Peter Bakker explains how accountants can save the world
“Accountants Will Save the World,” said Peter Bakker, then the newish CEO of the World Business Council for Sustainable Development (WBCSD), in a 2013 article for the Harvard Business Review. Peter’s HBR piece was based on a speech he had given to the UN Conference on Sustainable Development one year earlier, in Rio de Janeiro, aka Rio+20.
A decade on, Fiona Donnelly CA, ICAS Director for Sustainability, speaks to Peter – who still leads the WBCSD – about the impact of that article, and whether he maintains that optimism today. Peter talks about the progress made, the challenges to come, and what the future holds for the accounting profession
Fiona Donnelly: What inspired you to say accountants will save the world and what was the reaction?
Peter Bakker: I was surrounded by very passionate sustainability people making great speeches about the problems the world faced, but who weren’t necessarily practical about how you get business to change. Unless we can integrate the non-financial numbers into the way business thinks, we won’t see change on the scale we need. I came up with “accountants will save the world”, meaning once we integrate greenhouse gas emissions, and natural and social impacts, into the way we make budgets and measure performance, then we will get business leaders to focus on them.
Things changed in the past three years when the ISSB [International Sustainability Standards Board] was born, when Europe began work on the CSRD [Corporate Sustainability Reporting Directive], when even the SEC [Securities and Exchange Commission] started talking about how you integrate climate impacts into material risk assessments.
FD: What was the tipping point?
PB: I chaired two meetings of the Integrated Reporting Council and said: “All your initiatives are important, all have elements critical to what we’re trying to build, but it’s confusing business. We [need] consolidation.”
They formed the ISSB. The wise decision was made to put a pragmatic business leader, Emmanuel Faber, at the top. He galvanised the elements that now form the ISSB, which is becoming the global baseline. The big challenge now is how we make that a mandatory framework for as many nations and regions as possible, as fast as possible. Then accountants can deliver the data points on which business leaders and investors can make better decisions.
FD: You’re talking about double materiality reporting, whereas ISSB 1 and 2 are of a financial materiality set-up. Which will be better?
PB: I’m a pragmatist. Depending on the timeline, I think of them as the same. There are interesting accounting implications because climate is an inevitable, massive financial risk coming our way much faster than most people realise. And if they do realise it, maybe they don’t fully appreciate it.
It’s not easy to integrate long-term risks into today’s assessments. But we’ve achieved consolidation of reporting frameworks in a timeframe that three years ago [seemed unlikely]. The next step is twofold. Are the accounting frameworks and professionals set up for success in that arena? And are we sure capital markets know what to do with all that new data coming their way?
FD: It’s interesting that the new standards are being developed for investors – how are they being received?
PB: Investors have the same challenge with the accounting frameworks. It’s formulated simply in the statement: 90% of the market cap of all listed companies is in terminal value. As you take a discounted cashflow calculation, you have three to five years of projections, then a terminal value for eternal growth discount to today. If you think through the impacts of climate change – weather events, and also transformation from using combustion engines to electric vehicles, from fossil fuels to renewable energy – they make terminal value an outdated concept. You can’t now assume the cashflow from year five will go forth to eternity as the world will radically change in the next 10 years.
That’s a concept investors haven’t embraced yet. We can’t change that until they get materiality-based comparable data points, so they can see company A is decarbonising quicker than company B. Until ISSB [standards] are mandatory, investors are making judgement calls, not data-based calls.
FD: How do we make the change? In our seminar, we asked people about their biggest net-zero challenge. The most popular answer – 40% said they have more business-critical issues.
PB: For many people it’s too scary, too far away or they can’t translate it into their business. But I’ve worked with companies who are now making analyses of where they get their raw materials. For instance, an agricultural company growing products to make drinks has mapped where it produces the wheat and grapes it needs for its products. What are the likely scenarios for climate impacts there? What would that do to the commodity prices of wheat and grapes and how would that impact our bottom line?
One $1.2bn-turnover company we worked with did analysis that showed five years from now, the rise of commodity input prices as a result of climate impacts would wipe out its entire profit. This is five years out, not 40. It’s based on assumptions, so you need to run scenarios. But the response is: “Wow, this is more important than we may have thought by looking at the weather.”
I expect that to go up dramatically. Some insurance premiums are going up because the risks are rising; some risks can’t be insured now because the likelihood of damage means it’s unaffordable. Those inputs make conversations much more tangible and force leaders to ask: “What are the mitigation efforts we need to start integrating into capex or relocation plans?”
“Accountants will save the world” is not just about disclosures, but about how we turn these big – and no longer long-term but mid-term – risks into financial data points. I’ve been a CFO, I’ve been a CEO, and people in those positions are very uncomfortable reporting things they don’t know how to manage. The progress companies have made in managing the performance around these data points hasn’t been as robust as the reporting disclosure work. And soon companies will be asked to disclose all kinds of information.
Joining the dots
FD: Devil’s advocate question: we’ve got 24,000 members, just over a third based in Scotland. The economic situation is tough. If you’re an SME, struggling with cashflow, cost of living… how would you advise them to step up, cognisant of their day-to-day commercial pressures?
PB: Short-term pressures cannot be left unmanaged. I never say drop everything and focus on climate. But everyone needs an understanding of where these challenges will likely impact the company, its supply chain or its customers.
You have to ask: “Who are the 20% of suppliers that cause 80% of the emissions? How can we work with that smaller group of partners to jointly find ways to improve the 80%?” I think that’s the way to go.
