4 minute read
Synchronising time
If events happen at different times, how do we synchronise the accounting for their occurrence? Jimmy Jia, Management tutor at Mansfield and DPhil candidate at the School of Geography and the Environment, examines the disconnect between financial and carbon accounting methodologies.
‘Time is what keeps everything from happening at once.’
This humorous quote, often attributed to Albert Einstein or Mark Twain, summarises my research neatly. Some scholars point out that financial accounting, as we know it today, was created to account for the passage of time. Financial decisions are made not only between options but also regarding when to execute them. You can choose between buying a stock or a building, as well as when to buy them –at the same time, or wait several years between purchases. Furthermore, purchase decisions of the present are linked to cashflows of the future. For example, stocks purchased will incur a future dividend, and the capital costs to construct a building today will generate ongoing revenue in the future. Lastly, the assets will last for a certain duration.
One benefit of modern-day financial reporting is that it synchronises these activities across time, enabling decision makers to understand their current position and make informed decisions. Long-term activities, such as constructing and holding buildings, are recorded with the same system as recurring operational costs, such as laundry services. The methodology of this time synchronisation is rooted in double-entry bookkeeping, with the earliest known documentation published in 1494 by a Franciscan friar, Luca Pacioli, in his mathematics textbook Summa de arithmetica, geometria, proportioni et proportionalita.
Unfortunately, corporate greenhouse gas (GHG) accounting, the area of my research, does not account for the passage of time. Corporate GHG accounting uses the metrics of Scope 1, 2, and 3. Briefly, Scope 1 is an entity’s direct emissions from combustion of fossil fuel, Scope 2 is indirect emissions from electric energy consumption, and Scope 3 is all other emissions due to the upstream and downstream supply chain. However, Scope 1, 2, and 3 rely on life-cycle assessment (LCA) methodologies, which are well known to lack temporal attributes. Instead, this metric attributes to a present activity a summation of all events over time.
The temporal discrepancy highlights a big problem. The financial sector, through the Glasgow Financial Alliance for Net Zero (GFANZ), representing over $130 trillion in assets, has committed to alignment with the Paris Agreement climate goal of maintaining global warming to within 1.5ºC of pre-industrial levels. However, the financial sector uses a tool that synchronises time, while the carbon accounting sector uses a tool that sums across time. If the carbon accounting tool is not fit-for-purpose for the making of financial decisions, then the $130 trillion may be misallocated.
Fixing this problem begins with the insight that both financial accounting and LCA can be represented as an information architecture. The financial accounting information architecture was designed to represent the passage of time, with the past, present and future kept distinct. Historical costs are recorded on the balance sheet (ignoring fair market valuation for now), present costs are recorded on a profit and loss statement, and future costs are modelled on a pro forma. The treatment of past costs is different to the treatment of future projections.
My research applies the information architecture of financial accounting to LCA. I call the system General Purpose Life Cycle Assessment (GP-LCA) to show its parallel to General Purpose Financial Statements. Whereas financial reports consist of a balance sheet, profit and loss statement, and cashflow statement, I am proposing a GHG balance sheet, release and withdrawal statement, and GHG flow statement. Showing the GHG data in this format delineates stocks from flows, separates out past, present, and future GHGs, and creates a dataset that many stakeholders can use for further analysis. For example, engineers can still perform an LCA by summing together numbers from the three statements, and Scope 1, 2, and 3 can still be calculated with different combinations of items. Importantly, because GP-LCA is based on transactional data used to build financial statements, the system is aligned with management control systems, enabling leaders to analyse choices that maximise financial returns while minimising GHG emissions.
Closer to home, Mansfield is in the early stages of a project to redevelop the south side of the College site. The project team is already evaluating upfront construction costs and ongoing operational costs as part of the process. By wisely incorporating temporal attributes into carbon accounting, the upfront embodied carbon and ongoing operational carbon figures can also influence the sustainability of any design.
