018), “Coalition for inclusive capitalism”, available at: www.inc- Social and
cap.com/ (accessed April 2018).
environmental
Credit Suisse Research Institute (2017), “Global wealth report 2017: where are we ten years after the
crisis?”, available at: www.credit-suisse.com/corporate/en/articles/news-and-expertise/global- accounting
wealth-report-2017-201711.html (accessed 30 April 2018).
FRC (2014), “True and Fair”, FRC.
Henriques, H. (2014), “SRO1I: Can it have a mainstream impact?”, SVUK Blogpost, available at: www.
socialvalueuk.org/resource/sroi-can-it-have-a-mainstream-impact/
769
IFAC (2019), “International Standard on Assurance Engagements (ISAE) 3000”, IFAC.
IFRS (2017), “How are IFRS standards developed?”, available at: www.ifrs.org/news-and-events/2017/
06/standard-setting-process/ (accessed 8 May 2018).
Impact Management Project (2017), “Impact management project”, available at: www.
impactanagementproject.org
Milanovic, B. (2016), “In defense of equality (without welfare economics)”, available at: http://economistsview.
typepad.com/economistsview/2016/07/in-defense-of-equality-without-welfare-economics.html
Morgan, E.V. and Thomas, W.A. (1969), The London Stock Exchange, St. Martin’s Press, New York,
NY.
Morrell, A. (2018), “Larry fink, CEO of $6.3 trillion manager BlackRock, just sent a warning letter to
CEOs everywhere”, Business Insider, available at: www.uk.businessinsider.com/ (accessed 16
January 2018).
Nicholls, J. and Ruff, K. (2014), “Taking account of moral issues, ICAS blog post”, available at: www.
icas.com/ca-today-news/taking-account-of-moral-issues (accessed 8 May 2018).
Nicholls, J., Lawlor, E., Neitzer, E. and Goodspeed, T. (2012), “A guide to social return on investment”,
available at: www.socialvalueuk.org/app/uploads/2016/03/The%20Guide%20to%20Social%
20Return%20on%20Investment%202015.pdf
Pew Research Center (2018), A Global Middle Class is More Promise than Reality, Pew Research Center,
Washington, DC, available at: www.pewglobal.org/2015/07/08/a-global-middle-class-is-more-
promise-than-reality/ (accessed 30 April 2018).
Slinger, H. (2018), How Might Accounting, and the Role of Accountants and Assurance Providers, Evolve
to Contribute to the Creation of a More Sustainable Society?, ICAS essay.
Smith, A. (1904), An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed., Cannan, E.
(Ed.), Methuen and Co., London.
Social Value International (2017), “Discussion document, the relationship between social value
principles and the natural capital protocol”, SVI.
UK National Advisory Board on Impact Investing (2017), “The rise of impact, five steps towards an
inclusive and sustainable economy”, UK National Advisory Board on Impact Investing.
Value Balancing Alliance (2019), available at: www.value-balancing.com/about-us/
World Bank (2018), available at: https://data.worldbank.org/products/wdi-maps-poverty_and_shared_
prosperity (accessed 30 April 2018).

Corresponding author
Jeremy Andrew Nicholls can be contacted at: jeremyanicholls@gmail.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com