TPB Draft Notes
for B-Team Emily Hickson

TPB Draft Notes for B-Team Emily Hickson ... not sent ... a much shorter version was eventually sent

Burgess COMMENTARY

Peter Burgess

Dear Emily

Thanks for your prompt reply ... but not so much for the follow up questions you have asked!

I have been struggling for a long time to answer these questions for myself. It has not been easy and my thinking is very much still a 'work-in-progress'. My website ... http://truevaluemetrics.org ... documents in a pretty clumsy way where I am with my thinking. Getting the ideas organized and rigorously disciplined has not yet been accomplished, but I am confident that I am heading in a good direction, though this may not be immediately apparent!

I suggested in my initial message that measuring 'unsustainability' would be a useful metric, or set of metrics.

Though there have been a good number of thought leaders who have described various framings of the idea of unsustainability like Doughnut Economics from Kate Raworth (Oxford and Oxfam), Planetary Boundaries from Johan Rockström (Stockholm Resilience Centre) and Will Steffen (Australian National University) and hundreds of others, a useful way of reporting using numbers that are low cost, reliable and effective has not ye emerged..

You will be well aware, I am sure, that the conversation about sustainability issues among corporate leaders has grown enormously over the past few years. Andrew Winston's book called 'The Big Pivot' published in 2014 documented conversations with a large number of CEOs most of whom expressed their interest in and commitment to sustainability. When I asked Andrew how many CFOs he had talked to, there was an awkward silence. Sadly CFOs are not in this conversation in the way they need to be because they are required to be on top of financial reporting compliance more than making progress towards the sort of 'numbering' we need for the 21st century.

When Kering prepared an Environmental Profit and Loss Account in 2013, I was initially optimistic that there would be a wave of better numbering until I realized that the cost of this process ... data collection, analysis and reporting ... had been very very high and essentially this approach was completely uneconomical for routine reporting.

Your B-Team work and other initiatives like PRI (Principles of Responsible Investing) , GRI (Global Reporting Initiative), IR (Integrated Reporting) SASB (Sustainable Accounting Standards Board), SROI (Social Return on Investment) and others are evidence of the increasing importance being attached to better sustainability reporting ... but getting to an easy, quick, low cost, effective, reliable system and process for reporting using numbers remains elusive! A growing number of big organizations like the big accounting firms and some of the big investment funds are working on sustainability reporting initiatives but they are proprietary and focused on giving competitive advantage for their individual firms and not so much enabling the universal adoption of better metrics for the 21st century which I believe should be the goal.

My starting point for TrueValueMetrics has been to try to understand how the world works. While there is a huge amount of complex detail that I will never understand, there are some overarching themes that seem to be important.

The first of these is that there are 3 main segments for system ... a huge complex interconnected socio-enviro-economic system comprising: (1) People / Social (2) Nature / Environment and (3) Economic / Financial.

The priority for PURPOSE should be to achieve the most PROGRESS for PEOPLE (1) with the least degradation of Nature / Environment (2) and giving reward to the ACTORS engaged in the Economic Activities (3) that are making progress possible.

I have argued for a very long time that expecting this complex system to be optimized using only money wealth and organizational profit as the measurement cannot work ... and does not work. Worse, economic meassures like GDP growth further exaccerbate the problem. Back in the 1960s Robert Kennedy made a famous speach where he called out the inadequacies of GDP as a measure of performance, but more than 50 years later GDP growth is still talked about every day by financial decision makers. This has to change!

Many thinkers have concluded that accounting for financial capital is not enough, and that there should be accounting for ALL the capitals. Different authors have argued for 6 capitals, or 5 capitals or 7, or 8 capitals. Excactly how the capitals are labelled does not matter. What does matter is that ALL the capitals are included in the framework.

During my career in corporate financial management and consulting I have had to handle multi-currency accounting and reporting. I won't go into details, but it seems possible to use similar thinking to account for the impacts on all sorts of different capitals. For TVM we are segmenting the capitals in line with the impacts and suitable units of measure. The result is as follows:
... SOCIAL SEGMENT: Human Capital and Relationship Capital
... ECONOMIC SEGMENT: Physical Capital, Financial Capital, Knowledge Capital, Institutional Capital. Cultural Capital and Locational Capital.
... ENVIRONMENTAL SEGMENT: Natural Capital

That is a total of 9 capitals ... a little bit more segmentation than the six (6) being used by, for example, the Integrated Reporting (IR) initiative.

