Six Capitals: Capitalism, Climate Change and the Accounting Revolution that Can Save the Planet

Praise for Jane Gleeson-White

Six Capitals

‘Gleeson-White, author of the best-selling Double Entry, is the great populariser of accounting. If she can’t get you interested in accountants, no one can. So broaden financial reports to include measures of social and environmental issues and just watch how it changes the behaviour of business people. Gleeson-White makes a good case for the success of her unlikely revolutionaries.’ Ross Gittins, Sydney Morning Herald

‘Double Entry was a wonderful work of accounting history, Jane Gleeson-White’s Six Capitals is an ambitious look at what we will account for in the future.’ Dylan Schleicher, 800-CEO-READ, North America; Shortlisted for best Finance and Economics Book published in North America 2015

‘This is a seminal work on sustainability … Double Entry ended with a plea to accountants to become the heroes of sustainability and save the planet because only we can do it. Six Capitals tells us how … the clear message, that we must change our way of thinking, will be heard around the world because of books like this.’ Stanley Goldstein, New York Hedge Fund Roundtable

Double Entry

‘A lively history … show[s] double entry’s role in the creation of the accounting profession, and even of capitalism itself.’ New Yorker

‘Entertaining and informative.’ The Economist

‘Jane Gleeson-White’s small but perfectly formed Double Entry was my unexpected pleasure of the year.’ Gideon Haigh, The Australian

‘What is the link between the rise and collapse of global giant Enron, or the Royal Bank of Scotland, in the last few years and a little-known Franciscan friar who lived 500 years ago? Jane Gleeson-White unravels an intriguing story, helping to make sense of the headlines in the financial pages of our newspapers … In a brief review it is impossible to do justice to a book that is both informative and disturbing but we must commend Gleeson-White and her efforts to do both for us.’ Canberra Times

‘This book traces the 500-year history of double-entry book-keeping, the basis of modern accounting. A dull and unpromising subject? To the contrary, in the imaginative hands of Jane Gleeson-White it proves fascinating.’ Weekend Australian

‘If Michael Lewis’ Moneyball can make statistics sexy, maybe Gleeson-White, a writer and economics graduate, can do the same for accounting.’ Sunday Mail

‘Double Entry is an important book that raises controversial and challenging issues. It is highly recommended reading for all thoughtful members of our profession.’ Charter Magazine

‘Lucidly presented … An accessible introduction to this key development in the history of capitalism.’ Edward Chancellor, Wall Street Journal

‘Elegantly written account … charts the epic journey of the humble device that showed how to count the cost of everything, from the Doge’s Palace to the acrobatics of John Maynard Keynes’s General Theory.’ Nicholas Wapshott, author of Keynes Hayek: The Clash that Defined Modern Economics

‘Double Entry is the first primer to accounting history and its relevance to the modern world that I have ever seen … The messages it contains are clear and unambiguous and all accountants, practising or not, ought to note the tone of invocation for change. Jane Gleeson-White is to be congratulated.’ Alan Sangster, Accounting History

Also by Jane Gleeson-White

Double Entry

Australian Classics

Classics

This revised edition published in 2020

First published in 2014

Copyright © Jane Gleeson-White 2014, 2020

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to the Copyright Agency (Australia) under the Act.

Allen & Unwin

83 Alexander Street

Crows Nest NSW 2065

Australia

Phone:(61 2) 8425 0100

Email:[email protected]

Web:www.allenandunwin.com

ISBN 978 1 76087 678 4

eISBN 978 1 76087 421 6

Index by Puddingburn Publishing Services Pty Ltd

Set in Minion Pro by Bookhouse, Sydney

Cover design: Luke Causby/Blue Cork

For Jackson and Scarlet Hill

In memory of my aunts

Janet Fischer and Nancy Tomlinson

CONTENTS

Foreword

Preface Can accountants save the planet?

1 Three waves of wealth creation and the rise of accounting

2 Beyond GDP: the ‘new’ wealth of nations

3 Dealing with the corporation as monster and psychopath

4 From South Africa to St James’s Palace

5 The Holy Grail: integrated reporting and the six capitals

6 Rewriting the code: a twenty-first-century corporation and the rights of nature

Epilogue Corporations with conscience and a planet with being

Endnotes

Bibliography

Acknowledgements

Index

Double Entry

‘Accountants as agents of revolution? Now there’s a thought.’

