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The Dasgupta Review

The income statement must speak to nature

Author: ICAEW Insights

Published: 23 Jul 2021


A modified version of the value-added income statement that includes a provision for nature would play a key role in protecting biodiversity, says Paolo Quattrone, Professor of Accounting, Governance and Society at Alliance Manchester Business School.

In his report on biodiversity and economics, Professor Dasgupta was clear: if we are going to account for biodiversity loss, then we need to evolve a new language to accommodate that. 

This has been preoccupying Professor Quattrone. But Quattrone’s work takes us beyond language to judgment. “We're not just talking about words and grammar,” he says, “We're talking about applying concepts appropriately with judgment and through coherent accounting calculations.”

While the vocabulary is very much on Quattrone’s mind, he has been engaged in rethinking the format and structure of the income statement in a way that speaks to nature – in collaboration with ICAEW and the Capitals Coalition. “We are rethinking the income statement, not in terms of profit, but in terms of value-added, which is something we did in the past,” he says. “And it is also the approach used for national accounting.”

He continues: “The shift to value-added accounting recognises how value is produced and then distributed amongst stakeholders [investors, funders, shareholders, retained earnings for the company, salaries for workers etc], but we should include a line in the income statement: a provision to account for nature.”

Bring society and nature into accounting language

The concept is relatively simple and, if put into action, would result in a series of significant nature-centric outcomes. “The first is that we will immediately make it visible that we're destroying and consuming natural resources in the production of economic value, and we will have to think how to reconstitute that natural capital,” he says. “The second is that, in essence, we will internalise externalities. Within the current accounting framework, what happens to society and what happens to nature is not within the accounts. In this way, we will bring society and nature into an accounting discourse using accounting language.”

The third outcome in Quattone’s list is visibility of what natural resources are being consumed by business in the creation of value - and what we decide to do about it. This visibility may prompt businesses to take action. “Firms may say: ‘I've got this line in the income statement that relates to a provision for nature and constitutes a fund in my balance sheet to ‘give back’ to nature, but I see my provision is zero and I do not accumulate funds for reconstituting natural capital in the balance sheet.’ And then I would have to respond to the public’s questions as to why that provision is zero and my fund is low or nil,” he says. “What is more, if I do create a fund to account for nature, I will have to explain what strategies I have put in place to reconstitute the natural capital that I'm consuming.”

Limiting the destruction of nature

While it may be naive to believe we can produce economic value without destroying natural capital, Quattrone believes it is only fair to consider how to reconstitute that capital once we have consumed it. “That is what will ultimately limit the destruction of nature,” he adds.

“Accounting is never about matters of fact. It's always about judgment and matters of concern. But this proposed approach to the income statement will, at least, generate a space in which applying judgment can take place. The idea is relatively simple, and, in this simplicity, it is elegant. It is also within the remit of what accountants already do. I think Professor Dasgupta is right in saying that we need to expand the vocabulary of accounting, but I think he means that we need to do this so that we can have a conversation about what we do to nature and what we can do for nature, and we need to do it in and through the accounts. At the moment, this is not within the remit of accountants, or at least we do not have a technical solution to addressing it.”

Quattrone is emphatic that this approach means that any business that consumes nature – and all do – will have to put their hands in their pockets. “Human stakeholders will have to decide how much they are willing to give up in order to reconstitute that natural capital they have consumed,” he says.

Bring together metrics

It is also time to bring together metrics associated with the UN’s Sustainable Development Goals and ESG reporting with financial reporting. This is work he is doing with the Chartered Institute of Management Accountants and Professor Ariela Caglio at Bocconi University in Milan. “These initiatives leave the financial aspect exactly as it was and they shift the problem elsewhere so there is no relationship between the economic and non-economic, the financial and non-financial,” says Quattrone. The proposed approach unites the two sets of metrics and delivers data that informs the decisions about what an organisation will have to do to bridge the gap between the production and distribution of value, and the imperative to protect nature.

“As with everything to do with accounting, it will be a matter of judgment and valuation, but this judgment and valuation will be related to key financial measures and not be a judgment based on abstract ideas.” 

So, to what extent can these ideas about redefining the income statement to account for nature be transposed into policymaking, standard-setting and regulation?

Quattrone responds that there are three key actions. One is rethinking transparency, two is changing how accounts are kept, and the third is the institutional arrangements – in other words, the shift away from shareholder value as the driver of the reporting process. He also points out that there is a different role for accountants and auditors to play. 

“It will require strong policy intervention if we are to reform the way in which we keep the accounts and we produce corporate reports. And we need to make sure that the auditors change their role from certifiers to facilitators of a debate among relevant stakeholders,” he says.

GDP: the elephant in the room

From the governmental and supra-governmental perspective, the other elephant in the room is GDP and the omission from it, at present, of metrics around nature. “If GDP were to include nature as a stakeholder, then all information about the impact of business on nature could flow seamlessly, from transnational organisations like the European Union to the small subsidiary which is owned by a group, to an SME,” he says. “Unless there is strong policy and political effort in making this real, then it will not happen … but we will still need to address this problem.”

He says it is all a matter of balancing the different perspectives. “Accounting is powerful because it brings measurement, but it also brings judgment and proportionality. We have to be proportionate about nature,” he says.

Missing the technical aspect

As things stand, we have the Dasgupta Report and the UK Government’s response to it demonstrating a commitment to protecting biodiversity but, says Quattrone, what is missing is the technical aspect. “We've got the concept, we've got the words, but we don't have the numbers. The technical aspect needs to be in place, and it needs to be done in double entry,” he says. A modified version of the value-added income statement that includes a provision for nature would do that.

“This is not something that you resolve in the marketing department. It is not something that you do in the PR department. It is something that needs to be done in the finance function in cooperation with the other functions because, of course, accounting is the instrument through which you balance different perspectives that allow a firm to grow and flourish.”

The Economics of Biodiversity

In 2019, the UK was the first major government to commission a review into the economics of declining biodiversity. We speak to the team behind the Dasgupta Review, to find out what it means for business and the profession.

Sir Partha Sarathi Dasgupta
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