In addition TVM subdivides Natural Capital as follows:
Air, Biodiversity, Climate, Ecosystem, Energy, Forest, GHGs, Governance, Land, Minerals, Waste, and Water.

Every activity in the socio-enviro-economic system has IMPACT which changes multiple capitals imcreasing some capitals and diminishing others.

Corporate Organizations are the biggest actors in the system and have become incredibly efficient at making things and making money. They use management accounting within the organization to optimize for profit performance and know everything they need to know in order to achieve sustained profit growth. Sadly, there is no visible accounting for the impact business decisions are having on the socio-enviro-economic system beyond the reporting envelope of the corporate organization.

I want to see 'bean-counting' for money and profit (that is conventional financial accounting) complemented by a 'spaghetti-counting' mindset. Every accounting transaction for money has associated impacts in the supply chain, during use, and in the post-use waste chain. IMPACTS are changing the capitals for better or for worse throughout these complex chains.

In practical terms I have started to think in terms of a company not only being part of a Sector or Industry, but also being part of a Stream / Strand / String! As you know I learned engineering at an academic level in the late 1950s doing engineering calculations with a slide rule and first worked on computers during the 1960s, and have some appreciation how far modern engineering has progressed during my adult lifetime. Much of this has been enabled by sector specialization which is good, but it has also resulted in a lot of thinking never getting out of the sector 'silos'.

In tangible terms, products should be a much more important part of the thinking about sustainability and unsustainability. Products flow along a stream having impact as they move from process to process, from place to place, and through a variety of organizations along the supply chain. Then they have impact during use, and subsequently along the post use waste chain. It is through products that customers can influence the decisions of corporate organizations. Companies know this and routinely invest in advertising to influence customers to buyt their products. A better system would have potential customers having easy instant access to relevant information about the products they are choosing to buy or not. In TVM we call these data about products the STANDARD VALUE PROFILES which could eventually be used to enable some sort of incentive or reward for responsible buying by the customer.

In addition there are important links between people and consumption and products and companies and their supply chains. Companies need customers in order to sell their products and to be profitable. Customers should have much better information about the products they are thinking of buying ... information that is not merely 'advertising' paid for by the manufacturer / marketer but information that addresses all of the impacts associated with the product like (for example in the case of food) the product's impact on wellness, the impact on society and the environment along the supply chain, the impact there will be from waste, as well as some economic impacts.

I am very careful to be clear about the difference between cost and price and value. As a retail customer, we often think in terms of price being cost, but it really is not. Price minus cost is profit. Products move through a supply chain because of the profit at each stage of the supply chain. As a product moves through the supply chain there is an embedded cost that is made up of several different elements of cost.

The conventional financial accounts of a company comprise a balance sheet and a profit and loss account. The classification of accounts between balance sheet accounts and P&L accounts is a very important fundamental idea in double entry accounting that is not widely appreciated but is very important. In summary, this construct makes it possible to compute a profit for a period merely by knowing the information about the balance sheet at the beginning of the period and the end of the period. There is no need to have any information whatsoever about the multitude of activities that go into building up a profit and loss account. The activity information is needed better to improve performance, but not at all to measure progress.

The beginning balance sheet of a company reflects the history of the company up to that point in time. The same logic can be used to put on the record the story of a product as it moves through time and moves through a supply chain, though use and into the post-use waste chain.

Similar logic can also be applied to the story of one's life ... an individual life and a family. What is particularly disconcerting is that a reasonably high standard of living is seriously unsustainable given the terrible social and environmental inefficiency that prevails in the modern world. Poor people are a whole lot less unsustainable than richer folk!

Also the same logic can be applied to the stories of places ... very important because the place has a huge impact on quality of life and the level of unsustainability in the system. The place is also interesting because it is in a place that many of the more egregious corporate misbehaviors are visible.

In the corporate world there are long established rules about how to consolidate the accounts so that a corporate group of many separate corporate entities can be 'added up' in a coherent way and reported as one single reporting entity. When I was the CFO of a relatively small company we had over 30 separate individual corporate entities that needed to be consolidated for the periodic external reporting. The same ideas can be modified so that there is coherence between the total of the products flowing out of a company and the company as a whole. A similar logic can be applied to an individual operation of a company located in a specific place.