JONATHAN WATTS, 2010

‘How do you get economists and business people to take the environment and its relationship with the economy seriously? Change its name to one that resonates with commercial values. What’s a word that denotes great value, preciousness to a capitalist? I know—capital.’

ROSS GITTINS, 2012

‘Without a focus on a range of capitals, providers of financial capital simply do not have the information needed to allocate resources most effectively.’

PAUL DRUCKMAN, 2013

‘… everything will be fungible, nothing will be valued for its own sake, place and past and love and enchantment will have no meaning. The natural world will be reduced to a column of figures.’

GEORGE MONBIOT, 2014

FOREWORD

Six Capitals charts the rise of four movements designed to address some of the key problems of our times, including the inordinate power of the modern corporation and the invisibility of the earth’s living systems in global economic and accounting measures. The movements are: the push for a new corporation, the B Corporation, which is legally bound to benefit society and the environment while also making a profit; multi-capital or integrated reporting, which accounts for the wealth of society and nature as well as profit; natural capital and ecosystem accounting for nations; and the burgeoning rights of nature movement, which resonates with indigenous earth-centred laws and cultures. Together these changes are critical for the future of human life on this planet. Why? Because they extend the responsibility of corporations beyond purely profit-making to a legally binding requirement to operate for the benefit of nature and society; and they grant natural entities legal standing to fight for their own protection against corporate omnipotence, thereby recalibrating the respective power of corporations and the natural world.

Since Six Capitals was first published in 2014, these movements have only gathered pace, responding to the increasingly obvious ecological crises, social unrest, inequality, and ongoing economic and financial upheaval. Five years on, in August 2019, when 181 CEOs of the most powerful corporations in the United States released a statement that redefined the purpose of a corporation, causing shock waves through global business circles, they were speaking to the problem of corporate power and its single legally binding purpose: profit maximisation. This profit-maximising corporation is now obsolete, as they acknowledged: their statement overturned the doctrine of shareholder primacy—or profit maximisation—that has ruled US business practices and law for four decades. These CEOs, members of the Business Roundtable, including chairman Jamie Dimon (of JPMorgan Chase), Amazon’s Jeff Bezos and Apple’s Tim Cook, vowed to lead their companies for the benefit of all stakeholders, including customers, staff, suppliers, communities, the environment and shareholders. Responding to rising inequality and environmental catastrophes, with this statement the Business Roundtable shifted its weight from shareholder to stakeholder capitalism. This radical revision is rhetorical. Now legislative reform is required, as economist Joseph Stiglitz concluded in his commentary on the CEOs’ ‘shock conversion’.

And legislative reform—legal changes to allow corporations to operate for social and environmental purposes as well as profits (‘stakeholder capitalism’)—is exactly what advocates of B Corporations have been successfully driving in US state legislatures for over a decade. While the Business Roundtable’s announcement might be more rhetorical than actual at this early stage, the movement designed to bring actual change to the modern corporation responded to its statement by publicising its own corporate agenda. Six days after the announcement, more than 30 B Corporation leaders, including the heads of Patagonia, Ben & Jerry’s and Natura, took out a full-page ad in the New York Times inviting the 181 CEOs to work with them. As they pointed out, their certified B Corporations are already ‘walking the walk of stakeholder capitalism’. Their innovative model of corporate governance—benefit corporation governance—focuses on the ‘triple bottom line’: society, the environment and profit. Andrew Kassoy, co-founder of B Lab (which created B Corporations), welcomed the Business Roundtable’s statement, saying it was ‘a significant cultural shift’ and a ‘moment to celebrate’.

As with B Corporations, the push to grant legal rights to nature has become front-page news. In February 2019, the citizens of Toledo, Ohio, voted to grant Lake Erie legal rights to protect its ecosystem, the lake being their sole source of drinking water. Lake Erie is the first ecosystem in the United States to be recognised in law as having rights to exist, flourish and naturally evolve. In the past five years, rights of nature law has spread from its US birthplace to become a global movement, with communities, courts and governments around the world now recognising the rights of ecosystems in law, including in New Zealand, India and Colombia.

