What is normative accounting for intangibles?
Essentially a rethink of double-entry bookkeeping. Normative accounting for intangibles, flips the incentives.
At its heart is recognising the commitment as an obligation to be met over time - and the simple application of double-entry bookkeeping to recognise each £1 of capital allocated into building equitable relationships with nature as investing into an intangible asset on the balance sheet that grows in value as emissions are saved.
Applied to the climate and biodiversity crises, Bill Gates’ ‘major implications’ include that the incentives to meet a commitment to reduce emissions are upside down - accounting practice hasn’t kept up and has become the front line of the problem.
Applied to Anglo American’s commitment to a ‘30% reduction in Scopes 1 and 2 emissions by 2030’, accounting practice today treats the commitment as an externality (not the company’s responsibility)—and investments purposed to meet it (such as innovation or carbon credits) as costs.
The above accounting logic is the reverse of that needed to meet the social norm of a just transition to a clean, green economy and the needed 43% reduction in emissions by 2030.
Common sense says the logic should be:
1. Commitments were intended to and have set expectations that carbon emissions will be reduced by 2030.
2. Actions by a company that affirm its commitments are powerful evidence an obligation has been accepted.
3. The obligation is to be met in a series of annual emission reduction targets in line with a transition plan.
4. Innovation, carbon credits and other investments purposed to meet the obligation must be assets, and
5. Assets that grow in value if the commitment is met and grow further if accelerated in amount and/or time.
Applying it, Anglo American's commitment to a ‘30% reduction in Scopes 1 and 2 emissions by 2030’, would increase balance sheet assets by around $497m - materially improve its key financial metrics (profit, EPS, ROE, debt to equity ratios) and be taken into account in credit rating shown by this S&P paper - and would increase by at least $1.545bn and flow into other metrics if accelerated.
Applying it, ADNOC’s ‘emissions reduction of 5.4 million tCO2e in 2022’ would add around $770m of hidden asset value. Carbon and nature credits that preserve or regenerate nature’s capacity to sequester, say, 20m tonnes of carbon over 35 years, would return over $7.12bn on a $75m initial investment into assets on the balance sheet.
The same five-part logic can be applied to any commitment to invest in building an equitable relationship with nature, people and society.
