Start accounting for environmental costs

OpinionJournal - Featured Article:
EARTH IN THE BALANCE SHEET - For People and Planet
When will companies start accounting for environmental costs?

BY AL GORE AND DAVID BLOOD
"Capitalism and sustainability are deeply and increasingly interrelated. After all, our economic activity is based on the use of natural and human resources. Not until we more broadly "price in" the external costs of investment decisions across all sectors will we have a sustainable economy and society.

Our current system for accounting was principally established in the 1930s by Lord Keynes and the creation of "national accounts" (the backbone of today's gross domestic product). While this system was precise in its ability to account for capital goods, it was imprecise in its ability to account for natural and human resources because it assumed them to be limitless.

"License to operate" can no longer be taken for granted by business as challenges such as climate change, HIV/AIDS, water scarcity and poverty have reached a point where civil society is demanding a response from business and government.

In the corporate sector, companies like General Electric are designing products to enable their clients to compete in a carbon-constrained world. Novo Nordisk is taking a holistic view of combating diabetes not only through treatment but also through prevention. And Whole Foods and others are addressing the demand for quality food by sourcing local and organic produce.

In the nongovernmental sector, organizations such as World Resources Institute, Transparency International, the Coalition for Environmentally Responsible Economies (Ceres) and AccountAbility are helping companies explore how best to align corporate responsibility with business strategy.

Over the past five years we have seen markets begin to incorporate the external cost of carbon dioxide emissions. This is happening through pricing mechanisms (price per ton of carbon dioxide) and government-supported trading platforms such as the European Union Emissions Trading Scheme in Europe.

Enhanced Analytics Initiative, an international collaboration between asset owners and managers, encourages investment research that considers the impact of extrafinancial issues on long-term company performance. The Equator Principles, designed to help financial institutions manage environmental and social risk in project financing, have now been adopted by 40 banks, which arrange over 75% of the world's project loans. "

Mr. Gore, a former vice president of the United States, is chairman of Generation Investment Management. Mr. Blood, formerly head of Goldman Sachs Asset Management, is managing partner of Generation Investment Management, which he co-founded with Mr. Gore.