Since 2014 the four movements this book recounts have also taken off in Australia. That same year B Lab Australia and New Zealand opened its doors in Melbourne to promote benefit corporations in the region and is now pushing for amendments to the Australian Corporations Act 2001 to make certified B Corporations legally possible. These proposed changes are gaining widespread support among business, legal, investor and non-profit communities. The accounting system tailor-made for B Corporations, multi-capital or integrated reporting, is also beginning to take hold locally: 2017 was the turning point, when the Australian Institute of Company Directors publicly supported its adoption and investors recognised its importance in their capital allocation decisions. It is also increasingly being taught in Australian universities. For example, Monash University’s Associate Professor Nicholas McGuigan is using integrated reporting to challenge the binary logic of traditional accounting models and foster collaborations with creative and LGBTIQA communities. The local organisation advocating legal rights for nature, the Australian Earth Laws Alliance, worked on the first Australian Bill to recognise the Rights of Nature and Future Generations, which was introduced into the Western Australian parliament by MP Diane Evers in November 2019; and the first Australian legislation with a rights of nature element was passed in Victoria in September 2017. Natural capital accounting is similarly taking root. In 2018, environment ministers from the Commonwealth, states and territories endorsed a plan to undertake a continent-wide ecosystem accounting, and the first ecosystem accounting at a corporate level is currently underway in Tasmania.

What were merely unconnected murmurs on the horizon when I was writing the original edition of this book in 2013–2014 are now visible and their relationships clear: all pertain to updating the accounting and legal underpinnings of twenty-first-century capitalism, as well as its overarching narrative. They also concern the gathering conflict between people representing the needs of their human and natural communities, and those representing the needs of corporations for ever-expanding profits and of governments for economic growth, both of which so spectacularly underwrote twentieth-century economic development, which is now stalling.

The movements I recount are problematic, but they are materialising rapidly in the real world and offer important ways for thinking beyond the current economic, accounting and legal structures that shape our extractive global economy towards more regenerative thinking and institutions—notably by addressing the legal construction and purpose of the modern corporation (solely profit driven) and nation state (economic growth driven), and the legal status of the natural world as property.

Today it is even more critical than when I was writing Six Capitals that we both attend to these movements and understand that when speaking about the natural world we must consider other, better ways of valuing nature than natural capital and ecosystem accounting. As well as the legal rights of nature movement, these include indigenous ways of understanding the earth. Australia’s First Nations people hold a vast knowledge of this country and its relations with humans that is only just beginning to be recognised by the wider community. This knowledge is crucial for the way we inhabit our continent. Bruce Pascoe succinctly conveys its governing ethos: ‘It was the earth itself that was the most important thing and our law, our spirit and our economy were wedded.’ We cannot speak about one without the others. They are inextricably linked. And they all pertain to the thorny question of the value of the living systems of the earth, human and otherwise, in these troubled times.

If I learnt one thing from writing a history of accounting, Double Entry, and its sequel, Six Capitals, and seven years discussing the problems that bedevil contemporary accounting, it is that it’s ultimately about value: accounting is the way we define and measure value and translate it into numbers and money, ‘metrics’. And ‘value’ is a very fuzzy, ill-defined concept in a world where traditional religious belief systems no longer determine collective values as they once did, and monetary and so-called market value have taken their place as the apparently overarching global schema. I cannot overstate the power and significance of our much-overlooked accounting systems—nor the need for change and for these difficult conversations to continue.

Multi-capital accounting, questions about corporate power, the spread of benefit corporations and the rights of nature movement are here to stay. Six Capitals tells their story, from their first emergence in the postwar era until today. This revised, updated edition is for the new generations of business leaders, entrepreneurs, environmental activists, accountants, economists, scientists, teachers, parents, farmers, food growers and distributors, politicians, bureaucrats and other concerned citizens I’ve met on my travels since 2014. May the collective work on behalf of our beautiful, beleaguered planet be fierce and undaunted.