On a number of these transparency issues, you’ll soon see technology [make a difference]. Two years ago, scope 3 accounting was an interesting conceptual conversation. Today, our organisation has built the global standard for product-level scope 3 accounting and data-exchange protocols. By the end of the year, large companies like SAP and Microsoft will integrate that into their scope 3 accounting software tools. Tech and machine learning will help to create transparency that a few years ago would’ve been hard to achieve.
FD: Are boards giving it due priority?
PB: I’m concerned they’re doing this tick-box exercise instead of [showing] leadership. I’m involved closely with a large automotive company where the transformation is happening at enormous pace. If you want to beat Tesla, you need to be all-electric in five to seven years. That may sound a long time, but traditionally, their product cycle is seven years. So if people say, “Seven years from now, all your vehicles must be electric, stop making combustion vehicles,” then… you have to transform your complete business model and supply chain. Boardrooms should be all over this. If they’re not, they may be out of business 10 years from now.
Automotive is aware of the risks [of not changing]. It’s rising with companies in steel or aluminium, because they know if they can’t make the change to zero steel they might be in difficult waters. In construction, the supply chain is so fragmented, no, the risk of not transforming is not understood well enough. In the food sector, we still need more awareness.
FD: Do we need a change of mindset?
Humans can save themselves but typically wait until the last second to do so. WBCSD is creating awareness in a small but growing group of leaders that we need to do more than just optimise quarterly results. Climate is likely to be the input to say we cannot continue this way. Accountants will be a critical component of that with a set of tools, data, disclosure rules, whatever, to say this is how you’re going to make that change.
FD: You’re keen to reinvent capitalism. This is a sweet spot for accountants because we’re the numbers guys. Could you elaborate on how we might do that?
PB: Capitalism is an effective way of allocating resources, but we’re reaching planetary boundaries. Inequality is leading to serious tensions. So we’re beginning to hit the boundaries of what current capitalism can do. Its biggest mistake was becoming financial capitalism, trying to optimise the returns on financial capital, and forgetting there are other capitals – nature, people, etc.
John Elkington came up with the triple bottom line of “people, planet and profit” [in 1994], which is another way of saying there’s more than just financial capital. But when push comes to shove, the magnetism of financial capital is so much stronger than that of environment or planet or people that, under pressure, everybody will first optimise the financial results. We need to discard the discounted cashflow model. Because [that] analysis is the way the world of financial capital decides where we allocate money. It cannot integrate environmental or social aspects because they are, by definition, non-cash items.
If the world agrees tomorrow to a $200 tax per tonne of CO2, then you can turn it into a tax item. But that’s not going to happen anytime soon. To stop using the discounted cashflow model and go for something that integrates greenhouse gas and biodiversity… that’s an ideological battle I hope to have in the remainder of my life.
The second fast track is mandatory disclosures. The third is educating management to make decisions so we see collective improvements. Then capitalism can still be the organising algorithm.
FD: At ICAS, we’re embedding sustainability throughout our modules and training. What do you think the next 10 to 20 years will look like as a CA?
PB: The scope of what an accountant needs to be able to audit is going to change, so the education will be very different. I see a big expansion of skills in two areas. One is beyond financials into greenhouse gas, biodiversity, social impacts. The other is the realisation you cannot solve these issues within the boundaries of one company.
[Currently] the auditor has only to look at the legal entity – invoices come in, invoices go out, everything in between we audit. That won’t be the way environmental or social accounting will work. We need to have a view across the whole value chain. It needs a fundamental rethink of the board’s responsibility; and, therefore, the role of an accountant, internally or externally, to assure the information going out reflects that reality. That will significantly change the accountant’s profile – it will be a fundamentally different role.
FD: Why do you think accountants are so uniquely placed to fulfil these roles?
PB: A few still deny the science behind climate change because they have a vested interest in what is causing the problem, but every other leader should know we need to decarbonise. To get things done, we need to understand where the risk and impacts are and where the innovation opportunities are – normal business analysis. But now with other data points – and [only] accountants can help to create those data points – management will have the numbers it needs to make the decisions. Without better data there are no better decisions. Without better decisions, there’s no transformation. And without transformation there’s no hope of solving climate and other big themes.
FD: If you were a practising accountant now, what would top your to-do list?
PB:I would try everything I could to run the climate-impact scenarios. And, depending on the business, biodiversity or social impacts would potentially impact the risks over the business, or vice versa. If our company had tech solutions, I’d try to provide the data to create the business cases for investing more in those first.
Business is very simple. You need to understand your risk and avoid it hitting you. You need to find market opportunities before others do and go faster in deploying them. Over time, your business avoids the risk and grows, based on the opportunities you have identified. Same game, different data. Now we need to fix climate change.
FD: What’s next for you now?
PB: We’re going to New York for Climate Week and the UN General Assembly [Peter spoke to CA magazine in September, before both events]. It’s about how we decarbonise agriculture and heavy-emitting industry. How do we build a corporate performance and accountability system? Those are the big ones.
Solving inequality will take five years to reach the same level of urgency, but I’m very concerned about social tensions. I’m Dutch. There are 17 million inhabitants of the Netherlands. Next year there will be one million living below the poverty line. How can the eleventh [richest] economy in the world [allow that]? That’s something fundamentally wrong with the system. That’s all of us, not just a few bad people.
FD: If you had a magic wand, what would you do?
PB:I would put a $200/tonne price on CO2, globally, mandatory everywhere on everyone. Then we would change faster than anything. Then it will be sucked into the financial accounting so I buy myself more time to fix the other non-financials.
For more resources, visit the ICAS sustainability hub