Another concept that I am trying to apply is a version of something that I used to do in corporate financial management a long time ago. There was a time when corporate managers wanted to user computer to collect data on the actual costs of making the company's products. There was a huge amount of data, and usually nothing but analytical confusion. I used to junk these systems and replace them with a much simpler standard cost approach. Engineers calculated what the product should cost (material and labor) for all the processes along the production line. Periodically (day, week, month) we multiplied the standard costs by the quantity produced and compared that to the period costs for each of the processes on the production line. The differences (variances) were a starting point for determining ways to improve the product and/or the production. In the framing of TrueValueMetrics, the comparable idea is that of Standard Value Profiles

I have given a lot of thought to what specific data companies should be required to produce, but this is still a work-in progress. Some of the thoughts include the following.

With regard to payroll there is a serious tension between the company that does the paying and the staff that get the pay. With profit as the only / dominant measure of business performance low pay and payroll is better than high pay and payroll. From the perspective of the individual and society the high pay and payroll is better. At the limit, making products with no payroll is the best of all worlds for the company, but a disaster for society and society would quickly become totally unsustainable. Accordingly, part of the essential information has to do with the profile of a company's payroll. More on this to be fleshed out.

With regard to taxes, they are a drag on after-tax corporate profits, but at the same time they are an essential part of a functioning sustainable society. Accordingly there needs to be information about the how much and where taxes are being paid.

With regard to payments related to CSR ... something I call pro-good expenses ... these need to identified and valued as rigorously as everything else. For many large profitable companies these expenses are minuscule compared to the benefit flows associated with stockholders. Materiality is important and puffing up CSR should be called!

Energy is a big part of the modern world ... and a major contributor to many of the issues related to the environment. It is also an important foundation for everything that has resulted from industrialization during the last 200 years or so. People and their choices are the problem with respect to energy, not so much the companies that produce the energy. As I have already observed, rich people are unsustainable, and the energy use of rich people is unsustainable. Energy is the foundation for transport systems and for many products. Systemic changes are needed in lifestyle and in product formulation. The use of electricity is more or less unsustainable based on how electricity is generated. Nuclear, wind, solar, hydro, tide etc are preferable to coal, natural gas, etc.

In the past the flows of Mineral Resources to Raw Materials / Raw Materials to Usable Products / Usable Products to Solid Waste have mostly followed a linear path and the conventional accounting has been fairly simple. It gets more complex when impact on society and impact on environment is being accounted for as well, and again more complicated when the emerging circular paths are taken into account. The role of the circular economy is essential to sustainability ... a modern world with more than 7 billion of population and growing in material wealth and buying power is completely unsustainable unless there is significant use of circular flows to replace the traditional linear flows.

Many years ago (Club of Rome report of 1972) the issue is resource sustainability was put on the table. This problem diminished as more and more energy resources were discovered and many more mineral deposits together with better technology to extract the resources. Resource depletion should be taken into consideration, though perhaps there is less of an imminent crisis.

On the other hand the problem of environmental degradation needs to be addressed as rapidly as possible and at scale. It became apparent some years ago that there were many ways in which environmental degradation was out of control and starting to cause a variety of problems. I have memories of the killer smog of the mid 50s in the UK and the yellow nitrous oxide clouds of the mid 60s over Los Angeles ... both of which were addressed quite rapidly and aggressively with pollution control legislation and regulation. As far back as the 1980s I recall a lecture given by a Cambridge researcher visiting the USA about Greenland ice melt. I was at Sidney Sussex college at Cambridge and some of my contemporaries did some climbing in Greenland, naming two peaks they climbed Sidney and Sussex. 25 years later, photos showed how much the ice had receded ... and what has happened 30+ years later comes as no surprise. Climate change is a very very big deal. Again, back in the 1980s I did a lot of work associated with the drought in the Sahel and the Horn of Africa ... and found myself numbering how many people were dead because of this climate change. I also did work connected with economic development, and the increased poverty associated with agricultural failure arising from climate change that is happening faster than traditional society and plants / trees can change.

Some of my past corporate experience was in the international seafood industry. Degradation in many forms has impact on fish and seafood, whether it is the mangroves along the coast, unsustainable over-fishing, chemical pollution from land based industries discharging into rivers and into the oceans, or plastics following much the same routes. All of this is unsustainable ... and people and companies and products all have responsibility for these messes and all should be held accountable for this unconscionable behavior.