January 2020

Preface

CAN ACCOUNTANTS SAVE THE PLANET?

In October 2010, journalist Jonathan Watts reported from the United Nations Biodiversity Conference in Nagoya, Japan, an apparently anomalous phenomenon: the arrival of ‘money men’ at a forum previously reserved for nature lovers. Where flora and fauna had once prevailed, now ‘natural capital’, ‘biological resources’ and ‘eco-financing’ predominated. What were accountants doing at a conference on nature?

At the time, I was completing Double Entry, a book which began as a desire to celebrate the material origins of the Renaissance with the emergence of double-entry bookkeeping in fourteenth-century Italy—and ended as a history of accounting. It traced the story of accounting back to the emergence of the first clay tablets in Mesopotamia then to the Renaissance, when monk and mathematician Luca Pacioli first codified Venetian bookkeeping, which influenced the rise of capitalism and was implicated in the financial scandals of the new millennium, including the collapse of Enron and the global financial crisis.

Double Entry demonstrated that accounting has played a central if rarely remarked upon role in the epoch-shifting moments of our history, from the invention of writing to the wealth and cultural efflorescence of the Renaissance, from the Industrial Revolution to the rise of the global economy following the Second World War. So when accountants suddenly started appearing in places they had never been before, such as biodiversity conferences, I took note. Early in this new millennium, in the wake of the biggest financial breakdown since 1929 and amid crises in food, water, energy, weather, employment, population and wealth distribution, when we all sense that life as we have known it is changing in profound and unpredictable ways, I wanted to know what the accountants were up to—especially as Watts had opened his story with a rather extraordinary claim on their behalf: ‘So it has come to this. The global biodiversity crisis is so severe that brilliant scientists, political leaders, eco-warriors, and religious gurus can no longer save us from ourselves. The military are powerless. But there may be one last hope for life on earth: accountants.’

Now someone was figuring accountants as superheroes and suggesting they might be able to save the planet. This astonishing claim informed Double Entry’s concluding chapter on the failure of our national gross domestic product (GDP) accounts to value nature, an omission which encourages us to pollute, burn, extract and chop down its various components with little regard for the environmental consequences. This problem—which had been recognised by 2010 but not yet adequately addressed—suggested to me that something new was brewing in the world of accounting. So I continued to think about it and to wonder: can accountants save the planet?

This question implicitly addresses one of economics’ key conundrums: the concept of ‘externalities’. The fact that neither nations nor corporations account for the damage their lawful activities inflict on nature and society is considered by economists to be a problem of externalities. In traditional economics, nature and society are conceived as being external to the workings of commerce and this is reflected in the way we—and profit-driven markets—value the world. The problem of externalities is best expressed by former World Bank economist Raj Patel in his hypothetical ‘$200 hamburger’. In this 2009 thought experiment, Patel estimated the real cost of a McDonald’s Big Mac to be $200. The reason Big Macs sell for almost one-hundredth of this figure is that their price does not account for their real costs. These include their carbon footprint, their impact on the environment in terms of water use and soil degradation, and the enormous healthcare costs of diet-related illnesses such as diabetes and heart disease. Although traditional accounting models do not take these costs into account, they still have to be paid. But the McDonald’s Corporation does not pay them—we do. Society as a whole pays, in the form of environmental disasters, climate change, the depletion of natural resources and higher health costs. For Patel, the fact that corporations do not pay the environmental and social costs they rack up amounts to corporate subsidy on a massive scale. As he remarks, ‘You’d be forgiven for thinking that this ongoing bailout from nature and society to private enterprise is what puts the free into free markets—despite its protests, corporate capitalism has yet to prove that it can operate without these kinds of subsidies.’

The biggest accounting scandal of all in terms of externalities concerns our failure to account for nature. Economist Pavan Sukhdev, the author of the United Nation’s 2010 report Global Biodiversity Outlook 3, says that unless we value the goods and services currently provided by the natural world for free and factor them into the global economic system, we will continue to destroy the planet. He believes the changes required will entail a wholesale revolution in the way we do business, consume and think about our lives. This is why accounting was on the agenda at the 2010 UN Biodiversity Conference, bringing concepts like natural capital, biological resources