_____________________________
Peter Burgess ... Founder and CEO TrueValueMetrics ... Meaningful Metrics for a Smart Society True Value Impact Accounting ... Multi Dimension for ALL the Capitals
http://www.truevaluemetrics.org LinkedIn: www.linkedin.com/in/peterburgess1/ Slideshare: http://www.slideshare.net/PeterBurgess2/ Twitter: @truevaluemetric @peterbnyc Telephone: 570 202 1739 Email: peterbnyc@gmail.com Skype: peterbinbushkill

On Fri, Feb 2, 2018 at 3:44 AM, Emily Hickson wrote:

Hi,

I agree the report does not analyse if they are on track to 1.5C / net-zero by 2050. Its a compilation of stories and challenges making a point that diverse company face similar things - and they need to get outside their company and change the system to have a hope of getting to net-zero.

I didn't have the data or expertise to do what you are proposing. Would be very intrigued on what you propose for this year's report.

What questions would you ask of each company?, What data would you track? What sources would you use?

Best wishes,

Emily

On Thu, Feb 1, 2018 at 10:03 PM, Peter Burgess wrote:

Dear Emily

I have been following the activities of the B-Team since it was put together several years ago when I was still relatively young.

I read engineering at Cambridge in the late 1950s and then read economics before graduating in 1961. Subsequently I became a Chartered Accountant in London with Cooper Brothers (now morphed into PwC). After some professional experience I started doing management accounting and became a very young CFO in the United States as management information systems became fashionable.. I was good at profit improvement because I was not inclined for fiddle the books but more interested in fixing the factory and/or fixing a product and this was a very good way of getting more profit.

Mid career I started doing 'consulting' work but this did not go really well ... someone from the UK telling American executives what to do was not a great idea.Though they had been employing me as a (low cost) part of their management team for several years prior being independent did not work well! I did. however, get consulting assignments in the international area both private assignments and work for the World Bank, the UN and others. This was an eye-opener because the management systems of these organizations were to my mind in the stone age or before! Without management, anything goes ... and it was clear to me ... as an accountant who was quite good at 'following the money', that there was a massive amount of abuse and/or sloppiness in what was going on. My attempts to address not only the recipients of corrupt benefits but also the enablers of corruption (the writers of the checks) did not go down well and eventually my utility as an independent consultant diminished. Before that happened I did have opportunities to do assignments in around 50 different countries, which gives me something of a world view!

My interest in better metrics has not abated. The recently distributed report Net Zero by 2050 is a good read but at the end of the read I have really not learned very much ... all the stories I have heard before, and I have no idea about the progress and performance of the various initiatives. Essentially there is a complete absence of numbering ... and my position is that without numbering, anyone can say anything and get away with it!

I know numbering is not easy ... but it is 20+ years since John Elkington first talked about the Triple Bottom Line, and one might have expected that some sort of a reasonably widely accepted numbering system would have emerged by now. I thought this was on the B-Team agenda several years ago and reached out to no avail ... so I try again.

There are many many issues to address ... but one idea is that every company on the planet should be numbered and held accountable for the amount of unsustainability that they are responsible for ... and in fact the same idea can also be applied to every person on the planet ... and all the products flowing through the socio-enviro-economic system.

Rough numbers suggest that the US economy is one of the most inefficient on the planet, and of course rich consumers are massively more dangerous for the future of the planet than poor people.

To the extent that ideas like this can be helpful to your work ... please get in touch ... sooner rather than later because I am well into my declining years and therefore in something of a hurry!

Best regards

Peter
_____________________________ Peter Burgess ... Founder and CEO TrueValueMetrics ... Meaningful Metrics for a Smart Society True Value Impact Accounting ... Multi Dimension for ALL the Capitals
http://www.truevaluemetrics.org LinkedIn: www.linkedin.com/in/peterburgess1/ Slideshare: http://www.slideshare.net/PeterBurgess2/ Twitter: @truevaluemetric @peterbnyc Telephone: 570 202 1739 Email: peterbnyc@gmail.com Skype: peterbinbushkill

'Emily Hickson ... Net Zero by 2050'

-- Emily Hickson • Senior Manager, Net-Zero by 2050
Phone +44 772 446 7003 Email eh@bteam.org Twitter @Emilyahickson Skype eahickson Web bteam.org The B Team